Strategic Investment Policies for Digital Transformation: The Case of Indonesia.

• Author: Anas, Titik

1. Introduction

   The wide usage of mobile phones and the Internet has contributed to major improvement in almost all sectors of Indonesia, from commerce to public service. The agriculture and fishery sectors were introduced to electronic applications to improve their productivity and marketing channels. Manufacturing sectors benefitted from robots, artificial intelligence and e-commerce. The services sector went global without the providers having to cross borders. Personal consumption was made easy by e-commerce platforms and online food and beverage delivery services. Likewise, travelling was made easy by the availability of online one-stop service travel agents. Healthcare services have also become more accessible with online healthcare providers. Remote learning provides the opportunity for better access to quality education for people living outside the big cities. Public services were streamlined and made more accessible with digitized online services.

   The COVID-19 pandemic has accelerated digital transformation even further. It forced Indonesians to transition to digitalize businesses and consumption. Business activities, public services, healthcare, and education services were forced to be delivered online. Businesses that cannot be delivered online simply halted during the pandemic. People without digital literacy were left behind. A number of surveys have revealed the negative impact of COVID-19 on Indonesia's households and businesses (World Bank 2020; World Bank 2021; UNICEF et al. 2021). These surveys showed how merchants shifted to an online system to cope with the strict lockdown. The studies also showed that merchants who were able to transform into digital merchants tended to be more resilient than conventional firms. They revealed that structural barriers were impeding the adaptation to the new way of doing business which resulted in a relatively limited transformation from offline to online commerce. The surveys brought to light the struggles of households in coping with working from home when their children were studying from home as well. Suboptimal learning was evident as both students and teachers had little time to adapt to online learning.

   During the pandemic, the government also accelerated the rollout of digital infrastructure to allow people to remain productive during this period. In 2020 and 2021, the government increased public spending for ICT significantly. The allocated budget was IDR14.6 trillion in 2020 and IDR26 trillion in 2021, respectively. The 2022 government budget plan has provided significant allocation to ICT. The medium-term fiscal policy framework has also directed more investments towards ICT.

   In 2020, Indonesia enacted the Job Creation Law outlining the country's investment reform. The law pertains to a risk-based investment licensing process where low-risk investments do not require licensing but only registration. On 9 August 2021, President Joko Widodo launched an online single submission (OSS) system for risk-based investment licensing to facilitate the ease of starting a business in Indonesia. The law also attracts foreign investment into the digital sectors.

   This study elaborates on how the government of Indonesia has facilitated digital transformation. It begins with a discussion of digitalization in Indonesia. The next section discusses the digital transformation in Indonesia to date and some of the existing challenges. The third section discusses policies and budget allocations to accelerate digital transformation in the country. The final section concludes with some policy recommendations.

2. Digitizing the Economy: Digital Transformation in Indonesia

   The word digitizing or digitization refers to the process of turning an analogue into digital, for example, from paper-based to online documents in computers. Digitalization refers to the use of digital technologies and digitized data to change how we work, interact, and communicate. The term digital transformation is defined as the economic and societal effects of digitization and digitalization (OECD 2019). The key properties of digital transformation include how digital technology drives new and evolving business models and its implications for public policy.

   The past ten years have witnessed a significant increase in the consumption and production of digital goods and services in Indonesia. Indonesia has 142.5 million Facebook users as of January 2021 -- the third largest in the world. The country also has 94.2 million Instagram users as of October 2021 (Statista 2021a, b)--the fourth largest number of users globally. The country is also home to the ride-hailing company Go-Jek and several other e-commerce platforms (Google, Temasek, and Bain & Company 2021). Indonesia's e-commerce has experienced strong growth across all sectors as reflected in the 52 per cent YoY growth (US$35 billion to US$53 billion). The report also suggested that digital financial services grew very fast and have been enablers of digital business. About 98 per cent of digital merchants use digital payments, and 59 per cent of digital merchants utilize digital lending solutions to finance their businesses. The report also suggested that, since the beginning of the pandemic up until mid-2021, there were 21 million new digital consumers in Indonesia, with 72 per cent of them located in non-metro areas.

