Education Investment in Indonesia

Download our in-depth Guide to Investment in the Indonesian Education Sector white paper pdf here.

ASK worked incredibly hard and on a crazy timetable to close our transaction to acquire New Zealand School Jakarta.  The team really understood what we wanted, took time to give great advice on the areas we didn’t understand and always represented our wishes professionally.  The guys really took the whole process back to basics and led us to a successful transaction.

Marvin Suwarso, Chairman, NZSJ

 Contents

1.     Key Takeaways

2.     FAQ

a)     Is education open for foreign investment?

b)     How does the Foundation structure support foreign investment?

c)     Can schools be operated by entities other than a Foundation?

d)     Can I open a new SPK school?

e)     Can a foreigner or foreign entity open a Foundation and sit in the Board?

f)      How can an investor realise any return on their investment in a school or university?

g)     How to distribute profits from a non-profit entity?

3.     Introduction

4.     Legislative Background

5.     Overview and Outlook

a)     Foreign Investment in the Indonesian Education Sector

b)     Growth of K-12 market

c)     Growth of the Higher Education market

d)     Growth of the Indonesian EdTech market

6.     Investment

7.     Structuring

8.     Work with Us

 1. Key Takeaways

• Open for foreign investors in the Indonesian education sector

• Fundamentals for bricks and mortar education institutions, support services and EdTech are strong

• Regulatory landscape has never been so supportive of the private sector:

• Prevailing laws and regulations around education in Indonesia are progressive and supportive

• Structures available for foreign investment in the Indonesian education sector are open to 100% ownership

2. FAQ

a) Is education open for foreign investment?

Yes.  Depending upon the type of education (formal or non-formal), model and structure up to 100% foreign ownership is possible. 

b) How does the Foundation structure support foreign investment?

Foundations can be established as domestic (Indonesian founder) or foreign (foreign founder) entities.  Regardless of the foundation, foreigners can sit in the Board with certain requirements (see above).  The appropriate representation together with relevant changes to the Foundations Articles of Association will provide control over the entity and the school licenses and operations.

c) Can schools be operated by entities other than a Foundation?

Formal schools (e.g. Primary, Secondary or High School) only a Foundation can hold the relevant school licenses and operate the school.  Non-formal schools (e.g. online school or learning support services) can be owned and operated by a Limited Liability Company that can be up to 100% foreign owned.

d) Can I open a new SPK school?

“…the only way to create a new SPK school is to convert and upgrade an existing school.”

Market Entry, Regulatory Context and Greenfield Projects

This growth of private schools in Indonesia has opened up opportunities for both Indonesian and foreign students to enjoy high quality education of international standards within the country as well as meet the needs of a growing economy. However, the regulatory landscape is complex and shifting - in 2014 the government issued a new regulation (Minister of Education and Culture Regulation Number 31 Year 2014) which made it compulsory for all SPK schools to incorporate into their programmes the delivery of three subjects (Bahasa Indonesia, Civics and Religion) and national examinations for all Indonesian students. 

The same regulation also prohibited the use of “International” in the school name as well as the school programme. In terms of market entry for investors the most challenging factor of the current regulation is that an SPK school should only be established from an existing national private school which has received “A” accreditation from the National Accreditation Body – essentially this means the only way to create a new SPK school is to convert and upgrade an existing school. 

So green field projects are challenging to say the least. This means the most accessible way to invest in international schools is through acquisition or partnership which savvy investors will understand requires deep contextual awareness and a high degree of trust with your local partners.  Essentially, this means opportunity for investors. 

e) Can a foreigner or foreign entity open a Foundation and sit in the Board?

“The answer - absolutely.” 

Representation and Control

Top of mind for any investor looking into this sector is what the legal framework of foreign investment in education would look like and how this supports control over the investment and revenue flow. As regulated (under Law Number 20 Year 2003 regarding the National Education System) formal education services must be operated under a non-profit entity in the form of a Foundation (or Yayasan). Can a foreigner or foreign entity open a foundation? The answer - absolutely. As stated in Government Regulation No. 63 Year 2008 as amended by Government Regulation No. 2 Year 2013 regarding implementation of Foundation Law (Law No. 16 Year 2001 as amended by Law No. 28 Year 2004) the requirements for foreign representation are:

1. 1.     Minimum initial contribution of IDR 100 million (or approximately USD 7,000) to establish a foundation

2. 2.     At least one member of the Board of Management (Pengurus) must be an Indonesian national (can be as Chairperson, Secretary or Treasurer)

3. 3.     The members of the Board of Management (Pengurus) who are foreigners must be holders of a KITAS (Limited Stay Permit)

With this legal framework a foreign investor can assume full control over the foundation and the schools it operates. 

f) How can an investor realise any return on their investment in a school or university? 

