A Jokowi Presidency Politics, Government and Business Under Indonesia’s Future President

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Joko “Jokowi” Widodo has emerged victorious in Indonesia’s closely fought presidential election. On July 22, the General Elections Commission (KPU) officially declared the Jokowi-Jusuf Kalla ticket the winner of the July 9 election, following a nearly two week process of tallying more than 130 million votes from across the archipelago. Jokowi will be sworn in as Indonesia’s seventh president – and the second president elected by full and direct democracy – no later than October 20.

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A Jokowi Presidency Politics, Government and Business Under Indonesia’s Future President

  1. 1. A Jokowi Presidency Politics, Government and Business Under Indonesia’s Future President July 24, 2014
  2. 2. A Jokowi Presidency Indonesia… …is the fourth largest country in the world by population. …is the world’s largest Muslim-majority democracy. …is the 10th largest economy in the world based on PPP. …has a rapidly growing middle and consumer class, currently numbering some 45 million. Executive Summary Joko “Jokowi” Widodo has emerged victorious in Indonesia’s closely fought presidential election. On July 22, the General Elections Commission (KPU) officially declared the Jokowi-Jusuf Kalla ticket the winner of the July 9 election, following a nearly two- week process of tallying more than 130 million votes from across the archipelago. Jokowi will be sworn in as Indonesia’s seventh president – and the second president elected by full and direct democracy – no later than October 20. Jokowi will take the helm of the world’s fourth largest country at a time of unprecedented challenges. He will lead a nation in which ethnic and religious tensions are intensifying, the gap between rich and poor is expanding, and trust in government sits at an all-time low due to corruption. He will need to breathe new life into Indonesia’s lackluster economy, while preparing the country for rising competition associated with the imminent launch of the ASEAN Economic Community. Profound reforms are needed in education, infrastructure remains underdeveloped, and he will need to make deeply unpopular cuts in fuel subsidies. On the global stage, he will contend with a rising China to the north, a continuing influx of asylum seekers, and rising pressure to protect Indonesia’s overseas workers. Jokowi will need to lead the country through these challenges in a country divided over his very leadership. By Indonesian standards, his eight million-vote win over rival candidate Prabowo Subianto is a feeble victory. It has given him a fragile mandate to lead, which may be further enfeebled by Prabowo’s promised legal challenges and internal politics within PDI-P. Thus, the question becomes whether or not Jokowi has the political capital necessary to make the tough decisions the country needs. In Indonesia, like in any democracy, successful governance is determined by successful politics. The end of the official campaign marks the beginning of an intense period of political jockeying and behind-the- scenes campaigning. Coalitions will be dissolved and remade, parties will elect new leaders, political appointments will be made, and the legislature will make some important decisions of its own. Navigating this period will require a strong balancing act from Jokowi. His actions and choices will need to reaffirm his image as a reformer, while simultaneously garnering political support from the old guards that still dominate Indonesia’s politics. The success or failure of the Jokowi administration over the next five years will be largely determined by the political decisions made in the next three months. Multinationals in Indonesia will need to watch this political process carefully. Foreign investors have reacted positively to the Jokowi win on the back of his pledges to welcome foreign investment, cut red tape and ease bureaucracy. Yet Jokowi’s ability to implement these promised reforms will come down to whether he can build strong political support that can help him overcome his post-election weaknesses. 1
  3. 3. A Jokowi Presidency Election Fast Facts  There were over 190 million eligible voters  Total turnout was over 134 million, representing almost 70% of eligible voters  There were an estimated 67 million new voters, representing 35% of the population  Jokowi won with 79,997,833 votes (compared with Prabowo’s 62,576,444 votes)  Jokowi won in 23 of 33 provinces, including Jakarta, central and east Java, Bali, Papua and most of Kalimantan and Sulawesi . Joko Widodo  Born: June 21, 1961 in Surakarta (Solo), central Java  Age: 53  Religion: Islam  Socioeconomic background: working class  Education: engineering degree from Gadjah Mada University (1985)  Family: Married to Iriana, has three daughters  Current political party: Indonesian Democratic Party of Struggle (PDI-P)  Pre-political career: furniture store owner  Political career: mayor of Solo (2005-2012), major