Societies across the globe are being transformed by technological advancements, which are redefining the way people live, work, and play. Developments in connectivity and computing power, along with technologies such as automation, machine learning, and artificial intelligence are at the heart of this change.
By Hari Venkataramani, Sridhar Narasimhan, Shirley Dhewayani Santoso, Damian Manuel, and Vanda Chau
Indonesia is poised to benefit greatly from the digital revolution, as is the broader region. A study by Axiata and A.T. Kearney assessed that digitization could add US$1 trillion to the gross domestic product (GDP) of the Association of Southeast Asian Nations (ASEAN) by 2025, a 20–30 percent increase over the region’s current output.1
But while Indonesia has set an ambitious vision to become the largest digital economy in ASEAN by 2020, it lacks a coherent national narrative and road map to achieve this. Putting both in place is vital if the country is to emerge a winner in the digital age.
At the same time, Indonesia must focus investment in digital technology to strengthen infrastructure and stimulate the digitalization of state-owned enterprises.
The Need for a National Digital Road Map: Setting the Vision
Indonesia has taken some important steps toward fulfilling its digital ambitions. The government has launched a number of initiatives to help power digitization, including its “Making Indonesia 4.0” road map, an e-commerce road map, and many more (see figure 1). Together, these cover some aspects of taking Indonesia into a digital future, such as industrial digitization, education, and commerce.
Partially as a result of these steps, the conditions exist for a thriving local start-up ecosystem to emerge. For example, Indonesia is already seeing the fastest growing inflows of venture capital in ASEAN. At the same time, the government is aiming to prepare the next generation for a digital future by revamping the national educational curriculum.
But while such developments are impressive, they do not go far enough. The government’s digital initiatives are split across a number of different national road maps, and as such, lack a clear overall focus. There is no single national narrative on digitization along the lines of the United Kingdom’s “Digital Strategy” or Singapore’s “Smart Nation” vision.
To truly realize its digital ambition, the country needs to articulate such a national narrative and develop a comprehensive road map for turning its ambition into reality. To be effective, this road map should focus on four key areas:
- Building a digital infrastructure. This involves developing focused government investment plans for digital development, including infrastructure building, government service delivery, and ecosystem seeding.
- Boosting consumer awareness and trust. This starts with developing a compelling national vision for Indonesia’s digital future, clearly summarizing the benefits of a digital future for the nation. It also includes putting policies in place around cybersecurity and data privacy to boost consumer trust.
- Developing a future-ready workforce. Foundational national projects and policies are required in such areas as workforce and student skills development.
- Growing the innovation ecosystem and supporting local champions. A clear set of ecosystem-building priorities would help to focus national digital investment efforts. These might include setting up technology clusters or hubs that investors, universities, and start-ups can build around.
1. Building Indonesia’s Digital Infrastructure
Indonesia has made great leaps forward in connectivity over the past decade and now has more than 60 percent smartphone penetration. The country also has among the lowest mobile data prices globally and these continue to decrease. Indonesia is currently ranked 38th in the world in broadband affordability, according to a recent World Economic Forum assessment (Thailand ranked 74th, while Malaysia came in at 91st).2
That said, broadband speeds in Indonesia are among the lowest in ASEAN and many rural parts of the country still don’t have access to high-speed mobile networks; this is changing rapidly, however, with accelerated 4G network rollouts.
The government can support accelerated broadband access in three key ways:
- Create a healthy industry. The industry faces tremendous competition and profitability challenges that affect players’ ability to invest in building infrastructure. In fact, it’s state-owned enterprises that continue to make the bulk of any infrastructure investment. To build a healthy industry that can support the country’s digital ambition while balancing consumer needs, the mobile industry needs to consolidate around three healthy players.
- Undertake national infrastructure projects. Aggressive, government-led national infrastructure building (with regard to fiber infrastructure, for example) is necessary, both to connect remote islands and extend inland networks. While the Palapa Ring and National Smart City projects have been a good start, more such projects are needed. These could include a national broadband network, a national data center, and a cloud network. In other parts of the world, governments embark on such projects in prioritized partnerships with incumbent players.
- Liberalize technology policy. Indonesia still faces a spectrum crunch of about 350 MHz over the next five years. Valuable low-band spectrum is still supporting analog TV services rather than crucial broadband services. Indonesia needs an aggressive shift to digital TV services and a reallocation of the existing spectrum toward the players propelling much of the broadband investments. A liberalization of spectrum policies to allow spectrum trading would also be a step in the right direction.