“…invest in a company that provides services to support the foundation’s operations.” 

g) How to distribute profits from a non-profit entity?

As a non-profit entity a foundation is prohibited from distributing any profits to its founder or any remuneration to its board of patrons or other board members who are affiliated to the founder. So how can an investor realise any return on their investment in a school? The answer is to invest in a company that provides services to support the foundation’s operations. Support services that can be provided to a Yayasan include:

1.     After school activities

2.     Facilities support services

3.     Management and technical assistance services

4.     IP License and research and development

These ancillary services can be provided by a limited liability company which of course can extract profit or pay dividends to its shareholders. These services are open from 100% to 67% foreign investment (depending upon the type of services).

However, it is obviously crucial to ensure that this legal framework is supported by the right structure and good governance.  

 3. Introduction

Market landscape

The Indonesian private K-12 and Higher Education market is conservatively valued at USD1.2 billion per year with Higher Education accounting for USD950 million.  A peek at our closest neighbour, Singapore has their Higher Education market at USD2 billion and the SE Asian private education spend at USD60 billion annually.  With the global education market expected to top USD7.3 trillion in 2025 the Indonesian private education market is poised for significant growth (sources: EY Parthenon: Education in South East Asia, HolonIQ). 

More good news, the fundamentals remain the same – with the key demand drivers for private education in Indonesia supportive for growth:

• Shrinking household size

• Rapid urbanization

• Affordability

• Low capacity vs. demand

• Value of English proficiency

• Desire for international education

• Growth of middle class:

  • Trading up

  • New geographies

  • Bilingual education

  • International offerings

• Public sector deficiencies

• Positive regulatory landscape

• Supportive macro 

Despite global uncertainty and wobbles across Asia - the education sector is still buoyant in Indonesia with a bulging middle class of 135 million according to the latest United Nations Development Programme report. 

The burgeoning Indonesian middle class is critical for national economic growth, but meeting their demands is another matter.  As the public sector is still catching up to meet both the market and learning needs of its population the growth in middle class and contraction of household numbers provides potentially huge trading up opportunities for private operators to step in.   

Indonesia continues to be mooted as the next big thing, but it may actually come to fruition this time as a paradigm shift in Indonesian bureaucracy materialises in the form of new investor friendly regulations and reforms addressing the burning issue for investors as they to control their investment with the appropriate structure and legal framework.

Add to this an overwhelming appetite for international-style, bilingual education offerings from the growing middle class signifies happy days for canny operators and confidence for investors. 

From a learning angle the opportunities (or threats from whatever your angle) are clearly transformative: 

• Centre based disruption

• Blended learning 

• Tech solutions

• Talent war

• Flexible learning solutions

• Inclusive and SEN education

That said, there are potential obstacles that need to be addressed:

Regulatory reform: although there has never been a more supportive Indonesian Presidency and the raft of reforms support this – the oversight of the private sector by institutions ill-equipped to unleash private sector growth and creativity is a concern

Higher Education potentially faces a downgrade in market size – the key drivers (source: HolonIQ):

• HE tuition deflation: governments and consumers demand improved access, affordability and stronger ROI for post-secondary learning

• Faster/cheaper credible alternatives: upskilling alternatives are gaining traction and trust in the market

• Digitization driving a lower administrative cost base across all sectors

 4. Legislative Background

Despite the education sector in Indonesia being complex and shifting, shrouded in archaic regulations with arcane structures to navigate, recent regulatory developments give reason to be optimistic:  

• In terms of market entry for K-12 investors the most challenging factor of the current regulation is that an SPK (Satuan Pendidikan Kerjasama) school should only be established from an existing national private school which has received “A” accreditation from the National Accreditation Body – essentially this means the only way to create a new SPK school is to convert and upgrade an existing school.  Leaving acquisition as the more viable option.

• The opening up of the HEI market to foreign investment to establish HEIs in Indonesia (Minister of Research and Higher Education (“MRHE”) Regulation No. 53 of 2018 regarding Foreign Higher Education, October 30, 2018 (“MRHE Regulation 53/2018”) remains a largely underutilised regulation as the most popular form of market entry in higher education is to collaborate with existing Indonesian HEIs on Trans National Education (TNE) opportunities.  

Crucially, the Indonesian Investment Coordinating Board (Badan Koordinasi Penanaman Modal, BKPM) has opened many fields of business for foreign investment - education services being one of them. 