of Jakarta (2012-2014)  Notable achievements: o Anti-corruption initiatives, like barring his own family members from bidding on municipal projects o Healthcare insurance program in Solo and Jakarta o City revitalization and infrastructure projects  Personal style and approach: o Populist, can-do, down-to-earth o Media savvy o Relies heavily on trusted advisors, often outside official administration o Patient politician – deals come after several face-to-face meetings A Fragile Mandate Joko “Jokowi” Widodo officially won the July 9 Indonesian election with 53.15% of the popular vote. This result – reflecting a differential of just over 8 million votes – represents the smallest margin of victory in Indonesia’s history of direct presidential elections. It was a closely-fought campaign that in many ways represented a nationwide referendum on Indonesia’s future direction. Jokowi ran as the candidate of change. His very candidacy represented a break from the political dynasties that had dominated the presidency since the founding of Indonesia. He pledged to bring a new style of politics to the office of the president; a style that is bottom-up, down-to-earth and reflects a can-do spirit. He positioned himself as a man of the people and the natural leader of Indonesia’s younger generation. His rival, Prabowo Subianto of the Gerindra Party, presented the public with the option of returning to old-style politics. He pledged to bring back a level of decisiveness that many feel was lacking during the 10-year administration of outgoing President Susilo Bambang Yudhoyono. Deeply populist and nationalistic, Prabowo painted a compelling picture of an Indonesia for Indonesians. In words and in action, he was a bastion of old-style politics. The fact that the final results were so close suggests that this election did not produce a definitive answer about Indonesia’s future. Jokowi will come to power in October in a country where nearly half the voters are skeptical of his leadership and his vision for Indonesia. He simply does not have the popular support to enact the sweeping changes that will substantiate his image as a reformer. Without this mandate from the people, Jokowi will need to turn to politics to build the support he will need to be an effective leader. 2
  4. 4. A Jokowi Presidency Can Prabowo Still Win? Prabowo has pledged to appeal the KPU decision to the Constitutional Court by Friday, July 29. The Court has said it will listen to the case beginning on August 4, before making a decision by August 20. The Court can make the following rulings:  Reject to hear the appeal due to lack of evidence, thereby upholding the KPU results  Issue a recount in some areas or nationwide  Call for a revote Prabowo is unlikely to be successful in his appeal, despite having a degree of influence in the Court Although Jokowi’s victory margin was the smallest in Indonesia’s short history of directly electing presidents, It is still large enough to rule out a level of fraud that would alter the outcome of the election. A Difficult Balancing Act While the official campaign season has ended, the politics associated with this election are far from over. The fact that Jokowi was unable to secure decisive popular support means he will need to build strong political support to ensure he is able to govern effectively. Between now and his October inauguration, Jokowi will need to take steps to solidify his political backing and lay the foundations for an effective administration. The success of his presidency can be judged by whether he is able to:  Move the conversation beyond the election. Jokowi’s rival candidate Prabowo Subianto theatrically withdrew from the election results just hours before the official announcement, citing systematic unfairness by the KPU and other injustices. He has pledged to appeal the results to the Constitutional Court, which will have one month to issue a decision on the appeal. To ensure that his image is not tarnished by protracted legal battles, Jokowi will need to deftly position himself as Indonesia’s undisputed next leader without antagonizing diehard Prabowo supporters. He can do this by continuing neutral remarks that support unity as well as acquiring supports from the opposition’s side.  Negotiating within PDI-P. The Indonesia Democratic Party of Struggle (PDI-P) is chaired by Megawati Sukarnoputri, former president of Indonesia (2001-2004) and daughter of Indonesia’s founding father, Sukarno. A powerful politician, Megawati has made it clear that she views the party as the paramount ruling institution, of which Jokowi is a key member. So long as Megawati remains at the head of PDI-P, Jokowi will need to ensure that he retains strong support from her without opening himself to criticisms that he is a frail or “puppet” leader. Finding this balance will require him to make some concessions within the PDI-P while also standing his ground on key appointments and with regards to his policy agenda.  Build a strong coalition. There are already signs that Prabowo’s election-run merah-putih (red-white) coalition is beginning to unravel. Golkar, a party that has never served in the opposition, has already called for an “extraordinary [party] congress” that may see it elect a new leader who favors joining the Jokowi coalition. Meanwhile, an official from the outgoing ruling party signaled that his Democratic Party may be open to negotiations with the Jokowi coalition. 3
