Hilton King, legal counsel at Sampoerna
Strategic, discusses the key trends in key industries
– from telecommunications to palm
Sampoerna Strategic is an investment company with a diverse
range of interests from agriculture, finance, and property to
telecommunications and timber. As such, the company's general
counsel, Hilton King, is well placed to discuss the trends,
taxation and legislation affecting numerous Indonesian
industries from the booming mobile phone market, the millions
of micro, small and medium enterprises in need of financing, a
forestry industry struggling with environmental costs, and a
slowing property market.
Indonesia seems to be experiencing a mobile telephone boom
at the moment. What is driving growth in the industry?
Mobile phone penetration as a whole exceeds 100%, meaning
more than one phone per person.
The key growth drivers have been consumer behaviour trends,
increasing smartphone penetration and a lower cost internet
Indonesian consumers prefer and are very active in social
media such as Facebook, Instagram, Twitter, and Path. Indonesia
is one of the largest Facebook markets in the world with 70
million user accounts. Nearly 50% of users access the internet
through their mobile phones.
Smart phone penetration is increasing rapidly due to
low-cost smart phone proliferation. A Nielsen survey showed
that more than 50% of mobile phone users plan to buy smart
phones in next 12 months. By end 2017, smart phone penetration
is expected to exceed 50%.
And, due to tight competition, internet services are cheap,
although quality continues to lag behind that of many other
What is the climate like for micro, small and medium
Such enterprises are said to number greater than 50 million
in Indonesia, the vast majority of which are tiny, labour
intensive, in rural areas, and without access to capital,
technology and markets. Prospects have generally been limited
because of access to and costs of finance, but many programmes
including several led by established Indonesian banks are
changing this landscape. Start-up costs and red tape however
are more of a hurdle for smaller businesses to pass than larger
or established businesses. Many financing programmes targeted
to assist small businesses also provide start-up advice. More
small to medium businesses are taking advantage of rapid growth
in Indonesians' propensity to engage in online buying.
Indonesia is one of the world's leading wood exporters, but
the industry has come with an environmental cost. How are the
challenges of a sustainable forestry industry being met?
There are good initiatives in place although not well
reported, especially at community levels. We frequently hear
that the government of Indonesia is "working on a number of
initiatives" towards reducing the illegal timber trade and
non-sustainable practices in the forestry sector. High-profile
initiatives include the deal with Norway for a moratorium on
new forestry concessions. This initiative aims to conserve
unallocated primary forests and peat swamp forests across
Indonesia's national forest estate, for which Indonesia could
receive significant financial rewards. Some say the moratorium
is not broad enough, but at least it ring-fences some large and
ecologically important forest areas.
sector is one with good long term potential. We see
more international investors starting to focus on this
From 2005, it was recognised that the Indonesian forestry
industry needed a push into sustainable forestry, and some of
the voluntary forestry certification standards were recommended
to be harmonised into the existing national forestry
regulations. These standards for sustainable production forest
management and verification of timber legality in the supply
chain were embedded in regulations by 2009 and revised in 2011
and 2014. By mid-2014, significant progress was made toward
compulsory certification standards, however with the deadline
for achieving the compulsory standards having now passed, there
are concerns that the government is too lenient on the many
companies that have not made efforts to comply. Many challenges
are being addressed but criticism at the rate of progress in
meeting the challenges is fair.
How is the government's tax regime changing Indonesia's
palm oil industry?
Not significantly. Tax on palm oil exports applies a
progressive system – the higher the export price, the
higher the export duty rate. Presently the export tax is 0 if
the international CPO price is less than $750 per tonne.
Indonesia assesses the export tax monthly, paying attention
to international and domestic prices, and keeps a close eye on
Malaysia's export tax policy. A key objective of the export tax
was to ensure domestic supply, and to encourage downstream
industry, although the latter is yet to flourish. Fresh fruit
bunches have recently been made subject to VAT; this clarified
a grey area and is of benefit to producers as VAT input costs
are passed on.
Transfer pricing is under renewed focus from the tax
authority, given known practices in the industry. Improved tax
collection was a key election policy of the new government.
Remote area development of palm oil processing facilities may
qualify certain capex as deductible, although not all regional
tax authorities have been consistent in applying this. New
investment in downstream facilities such as bio-fuel may
qualify for tax holidays.
With the property market apparently slowing, what should
investors look out for?
There are certainly sectors of the market which have reached
their cyclical peaks. The office sector stands out in this
regard. That's not to say that further investment in this
sector is speculative, rather that investors and developers
need to exercise caution as we enter a period where supply will
likely exceed demand. Office leasing space is likely to be the
most competitive sector in the coming few years.
Strata office for sale has been very popular in recent years
and prices rose strongly. Projects in good locations with
proven demand should remain popular although further strong
price growth should not be expected.
The residential condominium sector is one which stands out
with long-term strong potential, simply because of the growing
middle class, growing incomes, and undersupply of affordable
housing across all sectors. Lack of infrastructure is forcing
developers to look to more high rise projects, and those in
mixed use (superblock) developments or popular suburbs should
fare better than most.
