Tue, 10 Nov 2009
From: The Jakarta Post
By James Rajasa, Jakarta
For a decade following the fall of Soeharto, Indonesia has long been viewed as the sick man of Asia. Now, it is difficult for South East Asian countries to reject the de facto leadership status of Indonesia, particularly in representing the region's economic interest. The fact that Indonesia remains, at least for the last 5 years, a vibrant and stable democracy, directly electing its Commander in Chief, makes for a nice icing on the cake in a region still nuanced by oligarchies, coup d'etats, and even archaic military regimes. This is no longer Soeharto's Indonesia. This is a democratic Indonesia.

All this enthusiasm is shared by young Indonesian professionals. This enthusiasm is followed by the sense of confidence that they too are at par with their offshore counterparts in terms of skills and knowledge. Yet the fact remains that a large chunk of investments in Indonesia is managed offshore, mostly in Singapore.

It is very regrettable that lawyers from Singapore meddle in foreign investments destined for Indonesia when investors could save money (and avoid complications) by dealing directly with Indonesian counsels. Singaporean law and arbitration courts sometimes even deal with disputes between Indonesian parties or investments in Indonesia.

Thanks to the unreasonable double tax treaty between Indonesia and Singapore, these investors (even Indonesians) could certainly save a lot of tax money by establishing holding companies in Singapore which in turn creates a huge service industry. But we see more and more Indonesian legal services being subcontracted to Indonesian lawyers, instead of being directly handled by us for transactions which don't benefit from the treaty.

The case is even stronger for financial services. We are all familiar with how Singapore has become a world-leading financial services provider. But things are different now. Our local banks, along with their bright young staff and investment bankers, some of whom graduated from top universities in the US, Europe, and Australia, can do what their Singaporean counterparts do. Many of these Indonesian business people have long realized this and have established their own sophisticated structured investment vehicles to bypass investment channels. These include private equity firms such as Saratoga Capital, Northstar Pacific, and Principia. The quality of services and returns they provide to their investors match (and in some cases exceed) those given by Singaporean and international companies.

Other fields of services are experiencing the same phenomenon. We have seen many Singaporean technical service firms working on Indonesian projects while at the same time using Indonesian employees. We have also now been accustomed to hearing of our friends or relatives being hired by major offshore firms, in the US, Europe, and the Middle East. Even in New York where competition is a lifestyle, there are several Indonesians working in large Wall Street firms and others working in various service fields.

All this proves only one thing: our service industry professionals are no less qualified than our neighbors'. The question now is how we bring the service industry back to Indonesia. Certainly, a more thorough study is required, but I submit they revolve around the following issues.

First, the government needs to amend its tax treaty with Singapore to somehow make it less beneficial for investors to establish holding firms in Singapore, hence reducing the need for Singaporean financial and legal services, while still maintaining Singapore's investment interest in Indonesia.

Second, we need to assure investors that Indonesia is safe, and Indonesians adequately qualified to render high quality services so as to eliminate their need for an offshore hub in investing in Indonesia. This runs parallel with promoting the efficiency investors will gain by investing or channeling their funds directly in Indonesia.

Finally, to hammer home a familiar point, the government needs to do much more than what it is currently doing to eradicate corruption, especially bribery in courts, or as Indonesians call it, the "court mafia", because these illegal practices create uncertainty for law enforcement in Indonesia, which in turn leads investors to choose Singapore as their preferred base. I have great faith in Indonesia's bright future in becoming one of the world's most important economic powers. It is inevitable, as well as evident. The process towards this goal will accelerate once we bring the service industry back to Indonesia, and yes, Indonesia can do it!

The writer is consultant based in Jakarta and New York



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