  5. 5. A Jokowi Presidency Indonesia’s Social Challenges o Indonesia ranks 121 of 187 on the Human Development Index, which measures quality of life, access to knowledge and standard of living o 11.4% of the population continues to live below the poverty line according to the World Bank o Indonesia’s Gini Coefficient (a measure of inequality) rose from 0.37 in 2012 to 0.41 in 2013 o Indonesia ranked 114 out of 175 (where 1 is least corrupt) on the 2013 Corruption Perception Index How coalitions break apart and are reformed will be important especially in so far as they affect the dynamics in the House of Representatives (DPR). As it stands, the PDI-P-led coalition trails the Gerindra-led coalition by 146 seats. Securing a legislative majority in the DPR will increase Jokowi’s changes of seeing his reformist agenda enacted, though opposition parties will always seek to impose roadblocks. Securing a majority will also allow his coalition to select the speaker of the house under a recent change to House rules (Law on MD3). A switch by Golkar alone could secure this majority. Jokowi will need to cement the backing of these “swing” parties without being seen as buying political support, which would damage his reputation as a reformer. To achieve this, he will need to emphasize a common platform. A key litmus test will be if he is able to keep his pledge to appoint only capable technocrats to his cabinet, at least for the key ministries. Navigating the political minefield of the next three months until the inauguration of the new president will require a strong balancing act from Jokowi on multiple fronts: between himself and the Prabowo camp, within his own party, and among his coalition partners. His actions and choices will need to reaffirm his image as a reformer, while simultaneously garnering political support from the old guard that still dominates Indonesia’s politics. The success or failure of the Jokowi’s administration over the next five years will be largely determined by the political decisions made in the next three months. A Jokowi Administration: The First 100 Days Jokowi and Jusuf Kalla will be inaugurated president and vice-president on October 20. It will be evident within the first 100 days of the administration whether Jokowi has amassed sufficient political capital and whether he has the necessary tenacity to take on Indonesia’s toughest challenges. The challenges that Jokowi will confront are both numerous and acute. He is set to lead a nation in which ethnic and religious tensions are intensifying, the gap between rich and poor is expanding, and trust in government sits at an all- time low due to corruption. He will need to breathe new life into Indonesia’s lackluster economy, while preparing the country for rising competition associated with the imminent launch of the ASEAN Economic Community. Profound reforms are needed in education, infrastructure remains underdeveloped, and he will need to make deeply unpopular 4
  6. 6. A Jokowi Presidency The Five-Year Plan Another key task for the new administration will be to finalize Indonesia’s next National Medium-Term Development (RPJMN) for 2015-2019. While the drafting has been going on for several months, the new administration will have the opportunity to provide significant input so that the final plan reflects the policy priorities of the new government. The plan will be released early next year and will form the basis of ministerial five-year plans (renstra) that will govern the work of all the key government agencies through Jokowi’s first term. cuts in fuel subsidies. On the global stage, he will contend with a rising China to the north, a continuing influx of asylum seekers, and rising pressure to protect Indonesia’s overseas workers. During this three-month window, Jokowi will need to skillfully divide his resources and political capital between addressing basic issues and investing in broader, aspirational initiatives that could cement his popularity among the electorate. The priorities of the Jokowi-JK administration during the first 100 days will likely be: o Bolstering economic growth. The previous government has already reduced the 2014 growth forecast from 6 percent to 5.5 percent. With the World Bank predicting that Indonesia will need to grow by over 9 percent to avoid the “middle income trap,” Jokowi will make bolstering growth through both fiscal and monetary tools his top priority. o Improving infrastructure. A second issue, very much related to the first, is that infrastructure, a growth driver, has been lagging behind the country’s overall economic growth. Bottlenecks, high transportation expenses, and the cost of logistics have created economic inefficiencies