Improving the quality of life in Indonesia, profitably: impact investing in Indonesia, a 5 year outlook.

There has never been a better time for impact investment in Indonesia than now. Impact investing refers to commercial investments in companies that have a large social or environmental impact. This article will explain that Indonesia offers an estimated USD 23 billion in impact investment opportunities over the next 5 years. Whether investments are impact or non-impact driven, the underlying fundamentals of Indonesia are ready for growth.

• The GDP is expected to grow at over 5% per year until 2030.
• McKinsey forecasts that 90 million Indonesians will join the middle classes until 2030.
• This consulting firm also projects an 11% growth per year for consumer spending on financial services and savings.
• To regulate this growth, Indonesia established its Financial Services Authority as recently as 2011, with the launch of its digital financial services directorate in December 2016.

Internationally, impact investing is a growing form of investment. Warren Buffet’s news company BusinessWire recently cited the latest impact investing annual report for 2017. The report concluded that the impact investing market is expected to grow from an estimated value of USD 135 billion in 2015 to USD 307 billion by 2020, at an annual growth rate of 18% from 2015 to 2020. This is faster than the growth of investing overall. Little to no mention is made in the report about Indonesia.

According to McKinsey & Co, it is likely to be the world’s 7th largest economy in 2030. This is only possible with consistent growth. Indeed, since 1980, Indonesia has demonstrated the most consistent (stable) growth of any economy. Indonesia today is the 4th most populous country and the 16th largest economy in the world.

Indonesia’s economy is growing faster than its regional peers and trading partners…

GDP in billion USD

Source:
World Bank

… This is translating into higher incomes per Indonesian citizen…

GDP / capita in billion USD.

Source: World Bank

… allowing an estimated 90 million Indonesians to join the consuming middle classes through to 2030.

The threshold income of ‘consuming’ and ‘other’ classes is USD 3600 p.a.
Source: McKinsey 2012

Where does Indonesia stand in this growing market of impact investing?

This article attempts to explore the size and potential of impact investing in Indonesia. I write ‘attempts to’ because the data and information are scarce. Nevertheless, as CEO of one of Indonesia’s leading peer-to-peer lending platforms https://mekar.id with the ambition to establish Indonesia’s first impact investment fund with Putera Sampoerna (a bio can be found at the end of this article), I want to get to grips with the size and potential of this market. I’d like to share my findings with you and in return I encourage readers to recommend improvements so that this can become an annual update on the state of impact investing in Indonesia.

In short, Indonesia offers USD 23 billion in impact investing opportunities over the next 5 years. This article will examine the opportunities in every sector of the economy. It will not mention specific companies that the Mekar Impact Fund intends to invest in. I do however welcome readers who are interested in investing to request a copy of the prospectus via impactfund@mekar.id.

What is impact investing in the Indonesian context?

In short, impact investing is about investments made in commercially viable businesses that have a positive impact on the livelihoods of large communities of people. This can be social investments in education, water supply, sanitation or healthcare, and can also be in activities that have a positive environmental impact like in renewable energy, tourism, recycling, sustainable agriculture, fisheries, and more.

In the Indonesian context I define impact investing simply as

‘improving the quality of life in Indonesia, profitably’.

Indonesia faces its own challenges. It is the world’s largest archipelago, with some 17,508 islands stretching 5721 km from East to West. That is considerably wider than the United States of America, albeit interspersed with sea. Indonesia has the world’s largest geothermal potential. There is fertile land and an abundance of natural resources. Indonesia is culturally rich and diverse with over 200 languages and 700 dialects.

As you can imagine, in this archipelago, it is an immense challenge to ensure that a newly harvested crop in Papua can make its way to a supermarket in Jakarta some 2000 km away. Challenging also is getting a pair of shoes that was ordered on one of Indonesia’s growing e-commerce sites from a Jakarta warehouse to a customer in Aceh; even more difficult is to guarantee a free returns policy if those shoes weren’t the right size or colour. Indonesia is a massive logistical challenge. Solving logistics is therefore key to improving the income and quality of life for Indonesians living outside Java. It is also essential to keeping the country together. Yet an investment in logistics isn’t usually considered an impact investment; in Indonesia it definitely ought to be.

This problem is similar in the financial sector where 60% of the adult population (20–65 years old) has a bank account. So helping the 40% unbanked adults get a bank account is important for ensuring that the poor can receive cash grants from the government, or to simply help people save money or get insurance and to make payments. Many Indonesians with a small business, without a bank account or collateral, will have to resort to borrowing from informal lenders or loan sharks who will charge about 15% interest per month. As much as 20% per day is often charged to stall holders at traditional markets. Small businesses lack alternatives. Only a paltry 20% of the country’s 55 million businesses have access to formal bank finance. Financial inclusion is therefore an imperative. This inclusion means getting people into the formal financial system. This can greatly improve the incomes and lives of the unbanked in Indonesia. Mekar, the company that Putera Sampoerna and my team have built, works daily to alleviate this financial inclusion challenge as does his bank, Bank Sampoerna.

