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Economy

Widodo promises digital economy boom for Indonesia

JAKARTA -- After a bruising year of economic retrenchment, Indonesian President Joko Widodo has latched onto technology as a potential game changer for the country's lackluster economy.

     Widodo, who has promised to lift growth to an average of 7% a year, sees the technology industry as one of the nation's potential economic drivers in years to come, claiming that Indonesia can become Southeast Asia's largest digital economy by 2020, with turnover of $130 billion a year compared with $18 billion now.

     To achieve that goal, the government is launching an e-commerce roadmap and 10 economic policy packages, and is providing access to financing for small and medium sized businesses and information technology startups. Limits on foreign investment in e-commerce have been loosened, allowing foreign companies to take 100% ownership of enterprises valued at more than 100 billion Indonesian rupiah ($7.5 million).

     The last move was welcomed by Indonesian E-Commerce Association chairman Daniel Tumiwa, who said e-commerce should always have been exempt from investment controls to encourage "smart money" from people with experience of the more developed e-commerce landscape overseas.

     The government had earlier closed off foreign investment in business-to-consumer e-commerce companies under its Negative Investment List. Foreign investors were able to avoid the regulation through tactics such as investments in the form of debt instruments convertible into equity, but the ban sent a strong signal that Indonesia was not keen on foreign investment in the sector.

     Under Widodo, Indonesia's attitude to foreign investment is changing rapidly. "There are still many excessive permits, licenses and restrictions to which we will say, 'Hasta la vista, baby,'" Widodo said at a summit between the U.S. and the 10-country Association of Southeast Asian Nations in San Francisco in February.

     Moves are also afoot to make it easier for young technology companies to raise domestic capital. The Indonesia Stock Exchange and the Indonesian Chamber of Commerce and Industry plan to set up incubators in Jakarta and Bali by July to help startups prepare for initial public offerings by helping them to find lawyers, accountants, venture capital investors and consultants.

     The IDX is also in talks with the financial regulatory agency, known as OJK, to set up a special listing board for startups. In an interview with DealStreetAsia, a Singapore-based financial news site, IDX president director Tito Sulistio said the stock market wanted startups and SMEs with net intangible assets as low as 5 billion rupiah to be able to register for IPOs.

     Steven Vanada, vice president of Japan-based venture capital fund CyberAgent Ventures, said these moves were indications that the government was becoming friendlier toward foreign investors. Nevertheless, he said, there was a long way to go before foreign investors would feel that government policy was stable for the long term.

     Vanada said the government had more work to do on the listing plans. "The most important thing is not only to loosen the IPO requirements, but making sure to educate [retail] investors on the potential of the startups," he said. "Being able to IPO but not being able to keep enough interest from investors won't yield a good effect."

Startup listings

     Aryo Ariotedjo, managing partner of Grupara, an Indonesian venture capital firm, said many startups filing for IPOs would need support from venture capitalists or strategic investors. "The VCs will help the company grow; public investors [will] only support [through money]," he said.

     Bhinneka, an Indonesian e-commerce business, recently said it plans to pursue a listing in Indonesia by 2019. To help achieve its ambitions, the company received $22 million in investment from Ideosource, a local venture capital firm, in November 2015.

     At a national level, Widodo is looking to produce 1,000 technology entrepreneurs by 2020. On a visit to Silicon Valley on Feb. 18, he won a commitment from Google to help train 100,000 mobile phone app developers by 2020.

     The plan is to provide a semester-long Android development curriculum for computer science students in their final years of college, delivered through university partnerships. Google will also translate its non-profit Udacity courses into Bahasa Indonesia, and hold developer mentorship programs called Google Developers Study Jams in five major Indonesian cities.

     Prior to Widodo's visit, Google had launched several other initiatives to help Indonesian developers thrive. These include Google Developer Group events, which bring together like-minded programmers in six cities, and the Launchpad Accelerator, which provides up to $50,000 in equity-free funding plus mentorship to Indonesian tech entrepreneurs.

     During his U.S. trip, Widodo courted Facebook and Twitter, asking them to ramp up their activities in Indonesia while helping to spread tolerance in the nation, which was recently the target of an attack by Islamist terrorists. The president also visited Plug and Play, one of the biggest technology accelerators in the U.S.

Students from six vocational schools learn about smartphone repair basics. (Photo courtesy of DNA Initiative)

     The Ministry of Information and Communication Technology and the Ministry of Education and Culture have also agreed to introduce a coding curriculum into Indonesia's 11,000 vocational schools this year. Students will be taught to build mobile apps, games, 3D models, and robotic mechanisms. If successful, the curriculum may also be introduced in 12,000 high schools.

     The technology startup scene in Indonesia has blossomed in the past few years. In 2014, e-commerce marketplace Tokopedia received $100 million in investment from Sequoia Capital of the U.S. and Softbank of Japan, while in 2015, MatahariMall, an online shopping site, raised $500 million. Go-Jek, a motorcycle taxi startup app, reportedly raised around $200 million.

     Other venture capital funds are eyeing startups, including Mandiri Capital Indonesia, which has received $25.2 million in capital from its parent, Indonesia's state-run Mandiri Bank, and Venturra Capital, formerly known as Lippo Digital Ventures, which has a $150 million fund.

     However, while it is easing investment regulations, the government is planning a fresh approach to taxing foreign technology companies. The ICT Ministry is drawing up a regulation that will require all Internet companies to establish permanent business entities in Indonesia and pay taxes or face service blockages.

     Internet giants such as Google and Facebook could face greater scrutiny over tax. According to Reuters, ICT Minister Rudiantara estimated that Indonesia's digital advertising industry was worth up to $800 million last year but escaped tax because of regulatory loopholes.

     "Google has an office in Indonesia, but digital age transactions do not go through that office. That is what we're looking to straighten out," Rudiantara told Reuters.

     U.S.-based Fenox VC said Indonesia was going through a major technology makeover that was bound to include changes in regulation. "As is true for most countries in such a period, regulation is playing catch-up," said Anis Uzzaman, general partner and CEO. "From the face of it, it is fair that businesses earning money in a country pay that country the appropriate taxes; this is just a way of enforcing that."

     Local technology businesses are also likely to support Rudiantara's move to ensure that foreign companies pay tax in Indonesia. "This is also to help local companies have a fighting chance against more established foreign companies," said Ariotedjo.

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