Opportunities for foreign investment across the board in Indonesia have evolved considerably since 2015. With a slew of new legislation aimed at reducing barriers and friction to entering the market, now more than ever before foreign investors are able to make new inroads, faster.  

Thanks to this regulatory shift, the educational sector has realized significant gains in this arena, from better integration in the overall system, to legislation that supports more favourable terms to both establish and sustain schools.

Significant Regulatory Shifts

• The biggest shift happened in June 2018 when President Jokowi allowed for all applications for permits and licensing for foreign investment to be completed online and through one door. The legislation, known as Government Regulation Number 24 Year 2018 for Online Single Submission (OSS) System, simplifies and speeds the process for a variety of ventures, including educational opportunities. While there are still some limitations in terms of sector and type of licenses, which still have to undergo relevant ministries, this policy is considered a breakthrough.

• Additionally, President Jokowi reinforced his support for increased foreign investment with his Presidential Decree Number 24, Year 2018. This gives foreign workers a shorter visa application process and extends to shareholders, who serve as directors or commissioners at a given company, a longer period for limited stay permits and work permits.

• Further to the current investment policies, the latest revision and updated negative list, which was issued in 2016 (Presidential Decree Number 44 Year 2016) gave more investment opportunities with some industries open for 100% foreign direct investment (FDI), including e-commerce (previously closed for FDI), marketplace (with minimum investment) and tourism, which are industries that are fast-growing in Indonesia. In general, the total investment expected for a foreign investment company is IDR10,000,000,000 (approx. USD 715,000) minimum paid up capital of IDR2,500,000,000 (approx. USD 180,000).

The educational sector is increasingly attractive to foreign investors (the fundamentals remain the same) as it is not as capital-intensive compared to other industries. Still, it’s critical that investors understand that there are still some important hoops to jump through. 

• Investment regulation refers to relevant Ministries, such as the Ministry of Education and Culture for early childhood until secondary education (including non-formal and informal education) and Ministry of Higher Education, Research and Technology for Higher Education. 

• Educational business must be run as a non-profit entity, in a form of Yayasan (Foundation). Foreign investment in a Foundation is open under the Government Regulation Number 63 Year 2008 with minimum initial investment of IDR100,000,000 (approximately USD 7,000). 

• There is no restriction as to the percentage of foreign investment participation, although domestic investment is also required.

While running an educational-based business in Indonesia demands adherence to relevant local laws, today pursuing this is more accessible, quicker and easier to accomplish than ever before.

 5. Overview and Outlook

a) Foreign Investment in the Indonesian Education Sector

Historically, there are some sobering facts for anyone looking closely at the education system in Indonesia:

• Despite having 4,498 universities offering 25,548 majors only the three state owned universities in Indonesia have made it into global rankings. They were ranked 771 (Universitas Indonesia), 853 (Universitas Gadjah Mada) and 862 (Institute of Technology Bandung), respectively.

• In at least one global study on literacy conducted by Central Connecticut State University in the US, Indonesia came second last out of 61 countries, only beating Botswana. Among the 8 ASEAN nations Indonesia is roughly tied with Malaysia and the Philippines ahead of Myanmar, Cambodia and Laos for literacy.

• OECD PISA data consistently ranks Indonesia as one of the lowest performing countries in PISA with stagnant PISA scores over the last 15 years and specifically (source: OECD PISA):

  • Reading: 70% of Indonesian students are below the minimum competency level

  • Mathematics: 71% of Indonesian students are below the minimum competency level 

  • Science: 60% of Indonesian students are below the minimum competency level

(The PISA tests are translated into Bahasa Indonesia.)

If you add the context of a mandatory 20% of the national budget set aside on education, spread across a decentralised archipelago comprised of 34 provinces, thousands of districts, sub districts and cities and 75,000+ villages - each with considerable autonomy, those taking a quick glance at the situation could be forgiven for seeing a very bleak picture.

There are bright spots:

• Indonesia is a very young republic, having only shaken off the shackles of a long and corrupt dictatorship in the late 1990’s during which less than 1% of the national budget was put aside for education.

• Foreign direct investment in education was only made possible in 2003 via Chapter XVIII of Law No. 20/2003 on National Education - and capped at 49%.

• Chapter VI of Law No. 12/2012 on Higher Education made it possible for foreign universities to operate in Indonesia, albeit with many caveats that negate the profit incentive for private schools and therefore work against the stated goal to “further liberalize tertiary education and promote the global exchange of students, staff and science.”

• With an increase in certification efforts across the entire country the government is aware and is actively shepherding a concerted effort to improve the quality and consistency being delivered.