and contributed to massive social frustration. Adherence to the Master Plan for Acceleration and Expansion of Indonesia's Economic Development (MP3EI), which was compiled in 2011 as well as the Master Plan on ASEAN Connectivity, means focusing on acceleration of economic development through infrastructure investment. The Jokowi-JK administration will make getting Indonesia back on track with its infrastructure goals a top priority. o Cutting subsidies. A pressing issue that is weighing down the government is the existence of subsidies, which is nearly 400 trillion IDR, or one third of the 2014 national budget. The enormously popular fuel subsidy, which makes up a large proportion of the program, was actually increased by the outgoing government. Jokowi-JK has promised to resolve the issue by replacing oil power with more gas, coal and geothermal power. They stated they will remove up to 90 percent of diesel-fired power plants within three years, which would save seven billion USD in energy costs annually. o Addressing social issues with signature initiatives. In addition to addressing these immediate problems, Jokowi will likely see the first three months as an opportunity to push through signature initiatives that will bolster his popularity. During the campaign, Jokowi promised two welfare programs for the people: a 'Kartu Indonesia Pintar' (Indonesian Smart Card) for poor children to be able to attend school and a 'Kartu Indonesia Sehat' (Indonesian Health Card) for poor people to get access to free health services. One or both of these programs will likely be rolled out within the first 100 days. At the conclusion of this period, roughly at the start of the new year, Jokowi will turn his attention to a myriad of secondary issues. He will focus on ensuring Indonesia’s readiness for the launch of the ASEAN Economic Community in December 2015. He will ramp up his diplomatic activities both within ASEAN and globally. He will have a hand in renegotiating a series of major mining contracts. He will broaden social programs, and then, in the blink of an eye, it will be time for Jokowi to prepare to run for his second term. 5
  7. 7. A Jokowi Presidency Protectionist Policies  New Trade Law. Enacted earlier this year, the new law gives greater power to the state over strategically important industries and a stronger role in protecting local industries. This came on the back of a ban on the export of unprocessed mineral ores at the beginning of the year.  Amendment to the Negative Investment List. The amendment, passed by a presidential decree, limited FDI in a variety of important industries, though some sectors were further opened to investment. A Case for Measured Optimism from MNCs Foreign investors and multinationals (MNCs) operating in Indonesia overwhelmingly supported Jokowi in the 2014 election. Jokowi is indeed a major proponent of continuing to expand foreign direct investment (FDI) into Indonesia, believing that it can make a positive contribution to delivering a sustainable and strong economy. However, foreign companies operating in Indonesia should not assume that a Jokowi administration will enact policies that will dramatically open Indonesia’s economy to foreign business. Several factors make this unlikely:  Regulatory realities. 2014 saw the DPR enact several pieces of legislation (left) that impose greater restrictions on foreign activities. As this legislation has already become the law of the land, the new administration will need to propose policies that generally agree with these regulations.  Campaign rhetoric. The PDI-P was quite vocal at the beginning of 2014 in asserting that Indonesia’s economic sovereignty is in danger of being unduly influenced by external actors. Jokowi himself has gone on record saying that foreign companies wanting to come to the ASEAN region should have to work harder to demonstrate a clear contribution to the region’s economic and social development. Therefore, in addition to existing regulatory realities, statements by both the future president and future ruling party suggest that dramatic shifts in the scope of allowed FDI should not be expected. Jokowi’s statement in particular suggests that Indonesia may in fact enact policies that require greater value-add from foreign investors going forward. A Cause for Optimism While the openness of the Indonesian market to foreign investment is unlikely to increase, a Jokowi administration is likely to benefit foreign MNCs in another important way. During his campaign, Jokowi pledged to:  Tackle corruption from the bottom-up;  Ensure unfair and illegal trade practices do not hinder the business environment further;  Streamline bureaucratic structures that have made doing business cumbersome and difficult;  Cut bureaucratic red-tape. If Jokowi is able to secure a majority in the DPR, as well as sufficient political support, foreign companies can expect there to be measurable progress in the ease of doing business under a Jokowi presidency. 6
