Jakarta. After more than five years of feasibility studies and high-level lobbying, Japanese officials thought they were on the brink of bringing bullet trains to Indonesia. Then China showed up.

“Suddenly, the minister of state-owned enterprises announced they had made something with the Chinese,” said Hiromichi Muraoka, senior Indonesia representative of the Japan International Cooperation Agency, the country’s foreign aid arm. “That surprised me.”

Japan versus China. It’s a story that is being writ large in the region, where decades of investment by Japan and its companies are now being challenged by China. And nowhere could the shift become more influential than in Indonesia.

Southeast Asia’s biggest economy has the largest population and most natural resources in the region. Its vast archipelago stretches from the Indian Ocean to the Pacific and borders some of the world’s busiest shipping lanes.

China’s desire to develop political and commercial links to the country is a boon for Indonesia’s President Joko “Jokowi” Widodo, a former furniture exporter who believes he can leverage competition with Japan to get better deals, according to Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore.

“Indonesia needs a lot of infrastructure and China has the expertise and the money,” Wiranto said. “You add that up with the political factor between Japan and China, and it’s quite hopeful that China will be pumping more money into Indonesia.”

Maritime Axis

Jokowi and China’s President Xi Jinping also have interests in common. The Indonesian leader wants to develop the country’s ports and fishing to create a “global maritime axis,” an ambition that complements Xi’s plan for a “Maritime Silk Road” in Asia. Indonesia also supports China’s suggestion for the Asian Infrastructure Investment Bank, which could end up funding projects Indonesia needs.

With China’s wages rising and economic growth slowing, Chinese companies have additional incentives to invest abroad.

Hence the headache for Muraoka. Japanese feasibility studies into high-speed trains in Indonesia date back to at least 2009. The aim is to cut the rail journey between Jakarta and Bandung, the country’s third-biggest city, to less than 40 minutes, from three hours.

$6 Billion Plan

The project would cost 726.4 billion yen ($6.1 billion), partly from the Indonesian government, according to a November 2012 feasibility study posted on the website of the Japan External Trade Organization.

As late as March 24, JICA President Akihiko Tanaka urged Jokowi to consider the Japanese proposal when the two met in Tokyo, according to a release from the agency.

Then, on April 23, Indonesia’s State-Owned Enterprises Minister Rini Soemarno dropped her bombshell. She said the government was considering a Chinese offer to build the railway as part of a $50 billion funding commitment from Chinese state banks.

Soemarno told reporters that the Chinese proposal was attractive because it didn’t require Indonesia to provide funding guarantees.

No Guarantee

“Japan always asks for a guarantee,” she said. “As long as they are in partnership with a state-owned enterprise, Chinese companies will never ask for a government guarantee.”

Indonesia estimates it needs to spend $450 billion on roads, railways, ports and power stations to revive an economy that shrank in the past two quarters. The state budget can only cover about 30 percent of that, according to the investment board.

China still has a long way to go to unseat Japan, Singapore and South Korea as Indonesia’s top sources of investment. Those three together spent more than $3 billion in the first quarter, compared with China’s $75 million, according to investment board data, not including oil and gas and financial services.

That’s partly because China is starting from a low base. It only reestablished diplomatic relations with Indonesia in 1990 after a break of 23 years.

During that time, former President Suharto carried out a brutal crackdown on communism and repressed the language and culture of the local ethnic Chinese.

Japan has been carrying out economic and development assistance programs in Indonesia since the late 1950s.

Top Investor

Rizal Affandi Lukman, deputy minister for international economic cooperation, said he expects China will jump from its current ranking of 10th-biggest investor to top the list within five years.

“There is so much eagerness for Chinese investors to get into infrastructure projects,” Lukman said in an interview.

High-level contact between Indonesia and China suggests Jokowi is happy to court that investment. He has visited China twice since becoming president in October.

When Indonesia hosted the Asian-African summit last month, Xi flew down on the final day to Bandung, location of the group’s first meeting 60 years ago. He walked alongside Jokowi to the conference venue, recreating a stroll that former leader Sukarno and Premier Zhou Enlai took back in 1955.

Turning China’s interest into actual investment has been more elusive. China has a history of not delivering on promised projects, said Tamba Hutapea, deputy director for planning at the investment board, something he put down to a lack of familiarity between the two nations.

“I understand why the government is willing to open up for Chinese investors, but they need to put some guidelines on how they want to do business,” said Yadi Jaya Ruchandi, chief operating officer of the Indonesia Infrastructure Guarantee Fund, a state-owned enterprise formed to support public-private partnerships.

Poor Quality

“There is a wariness about Chinese investment that is masked by Jokowi and his aides’ eager efforts to market Indonesia to Chinese investors,” said Aaron L. Connelly, a research fellow in the East Asia Program at the Lowy Institute for International Policy in Sydney. “Indonesian policy makers have been frustrated with the quality of Chinese firms’ work on projects financed by Chinese investment, particularly in the power sector.”

Even with the Chinese as competitors, the scale of Indonesia’s infrastructure needs means Japan’s investment is unlikely to end. Japanese companies are building a mass rapid transit system in Jakarta, and JICA said it approved loans for seven projects last year worth 62.3 billion yen.

