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Education | Investment in Indonesia's Higher Education Sector: Promising Yet Challenging

After being in limbo for six years since the first issuance of Law No. 12 on Higher Education in 2012, significant progress has finally been made on the planned opening of foreign universities in Indonesia. The Ministry of Research, Technology, and Higher Education announced in September 2018 that two Australian universities have obtained approval to open their branches in Indonesia.

Investment in Indonesia's Higher Education Sector: Promising Yet Challenging
Australian universities are being prioritised following the finalisation of the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA).

This is good news for Indonesia’s middle-upper class who spend millions of dollars to send their children abroad in search of quality education. Moreover, the entrance of the two Australian universities will also serve as a testing ground for other foreign universities as to whether the investment and collaboration model set out in the higher education law is viable or not. 

Enormous potential

Indonesia's higher education sector offers promising investment opportunities for global and local educational institutions. Currently, nearly 43% of the country’s population is below 25 years old and its middle-class population continues to grow and is expected to double to 140 million by 2030 (See Indonesia's 2019 Economic Outlook: Challenging Times amid Political Turbulence).

Indonesia currently has 4,498 universities offering 25,548 majors. However, quality has long been of concern to parents and policymakers in Indonesia's higher education sector. The accreditation level of the majority of Indonesian universities has been falling into the B and C categories. As of the end of 2017, only 65 universities held A Grade accreditation status which is expected to slightly increase to 75-80 in 2018.

At an international level, only three national universities in Indonesia, all state-owned ones, managed to make it into the list of the world's top 500 universities. The Indonesian government has been focused on improving the quality of local universities by introducing a number of policies including stipulating Law No. 12/2012 on Higher Education (See Indonesia’s Higher Education Act 2012).

We have seen the government take the initiative of linking industry demands with the higher education sector. We agree with this measure because it is essential that our sector collaborates with industry players.

The law promotes the internationalisation of higher education and encourages the entrance of foreign universities. The presence of foreign universities in Indonesia is expected to increase competition as well as help facilitate knowledge-sharing and technological exchange which is designed to encourage and improve the quality of local universities.

Many Indonesian universities have already partnered with foreign universities through lecture and student exchanges, grants and scholarships, dual degree programmes, joint research, training, and publications. Now the Indonesian government is looking to take it to the next level by allowing foreign universities to establish local campuses in the country. Foreign universities have technically been allowed to open branches in Indonesia since 2016, yet the offer has not been realized due to lack of clarity and commercial interest. The Ministry of Research, Technology, and Higher Education issued a regulation to clarify the implementation of the regulation based on Law No. 12/2012 on Higher Education.

In early 2018, the Indonesian government announced that there were five to ten foreign universities that have expressed interest in opening branches in Indonesia. These include the UK's prestigious Cambridge University and Australia's University of Melbourne and University of Queensland. In addition, there have also been talks and meetings held with US universities such as the Massachusetts Institute of Technology (MIT) and North Carolina State University, as well as Spain’s University of Alicante Geographical Information System (SIGUA).

In the second half of 2018, the Indonesian government further announced that it has given the green light to two Australian universities to open branches in Indonesia with plans for one to do so before the end of the year. Australian universities are being prioritised following the finalisation of the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA). The agreement sets out the terms of a partnership in the development of vocational and higher education between the two neighbouring countries. This includes cooperation in human resource capacity building to increase the number of skilled workers and improve local labour competitiveness (See Higher Education: Indonesian Academia Must Open Up).

Under the agreement, which is expected to be signed in November 2018, the Trade Ministry has eased investment regulations in Indonesia’s education sector exclusively for Australian higher education institutions. This has been made possible by granting foreign equity participants (FEP) to the country thus enabling Australia to realise its investment in Indonesia's higher education sector.

Additionally, the agreement will also provide an opportunity for 200 Indonesian students to attend an internship program in Australia as part of a transfer of technology. The internship program is open to nine sectors, namely education, tourism, telecommunications, infrastructure, health, energy, mining, finance, and information technology. The Indonesian government expects the program to expand to other Commonwealth countries in the near future.

Challenge and opposition

Despite the benefits and positive reception, not all stakeholders are happy with the policy. There is a strong opposition from a number of local, private campuses against the policy.

Indonesian local universities fear that the entry of foreign universities will make it more difficult for them to attract talented faculty members and, most importantly, students. Furthermore, the lack of both will force local campuses to close down their operations. Additional opposition comes from community groups and religious organisations who fear that foreign campuses may remove nationalistic principles and religious values from education.

Nevertheless, the concerns of local, private universities that the presence of foreign universities will seize their market share and put them out of business seem to be overstated. Foreign universities will impose higher tuition fees than the average Indonesian university given their focus on the upper-middle-class segment. Thus, their presence will only impact, if at all, a handful of elite universities, both private and state-owned ones.

To address these concerns, the Indonesian government is imposing a variety of restrictions which limit the commercialisation of higher education by foreign institutions. These include the obligation to adjust the programmes to local rules, culture and conditions including using Indonesian names, language, and being an Indonesian legal entity. Another restriction is that the government is only allowing foreign universities to offer a few, selected majors such as science, technology, engineering, mathematics, business, and management. Moreover, the proportion of foreign faculty is also limited to 40%, and they need to operate on a not-for-profit basis in a specially designated area.

Unfortunately, these restrictions have reduced the attractiveness of the Indonesian higher education sector despite its huge economic potential. As a result, many foreign universities have postponed their entry into the country.

The planned entry of Australian universities will prove crucial as it will either make or break the policy. It will either pave the way for the entrance of numerous foreign universities into Indonesia or it will see them give up their interest altogether if the partnership model offered by the Indonesian government proves to be unviable and unsustainable.

Remain prospective

Having said that, the prospects for investment in Indonesia's higher education sector remains positive. In 2018, no less than 2 million high school graduates went to college with a gross enrollment rate of 31.5%.

At the same time, the number of Indonesia’s upper-middle-class families with sizeable disposable incomes is growing. This market segment has the means and resources to finance their children's education at any cost. The presence of the local branch of foreign, reputable universities will become an attractive alternative for these people as opposed to sending their children to study abroad — an estimated 40,000 students were sent abroad in 2010. Around 17,000 of these students are enrolled in Australian campuses, while others form a majority of enrolled students at the Singaporean branch of Australian and UK campuses. This illustrates ample opportunity to capture a market that is aspiring to provide their children with an international standard of education without leaving the country. 

Global Business Guide Indonesia - 2018

icone share

Indonesia Education Snapshot

Number of Tertiary Education Institutions: 4,445 (2016)
Type: 91.5% Private, 8.5% Public
Students in Higher Education: 4,941,574 (2016)
Net Enrolment Rate in Tertiary Education: 22% (2014)
Relevant Law: Higher Education Law No. 12 of 2012 provides universities with the autonomy to set their own tuition fees and authorising the set up of foreign universities in partnership with Indonesian institutions.