  8. 8. A Jokowi Presidency Recommendations for Multinationals 1. Watch the politics closely. Given the make-or-break importance of the transition period in determining the political strength of the Jokowi administration, multinationals with a business interest in the country will need to closely track developments over the next three months. In particular, Jokowi’s ability to form a coalition that gives him a majority in the DPR will signal whether his pro-business reforms will succeed in passing. The outcomes of this interim period will be especially key for MNCs considering major new investments into the country. 2. Prepare for a new style of governance. Jokowi is known for a way of governing that sets him apart from the hierarchical, staid style of most politicians. He is seen as approachable by the business community. He often chooses to forgo bureaucratic formalities in order to solve problems, and decisions are often made following iterative trust-building sessions. While Jokowi’s style will need to change somewhat to accommodate the demands of a national mandate, MNC executives will nevertheless need to anticipate a new style of government relations that is more personal and puts greater emphasis on trust. 3. Consider how your business contributes to Indonesia’s development. The days of open FDI are coming to an end. Jokowi has already said that new FDI into Indonesia will need to demonstrate its contribution to the development of society, which is reinforced by various legislation passed in 2014. MNCs hoping to enter or expand their business in Indonesia need to develop strong narratives that demonstrate a clear and authentic value proposition to Indonesia. 4. Start forming relationships with the key people. The task of preparing a new government relations strategy should start now. The first step is to develop a stakeholder map that identifies the individuals – both public-facing and behind-the-scenes – that will influence your business in the next term. The map should be a living document that is updated as more information is announced. Appendix 1 identifies just a few of the top influencers that APCO’s Jakarta team believes should be on every business’s radar at this stage. 5. Look for authentic door openers. The next six months offer numerous opportunities for multinationals to approach the government to begin build relationships with the next administration. Opportunities include: 1. Suggesting language for the next national five-year plan based on global best practices; 2. Providing practical ideas for how the government can meet the proposed targets under the new Sustainable Development Goals, which will replace the Millennium Development Goals in 2015; 3. Offering concrete proposals for public-private partnerships that can address a need in Indonesia. 7
  9. 9. A Jokowi Presidency Appendix 1: Some of Jokowi’s Top Influencers Just some of the individuals that should be included in early versions of stakeholder maps are listed below. Going forward, there will be a range of influencers around Jokowi – both in public and behind-the-scenes roles – that MNCs will n eed to track carefully in order to maximize the effectiveness of their government relations efforts. 8
  10. 10. A Jokowi Presidency About APCO Worldwide in Indonesia APCO Worldwide opened its office in Jakarta in 2000, at a time of political transition and intense uncertainty, when Indonesia’s people were enthusiastically embracing democracy after many years of authoritarian rule. APCO assists clients in understanding and responding to new paradigms for business in a complex, fast changing and sometimes turbulent environment. APCO is today an established part of Jakarta’s business infrastructure. We offer a range of services within the framework of strategic communication, public affairs and corporate advisory services. Our services include:  government relations  crisis management  regulatory and fiscal reform  corporate responsibility  coalition building  market entry  litigation communication  media relations and monitoring APCO’s strategic approach is based on tailored research and insightful analysis. Our knowledgeable and experienced professionals in Jakarta have strong sector experience particularly in energy, mining, pharmaceuticals, food and beverage, banking and financial services, as well as in providing services to governments and nongovernmental organizations (NGOs). We also work with our colleagues in APCO’s offices globally to meet the needs of our international clients. For questions or comments on this analysis, or to learn more about APCO’s services in Indonesia, please contact us: APCO Worldwide, AXA Tower, 45th Floor Kuningan City, Jl. Prof. Dr. Satrio Kav. 18, Jakarta 12940 www.apcoworldwide.com Madeleine Hardjono senior director, Jakarta +62 811850911 mhardjono@apcoworldwide.com Jennifer Hart deputy managing director, Jakarta +62 8119885455 jhart@apcoworldwide.com Quint Simon consultant, Jakarta (m) +62 821 90790460 qsimon@apcoworldwide.com Muhamad Heikal (Heikal) consultant, Jakarta (m) +62.8111991011 mheikal@apcoworldwide.com 9

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