2. Boosting Consumer Awareness and Trust
Consumer access to and engagement with digital is high in Indonesia. More than 80 percent of the country’s population are mobile Internet users, for instance, and it also has the world’s fourth-largest number of Facebook users. What’s more, more than 30 percent of its consumers buy goods online—a figure that is rapidly rising.3
However, Indonesian consumers continue to be reluctant online transactors, especially when it comes to making payments and using digital banking services. This is largely due to digital security and privacy concerns. According to a survey by the Indonesian Internet Service Providers Association (APJII), 66 percent of respondents are worried about their data being stolen and 84 percent are concerned about online scams.3
To counter such concerns, Indonesia needs to take action on three fronts:
- Cybersecurity. Indonesia has already set up a national cybersecurity agency. This must be supported by clear sector-level dialogues to create a national cybersecurity strategy, and the implementation of cybersecurity and cybercrime laws. Global experience also shows that cross-industry coordination on an ongoing basis is essential for effective security response. Policies should ensure that the private sector, state-owned enterprises, and small and medium enterprises can invest sufficiently in cybersecurity infrastructure and adopt robust security policies.
- Data privacy and protection. While the government has stated its ambition to build out data privacy and consumer data protection policies, there has been limited progress in this space. Many countries around the world—including the European Union (EU), Canada, and China—have built comprehensive data protection and privacy policies. The EU’s General Data Protection Regulation offers a template for the nature of policymaking in this area. The presence of such policies covering both personal and non-personal data would go a long way to improve consumer trust. Adopting emerging technologies such as blockchain could also play a crucial role in data privacy.
- Consumer education. The general population lacks digital awareness to a very large degree. National e-literacy programs, such as those established in India, would play a vital role in spreading awareness about digital services. Reinforcing security and data privacy measures, as outlined above, could also trigger accelerated adoption.
The government can also play an active role in spurring digital awareness by offering more of its services online. Encouraging agencies to adopt e-government services (to register property, births, or deaths, for example) would also stimulate digital transactions.
3. Developing a Future-Ready Workforce
Indonesia is going through a demographic “golden period” at the moment, with a high working-age population (42.4 percent of the population is between the ages of 25 and 54, according to recent World Population Review research). These workers need to be trained in the skills required to flourish in the digital age, such as critical thinking and problem solving, creativity, digital literacy, and a range of social and emotional “soft” skills. All will be vital for the rapidly evolving and more highly automated workplaces of tomorrow.
The government has already started taking steps to address these needs at the primary education, vocational school, and university levels through a nationwide education curriculum redesign master plan.4 Through this plan, it also aims to support mobility training for displaced workers in collaboration with private universities.
However, when it comes to ensuring that the current workforce is receiving sufficient training to meet the challenges of the future, a number of gaps in national policy still remain. The government’s spending on education (~3.3 percent of GDP) also lags behind other advanced countries, which typically spend 5–6 percent of GDP.5
To remedy this, policymakers should take the following three steps:
- Encourage private sector skill-building. The government should incentivize and encourage organizations to upskill their employees with an eye to building a workforce that’s fit for the future. It should also facilitate cross-organization and cross-industry forums for training and knowledge exchange.
- Expand the national education curriculum. The government should expand the National Education Curriculum Redesign so that it includes building a lifelong learning program for the entire population. The “Thailand 4.0” model includes some good examples of effective governmental action in this area. The Thai government is promoting lifelong learning through 3,600 community digital centers, and has also established a Strategic Talent Center, where specialized science and technology skills are matched with private sector needs.
- Facilitate industry–university collaboration. The government should work with educational institutions and businesses to map a clear view of future skills demand versus supply and facilitate industry collaboration when it comes to creating talent exchange and training programs. Industries need to play a role in curriculum-setting—indeed, in the entire education process—and policymakers could help to facilitate that.
4. Growing the Innovation Ecosystem and Supporting Local Champions
Indonesia is seeing a rapid growth in digital start-ups, primarily in the e-commerce sector. An increasing number of unicorns (privately held start-ups with a valuation of US$1 billion) are also starting to emerge, including GO-JEK, Traveloka, and Tokopedia.
Venture capital (VC) investments in Indonesia have grown exponentially—up to 68 times—from 2012 to 2016. Today, Indonesia accounts for 20 percent of VC investments in ASEAN.6
On a macro level, then, the innovation ecosystem appears to be on an upward curve. However, gaps still remain with regard to such areas as fiscal incentives, funding and exit options, and facilitating ecosystem growth.