Other sectors that aren’t usually part of the typical impact investing definition are in agricultural efficiency, import substitution and transportation. Many farms see their crops peter away after harvest because they have no storage, processing or way of getting them to market. Import substitution investments are important as well, and the salt business is a good ironic example. Unilever and Indofoods in Indonesia get most of their salt by importing it, yet this country has one of the biggest coastlines in the world. Transportation is another ‘quality of life’ issue in Indonesia. With its 130 million cars and motorbikes, it is still adding around 6–7 million new vehicles to its roads each year. Investments to streamline the sale of used vehicles or investments in public transportation are clearly also an impact investment in this country of congested streets.

These domestic challenges mean that impact investment for Indonesia needs to be looked at through a slightly broader lens.

Who is doing impact investing in Indonesia?

There are currently no impact investment funds in Indonesia. However there are several overseas-based funds that invest in Indonesia.

Based in Indonesia are three angel investor networks that do impact investments. Angin Angels, Angel-EQ and Kinara invite their investors to invest in social enterprises. Also based in Indonesia are a larger group of financial institutions that finance small businesses, but not with an impact focus. The largest by far is Bank BRI, maybe the largest financier of small and micro businesses in the world. Other banks in this area are Bank Sampoerna and Indosurya Finance mainly focussing on SME finance. Among the largest microfinance institutions (MFIs) are Koperasi Mitra Sejati, Komida, MBK Ventura, Koperasi Usaha Mandiri and Bina Artha Ventura. In the online P2P lending space there are companies like Mekar.id, Amartha.com and Tanifund.id.

In summary the majority of the Indonesia-based institutions focus on micro-credit style lending, which mainly aims to help finance the unbanked. The MFI total loan book assets are approximately USD 650 million, excluding the Bank BRI portfolio.

Based overseas, but investing in Indonesia are Aavishkaar Frontier Fund, IIX Global, Capria, Patamar Capital, Triodos Asset Management, C4D Partners. The largest fund though is Tropical Landscapes Finance Facility (TLFF) established in 2016 by ADM Capital, BNP ParisBas, ICRAF and UNEP. This fund recently invested USD 95 million in a joint venture between Michelin and Barito Pacific for sustainable rubber plantations. This is the first of several transactions that TLFF intends to make. TLFF is seeking investment opportunities in reforestation, renewable energy and sustainable agriculture. TLFF has documented their vision for an Indonesian Green Economy.

The potential for impact investment over the next 5 years

Estimating the size of impact investment in Indonesia is not easy. It is an exercise in guesstimating. Nevertheless, the Mekar Team have found various data sources, some new, some outdated, some based on news articles and others based on government announcements. The assumptions, method and sources used for my conclusions can be found below. Mekar welcomes any improvements or better sources of data.

Over the next 5 years Indonesia will need and can certainly absorb USD 23 billion in impact investments. Some of these investments are already happening, in agriculture, energy and transport, and may not have been labelled as an impact investment. In this same 5 year period all the sectors listed below will also need more than USD 180 billion in investments in the form of commercial ventures and public private partnership (PPP) projects. This 5 year investment value is equivalent to 18% of Indonesia’s GDP in 2017. The Mekar Team estimates are conservative as in reality the size of actual investments over the next five years is likely to exceed this.

The impact investing value over the next 5 years will probably exceed 2% of the 2017 GDP. Also, far more impact investments are likely and definitely needed if Indonesia wants to overcome its challenges in water, energy, waste processing, infrastructure, etc. The TLFF Fund even estimates that Indonesia needs some USD 50 billion over the next 10 years. However, I do not think that this much capital will materialise.

Source: the estimates are described in the ‘assumptions’ section per sector of industry.

For detailed analysis of the trends, issues and impact investment opportunities for the 17 sectors of the Indonesian economy, read the full article on the MEKAR website blog

Conclusions & Next Steps

Over the next five years Indonesia has USD 23 billion in investment opportunities to offer impact investors. Of the 17 sectors covered in this article the industries with the most potential are finance, education, food and beverages, tourism and agriculture and fisheries. These five sectors offer the greatest potential because of their size, growth prospects and relative lower risk of government intervention.

Clearly, this conclusion is highly generalised. There are plenty of opportunities that have growth prospects and avoid the regulatory or other risks in all the industries discussed in this article. Take for example the highly regulated healthcare sector: a startup that approached us recently wants to build an app for doctors on call or on demand. Such a startup has plenty of growth potential and faces no regulatory constraints.

The top impact industries with the….

Next Steps

If you are interested in impact investing in Indonesia we recommend that you work with an investment company based in Indonesia. This is because in Indonesia it is relationships that prevail.

Mekar Impact Fund combines strong Indonesian relationships at local and national levels along with knowledge and experience of impact investing internationally. In the second half of 2018, Mekar Impact Fund will be raising funds to start making impact investments in early 2019. You may request the company’s prospectus via impactfund@mekar.id

For detailed analysis of the trends, issues and impact investment opportunities in 17 Indonesian sectors of industry read the full article on the MEKAR website blog