Retail growth opportunities are more selective and
strategic, with secondary and tertiary cities now being
targeted by developers following a moratorium and perceived
oversupply of malls in Jakarta.
The logistics sector is one with good long term potential.
We see more international investors starting to focus on this
sector. Clearly, government investment in strategic
infrastructure will help.
Indonesia never dipped into recession during the financial
crisis and its aftermath. What has contributed to the strength
of its economy?
Important factors in avoiding the recession were a healthy
balance of payments with a commensurate level of foreign
currency reserves, and a strong central bank policy which
showed flexibility through its free floating exchange rate,
lowering interest rates, ensuring liquidity in the system, and
a stimulus policy. Local banks were solid with low NPLs,
healthy LDRs and high CARs – these had adjusted
following the prior Asean economic crisis of 1998 and helped
lead a consumer borrowing and spending boom. Export markets
were robust – although export and commodity prices
fell, export volumes remained strong.
What does the abolition of the fuel subsidy mean for
investors and businesses?
Businesses depending on fuel are more competitive, and the
abolition of the subsidy has assisted to curtail inflation
– although the oil price has fallen in any event. For
investors there is encouragement that the government has now
freed up expenditure on infrastructure and other sectors of the
economy that require support. In 2014 the subsidy consumed
about 15% of the state budget. Savings in 2015 should be about
$15 billion, which is particularly timely given the recently
widening current account deficit.
Indonesia's new government is looking to increase revenue
with greater scrutiny of corporate tax affairs and transfer
pricing. How do you think this will affect multinational
companies looking to invest in the country?
As a policy, multinationals welcome this because an improved
tax take benefits the country as a whole, and the government
did flag this as a key election policy. Multinationals are more
concerned – as is often the case with Indonesia
– as to how new rules and scrutiny are applied, and
that this be done in a fair and non-discriminatory manner. The
resources of the tax authority to investigate and understand
industry practices have increased markedly.
Does Indonesia's infrastructure prove a barrier to
Definitely. For the umpteenth time an Indonesian government
now says it will commit to focusing on infrastructure
development, and makes clear statements of recognising the need
for private and foreign sector funding.
structural reforms to develop the manufacturing base
and draw away from the dependence on commodities are
Regulations that encourage private sector participation,
such as those on land acquisition, are in place, but as is so
often the case, implementation of regulations requires
political will. And local government authority, which
inordinately throws up barriers to and increases the costs of
infrastructure projects, is often at odds with central
government policy. Even in the case of projects or types of
projects that the government has prioritised, for example
roads, ports, and power plants, the wheels of bureaucracy and
the preference for avoiding mistakes – the gaze of the
anti-corruption body is an important factor – rather
than pushing projects through, particularly where large
infrastructure projects mean the bureaucracy is dealing in
novel territory, means infrastructure spending budgets often
Greater coordination is required among government
ministries, and there is hope the new Presidential Working Unit
– established to better give effect to President
Jokowi's imprimatur – will make a difference.
What are the biggest risks for companies looking to invest
in Indonesia today?
Regular rule changes, weak and inappropriate legal
enforcement, insufficient infrastructure causing a lack of
competitiveness in product cost and delivery, the
implementation of regional (local) government autonomy meaning
additional uncertainties and licensing costs, inconsistent tax
treatment, and less than sufficient flexibility in the labour
market and regulation.
A declining Rupiah is not necessarily a major risk so long
as it is managed and demonstrates stability rather than
What reforms would you like to see to enhance Indonesia's
investment climate over the coming years?
Comprehensive structural reforms to develop the
manufacturing base to draw away from the dependence on
commodities is essential, and to that end major infrastructure
development is a key ingredient.
Coordinated approach amongst ministries to enticing
investment is essential. The new cabinet has a mix of
experience and in many respects do not appear to be a natural
fit, and it is hoped the Presidential Working Unit improves
cabinet effectiveness. Regulations are usually well meaning in
intent but need to show long term strategy and avoid short term
nationalist prone reaction.
Reform of and trust in the legal system is a longer-term
fix. A stronger central government needs to take the lead in
infrastructure projects that tie in several ministries, local
government and local communities. Tax reform and initiatives
towards a more flexible labour market (one that reduces costs
of labour transfers) require the same focus.
General counsel, PT Sampoerna Strategic
Hilton King has worked in Indonesia for 26 years,
and is currently general counsel to PT Sampoerna
Strategic, a diversified Indonesian investment group,
with interests in palm oil (and other crops including
rubber and sago), timber processing, microfinance,
telecommunications, and property.
PT Sampoerna Agro Tbk is listed on the IDX and Samko
Timber Pte Ltd on the SGX.
The highly-regarded Putera Sampoerna Foundation is
dedicated to improving access to and quality of
education in Indonesia, notably through the Sampoerna
School System. Hilton began legal practice with the
Australian firm Freehills, first in Melbourne and then
For 19 years from 1989 he was foreign legal
consultant to the Indonesian law firm Makarim &
Taira S. Hilton specialised in project finance,
M&A, investment and commercial law. In particular,
he focused on infrastructure, energy & resources,
foreign investment, manufacturing and financial