As an A.T. Kearney and Google Indonesia VC outlook study found, the government could stimulate progress in these areas by6:
- Offering intellectual property (IP) protection and fiscal incentives. The government should put in place an effective IP framework to encourage companies to build out original research and ideas. This needs to be supported by tax incentives to encourage investments in the start-up ecosystem and to allow start-ups to compete effectively in the marketplace.
- Providing more funding and exit options. The government should consider setting up a national VC fund along the lines of that established by the Chinese government in 2016. At the same time, a multitier market system for higher-risk start-ups could enable more liquidity and greater investments in the space.
- Facilitating ecosystem growth by:
- Simplifying corporate rules and laws regarding the setting up and shutting down of companies to encourage entrepreneurship
- Attracting overseas entrepreneurs via policy actions such as preferential work permits, where there is a specific need for specialized talent in the short to medium term
- Creating mechanisms for start-ups to secure access to mentors through national incubator ecosystems and interactions with national digital champions. The government could also consider allowing start-ups preferential access to projects linked to government and state-owned enterprises to help spur ecosystem growth.
Increasing Investment in Digital Technology
To fulfill its vision of a digital future, the Indonesian government must also boost investment in digital technology. Such investment should be focused on digital infrastructure spending at the network operator and enterprise levels.
Indonesia currently invests less than its ASEAN peers do in building a digital infrastructure. For example, the country’s investment in digital amounted to 1.3 percent of GDP. Thailand’s investment during the same period was 2.4 percent of GDP, while Malaysia’s was 4.5 percent and Singapore’s 6.6 percent.7
More specifically, over the next five years, the government needs to increase the country’s information and communication technology spend as a percentage of GDP to 2.5 percent and invest IDR 275–300 trillion per year (a total of approximately US$100 billion) in 10 crucial areas such as networking, security, cloud, and data analytics (see figure 2).
Spurring State-Owned Enterprises into the Digital Age
State-owned enterprises in Indonesia contribute 13 percent of GDP and 25 percent of the stock market.8 Were these entities to make significant digital strides, their progress could be held up as a template for other companies around the country to learn from. As those companies started to digitize in turn, their growth could encourage the development of a local digital ecosystem.
In other words, there could be substantial knock-on benefits should the government and the ministry spur state-owned enterprises on to adopt digital growth.
Compared to local and global digital leaders, state-owned enterprises in Indonesia have relatively lower digital maturity (see figure 3). Annual digital investment in these entities would need to triple over the next four to five years to ensure that they could catch up with advanced ASEAN economies.
While any such spend needs to be encouraged across industries, manufacturing, logistics, agriculture, and services offer the biggest opportunities (see figure 4).
State-owned enterprises can potentially play a valuable role in helping Indonesia embrace a digital future. They can help to improve consumer education and trust, educate and upskill the workforce, and build the local innovation ecosystem.
To unleash state-owned enterprises’ potential in this regard, the state-owned enterprises ministry could focus on five key elements:
- Ensure all state-owned enterprises develop clear digital road maps aligned to strategy. This should be done in tandem with sector champions and telecommunications, and by putting in place clear guidelines and outcomes
- Establish a central digitization agency that can sign off on and enable the execution of state-owned enterprise road maps
- Make it easier for internal policy to be put in place, with a specific focus on:
- Standardizing procurement processes that can enable small-scale digital procurement without the traditional legacy processes, and reducing onerous compliance requirements to enable start-ups to participate in state-owned enterprise procurement
- Diverse recruitment policies that enable higher payment for specialized skills beyond companies’ standard HR policies, and shared specialist resources across state-owned enterprises
- Create an overall culture of value-focused innovation and digitization, with board-level key performance indicators to measure progress across all dimensions
- Foster the local ecosystem through policies where local vendors are given preferential access to projects linked to state-owned enterprises to help boost participation
Indonesia: Harnessing the Benefits of the Digital Age
While taking action in the ways described above, the government should also urgently set up a national digital taskforce to coordinate national policymaking and promote broad consumer adoption. To be effective, such a taskforce should be truly representative of both government and industry. That way, it would be able to play a vital role in powering Indonesia’s digital transformation journey.
Digitization offers Indonesia a chance to accelerate its economy and offer new growth opportunities to its people. It is imperative that the government takes urgent action now if it is to realize its ambition to become the region’s largest digital economy.
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