The future is very bright:

In addition to these relatively recent bright spots, significant economic facts are in play that give Indonesia a tremendous opportunity in the near to mid-term future:

• Annual GDP growth continues to outperform analyst expectations. A closer look reveals that while debt to GDP ratio continues to grow it is due to significant (and long-delayed) infrastructure projects and is buoyed mainly by the high consumption of a large and growing middle class.

• According to the British Council, (https://monitor.icef.com/2012/09/new-2035-enrolment-forecasts-place-east-asia-and-the-pacific-in-the-lead/) the number of Indonesian post-secondary students is expected to rank among the top 10 worldwide in terms of numbers by 2035.

• Indonesian demographics will continue to experience significant growth in the productive age population right into 2050, when it will be comprised of over 200 million residents of productive age.  

While there is still a long road ahead to developing Indonesia’s overall education quality, impact investors and foreign funds that have the foresight to drill down and peel back the layers, develop local relationships and bank on undeniable growth are lining up to find the best existing schools, vet them, and make them part of Indonesia’s growth story.

b) Growth of K-12 market

“...from 238 SPK licenses issued by 2014 the number has grown to 501 SPK licenses in 2018.”

Most observers of the Indonesian K-12 education sector have noticed rapid growth over the last decade.  Since a major regulatory change in 2014 there has been a dramatic increase of private schools of international standards in Indonesia (known as Satuan Pendidikan Kerjasama, SPK schools). Data issued by the Directorate General of Primary and Secondary Education(Ministry of Education and Culture of the Republic of Indonesia) shows that from 238 SPK licenses issued by 2014 (the year when the SPK regulation was implemented) the number has grown to 501 SPK licenses in 2018.  These developments have provided investment opportunities, in particular in schools targeting mid to upper price points. 

Key Legislation Governing the International K-12 Education System

In 2014, the climate of international schools in Indonesia changed in profound ways.  The Minister of Education and Culture issued a regulation (Ministry Regulation Number 31 Year 2014) regarding the cooperation of education management and operation between foreign education institutions and Indonesian educational institutions. In short, it stated the terms under which existing international schools and/or private schools using a foreign curriculum must cooperate with foreign education institutions.

Key aspects of this game-changing regulation included:

• Prohibition of the use of the word “international” in the title of schools in Indonesia

• Elimination of international school status, which had been in effect since 1974

• Introduced of three compulsory subjects: religion, civics and Bahasa Indonesia, or Indonesian studies, to be included as part of the school curriculum

These major compulsory shifts created challenges in interpretation and implementation of the law for private school operators. Now, in order to open a private school with an international curriculum - known as a Cooperative Education Unit (Satuan Pendidikan Kerjasama or SPK Schools) - it’s required that the school must go through national accreditation, which has a different set of standards than what are commonly found outside of Indonesia. 

The debate as to how to properly comply with the current national system while still delivering high quality private education is ongoing. Because a large number of students currently study in SPK schools, it’s up to school operators and regulatory enforcers to navigate the gray areas of the regulation and shore up workable solutions for both parties.

The Indonesian government’s Ministry of Education and Culture is currently discussing how to change this regulation in order to address these fundamental challenges.  

Still, investment in education in Indonesia represents a tremendous opportunity for foreign investors and school operators. President Jokowi has recently introduced a slew of new legislation, such as Government Regulation Number 24 Year 2018 for Online Single Submission (OSS) System (passed in June 2018), Omnibus Law (link to Foreign Investment Resource) and opening up of key investment sectors (Positive Investment List) that works to reduce the barriers and friction to entering the marketplace.   

More recent government strategic initiatives (Merdeka Belajar) have identified the private sector as a key driver to achieve high quality education for all Indonesians – specifically, incentivising private sector contribution and collaboration in education through CSR funds, tax incentives, public private partnerships, greater autonomy and profit allowed:  

Educational businesses tend to be less capital-intensive, and therefore is a naturally attractive option for foreign investors. The extra attention to compliance with local laws is worthwhile, as starting up an educational venture is today more accessible, quicker and easier to accomplish than ever before.

c) Growth of the Higher Education market

Higher Education (Polytechnics, Academies, Institutes and Universities) including Transnational Education (TNE platforms and programmes including distance learning, teaching partnerships, off-shore campuses and MOOCs) accounted for 8,000,000 enrolments in Indonesia in 2017.  The gross enrolment ration of 36% combined with 59% enrolments in private Higher Education Institutions (HEIs) represents opportunity for investors and operators.  With STEM graduates only making up 16% of all graduates the government is pushing the sector to develop partnerships with foreign universities to meet the targets for the Indonesia Vision for 2045 and the development of human capital.  Furthermore, with 335,000 enrolled on post graduate courses and 43,000 on doctoral programmes the post-grad market presents further opportunity.