On his trip to Japan in March, Jokowi urged a group of businessmen and officials to invest in Indonesia’s infrastructure. He’s promised to settle land disputes that have blocked a Japanese-backed power station in Java.

Labor Challenge 

Chinese companies hoping to join them  must also navigate the corruption, bureaucracy, cultural differences and changing regulations that have bedeviled foreign investments in the country for decades. China’s investments in countries such as Vietnam and Ethiopia have relied on bringing in its own workers for many factory and construction jobs.

Chinese companies could find that more difficult in Indonesia, which is clamping down on work visas for foreigners who do jobs that locals could do.

“There are obstacles when going global, but we’re looking on the bright side,” said Li Huaizhen, president of China Minsheng Investment Corp., which announced on April 20 that it intends to build a $5 billion industrial park in Indonesia.

“This is a good time to invest in Indonesia,” he said. “The two countries are getting very friendly.”

Bloomberg

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Alcohol can be a hard sell in Indonesia, which has more Muslims than any other country. It’s about to get a whole lot tougher.

A regulation supported by Islamic groups that is scheduled to come into effect next month will prohibit the sale of beer at convenience stores and other small shops in the world’s fourth-most populous country.

The ban adds to a growing list of measures by President Joko Widodo’s administration that run counter to the pro- business messages he presented while campaigning for office last year.

At stake are beer sales in Southeast Asia’s largest economy, where domestic consumption makes up more than half of gross domestic product and the government is trying to spur growth, foreign investment and tourism.

“Losing this channel will mean a big decline in sales for leading beer manufacturers,” said Yulia Fransisca, a senior analyst at Euromonitor International. “The government will continue to be pressurized to create more restrictions on alcoholic drinks by Islamic groups in the country.”

Beer sales climbed 11 percent last year, according to Euromonitor research. Beer producers in the country include Multi Bintang Indonesia and Diageo, which brews and distributes Guinness through a third-party arrangement with Multi Bintang.

“Our concerns with the current announced policies is that they will impact some of the smaller retail businesses and tourism,” Diageo chief executive Ivan Menezes said in an interview in Singapore on Thursday. “There is also the risk of illicit alcohol growing again, and that is in nobody’s interest.”

The regulation, a revision to an earlier bill tightening restriction on alcohol sales, states that beer can only be sold at supermarkets and hypermarkets, where wines and spirits are currently also available. Those who violate the law risk having their trading license revoked. Alcohol sales in restaurants and bars are unaffected.

Neneng Sri Mulyati, a spokeswoman for 7-Eleven mini marts, a franchise run locally by Modern Internasional, said it would comply with the law at its 190 shops in and around the capital when it comes into effect mid-April. Multi Bintang declined to comment.

The regulation was issued without consultation with producers or retailers, according to Charles Poluan, the executive director of Indonesia’s malt beverage producers association.

“Traditional shops are the backbone of the beer distribution channels across a vast area of Indonesia,” said Poluan, who says he’s been unable to meet with Trade Minister Rachmat Gobel to discuss the ban. “We can’t yet determine how badly it will affect us economically. The picture is too astounding.”

The president governs in a coalition including the Islamic National Awakening Party (PKB), in a country with a secular constitution.

Islamic practice and belief is less rigid than in most parts of the Middle East and South Asia, with Indonesia’s westernmost Aceh province the only one that adheres to a version of shariah law.

In recent years conservative voices have become louder, providing opportunities for populist politicians of Islamist leaning or from secular parties to boost legitimacy by pandering to them, said Muhamad Ali, an Indonesian professor of Islamic studies at the University of California.

‘Creeping shariah’

“This is creeping shariah, slow but steady, using legal and constitutional means,” said Ali. “Nationally, it was a success for the Islamists and secular politicians who are using Islam as a way of attracting votes.”

Since the late 1990s, several district governments have issued shariah-inspired bylaws targeting alcohol consumption and regulating dress and other Islamic morals and practices.
Implementation of the beer regulation is likely to be patchy and skirtable by bribery, according to Michael Buehler, a lecturer in comparative politics at the School of Oriental and African Studies in London who has carried out research on local Shariah laws.

“This is purely the politics of symbols,” he said. “What you can see happening is vigilante groups using the law to take things into their own hands and smash up places. That’s what make them problematic.”

The regulation was signed by Minister Gobel after a social media campaign by an anti-alcohol group that was supported by Islamist activists. The regulation states its aim is to “protect the morals and culture of society”.

“We don’t want investments that damage our young people,” Gobel told Muslim activists at his office a few days after he signed the law, some of whom were asking him to ban the production of beer in the country.

“I don’t care if investors make an enemy of me. I just laugh. Tourism is not a problem. Do we want to protect Indonesian citizens or tourists?”

That stance contrasts with efforts by Jokowi to promote tourism, including plans to gain over $1 billion in revenue by waiving visas for visitors from 45 countries including the US, China and Japan. Bali, a mostly Hindu island with a thriving beach and party scene, is the country’s top tourist destination.

The island is protesting against the ban, said Bali tourism office head A.A. Gede Yuniartha Putra.

“Foreigners like to have a drink when they are here,”, he said.

“This is going to seriously affect tourism. We want to be exempted from this, otherwise we won’t obey it.”

Bloomberg

The post Beer Today, Gone Tomorrow: Indonesia Targets Sales of Ale appeared first on The Jakarta Globe.