   The significant increase in consumption and production of digital goods and services was made possible by ICT development in general, and the Internet. The ICT sector grew quickly at 10 per cent (CAGR) over the past decade while the national economic growth was around 4 per cent (CAGR) in the same period (Figure 1). Although COVID-19 hit the economy severely, reflected by a contraction of -2.07 per cent in 2020, the ICT sector grew by 10.6 per cent.

   Mobile cellular telephone subscriptions increased remarkably from 3.7 million to 355.7 million in the past twenty years (Figure 2). The age group of 15-24 is the largest user of the Internet, with almost 84 per cent of this age group using the Internet, followed by the age group of 25-74, with 44 per cent of this age group using the Internet. Indonesia also witnessed an increase in young age users of the Internet (

   Meanwhile, the Eastern region of Indonesia (Maluku, Nusa Tenggara, and Papua) has experienced inadequate Internet access (World Bank 2021a).

   With regard to the mode of Internet access, broadband access through mobile networks is more prevalent than fixed broadband Internet (Figure 3). ITU's record shows that mobile broadband subscriptions in Indonesia increased by fivefold in the past ten years, from 45 million in 2010 to 244 million in 2020. Fixed broadband subscriptions, which were very limited at 2 million in 2010, grew to 11 million in 2020. Fixed broadband is used by a very small segment of the population. Large volumes of fixed broadband data usage comes from educational institutions, health facilities, and government and private offices (World Bank 2021a).

   There has been a remarkable growth in Internet penetration in the past decade (Figure 4). The share of individual Internet users and households with Internet access increased fivefold in the past decade. Figure 4 also shows that the share of households with a computer increased slightly. On the other hand, the share of households with fixed-line telephones showed a negative trend, while the share of individual mobile phone users almost doubled, indicating a shift in preference from fixed-line telephones to mobile phones.

   The number of Internet providers and subscriptions has increased significantly (Figure 5). The mobile Internet providers with major market shares are Telkomsel (46 per cent), XL Axiata (20 per cent), Indosat (17 per cent), Tri (10 per cent) and SmartFren (7 per cent) (World Bank 2021a). The fixed broadband Internet market is more concentrated, with IndiHome (from PT Telkom) dominating the market with an 87 per cent market share, followed by First Media (7 per cent), MNC (3 per cent), and Biznet (1 per cent).

   Despite the growth in quantity, the quality of Internet access in Indonesia is below its peers in ASEAN (Figures 6 and 7). The topography and scale of the Indonesian archipelago are major challenges to a full nationwide network coverage (Internet Society and TRPC 2015). Internet bandwidth penetration is concentrated in urban areas while small villages and remote rural areas are often unpenetrated. The Java and Sumatra islands are regions with high Internet penetration at 41.7 per cent and 16.2 per cent, respectively, while the rest of Indonesia at less than 10 per cent (APJII and Indonesia Survey Center 2020). Nevertheless, the digital divide across provinces in Indonesia has narrowed over time (Figure 8).

   What is the profile of e-commerce in Indonesia? The Indonesia Bureau Statistics (BPS) 2020 and 2021 e-commerce surveys showed that most of the e-commerce sellers in Indonesia were of small scale, with total sales amounting to less than IDR300 million per year. Interestingly, the survey indicated that most e-commerce sellers used non-marketplace media for their businesses, e.g., instant message applications (90 per cent of respondents) and social media (60 per cent). Payment methods remained conventional, with more than 70 per cent of the respondents using cash as their delivery payment method. The e-commerce sellers are predominantly young people with secondary education levels. The surveys also revealed that low demand and capital were the two major impediments hampering their business growth.

   How did the pandemic affect e-commerce? BPS surveys revealed that the pandemic had caused about 70 to 85 per cent of the respondents to experience a drop in their sales and volume of transactions. Several other studies also found evidence of the adverse effect of the COVID-19 pandemic on MSMEs (ADB 2020; ILO 2020; Bappenas 2020). Domestic demand for MSMEs products fell by a third in the month...