With outbound mobility of 50,000 students (2018 data) it’s clear the focus is on developing domestic pathways among varied providers.  With public 245 HEIs (Polytechnics, Academies, Institutes and Universities) and over 4,600 private HEIs (2017 data) much of these efforts will fall to the private sector. 

Key Legislation Governing the Higher Education System

Despite the New Regulations for the establishment of International Branch Campuses in Indonesia (October 2018) as of the date of writing only one foreign branch campus is set to open in Indonesia (Monash International Branch Campus).  Several local universities run Joint and Double Degrees with universities in Australia, Germany, Japan, the Netherlands and South Korea (requiring a mobility period0 although Indonesia is not a major host of TNE programmes.

Yet there is growing enthusiasm within the Ministry of Education for greater use of online technology to support face-to-face teaching and the government is keen to support the development of TNE in Indonesia as part of its Vision for 2045 and the Development of Human Capital.

Regulatory Landscape

Current regulations (Ministry of National Education Number 26 Year 2007) allow for Joint/Double Degrees with foreign universities. Further, Ministry of Education and Culture Regulation Number 109 Year 2013 Distance-Learning Higher Education programmes can be delivered by a consortium of Indonesian University or with foreign university. The Ministry of Education has been welcoming further applications from universities for Blended-Learning programmes in partnership with Indonesian Universities to provide:

• Greater and wider geographical reach

• Building online capacity of Indonesian Universities

However, Franchised and Validated programmes are not referenced in Indonesian Regulations and there is no national register or published data of approved TNE programmes offered in Indonesia.

Sources: UNESCO Data, Cormack Consulting Group

d) Growth of the Indonesian EdTech market

Globally EdTech is growing at 16.3% and is expected to grow 2.5x from 2019 to 2025, reaching USD404B in total global expenditure (HolonIQ).  In Indonesia Ruangguru (USD150M 2019) and Zenius (USD20M 2020) represent the exception rather than the rule.  Although edtech presents great potential, Indonesia still lags behind other emerging markets (China and India).  The low profitability of the sector compared to high profit-generating tech startups has created challenges with funding which has slowed growth in edtech companies.   

Constraints on supply-side:

• difficult access to funding

• high customer acquisition cost

• shortage of talent

Constraints on demand-side: 

• low willingness of customers to pay 

• lack of digital literacy 

• poor digital infrastructure

These constraints on both the supply and demand-sides require solutions from private and public sectors.  

Content access and delivery are democratizing education globally with flexible learning options for parents and students needed to meet these demands.  K-12 and HEI operators are adopting blended service provisions generating significant growth in online providers. 

Parents and students expect more nimble, flexible approaches to learning to allow for contextual challenges and opportunities across geographies in Indonesia.  The scarcity of educators capable of delivering these programmes has been a challenge in Indonesia and will continue to get worse – don’t expect anything else. The opportunity for technology to jump in and meet this manpower shortfall is massive and regional developers are making significant progress.

Source: World Bank Group: Edtech in Indonesia – Ready for Take-Off? May 2020

 6. Investment

Impact of Regulations (regional analysis)

Although foreign ownership is possible the key takeaway for Indonesia is that formal education must be operated by a foundation (essentially a non-profit entity).  Typically, operators in Indonesia will employ the Opco/Propco model. 

Recent government strategic initiatives (Merdeka Belajar) are taking tentative steps towards for-profit education with a number of incentives for the private education operators designed to promote collaboration with the public sector.

Overview by country

 7. Structuring

Key to any investment in the education sector in Indonesia is structure.  Specifically, how control over the investment is structured in terms of entities, jurisdictions, representation and their relationships.  Choosing the right structure obviously depends upon the nature of the investment and the appropriate model.  

 8. Work with Us

ASK Consulting supports investment for all stakeholders from operators to investors across the region with Board advisory services: 

• Mergers & Acquisitions Advisory

• Understanding regulatory landscape

• Defining & Implementing best structures & commercial frameworks 

• Identifying & reaching suitable partners (preschool, K-12, HEI, TVET, EdTech, investors)

• Government relations

• Negotiation support & representation

• Due Diligence

• Legal documentation

• Local representation

• Non-profit entity establishment

• License and permit process 

Deals Supported:

• Merger & acquisition

• Private Equity investment

• Management buyout

• Disposal

• Fundraising

• New fund

• Project financing

• Refinancing

• Sale & lease-back

• Share issue