Tue, 13 Nov 2007
The Investment Coordinating Board (BKPM) has reported steady and sharp increases in new foreign investment approvals amid persistently negative perceptions among foreign businesspeople and analysts of Indonesia's investment climate.

Most foreign investors and business consultants still consider the country one of the least attractive places in Southeast Asia for direct investment due to numerous impediments to business operations. They do recognize the BKPM figures on licensed investment but point out that investment approval is one thing, while investment realization something else entirely.

Many foreign investors apparently wanted to obtain licenses before the particular business fields were closed to new investors. But the blunt fact is that all the wonderful data on investment approvals mean little for the economy and job creation if the investment commitment is not realized in fixed assets.

The situation is strikingly different in foreign portfolio investment as investors still pour a lot of money into Indonesia's corporate stocks, government bonds and Bank Indonesia's commercial papers. Obviously it is this short term capital inflow that is partly responsible for keeping the rupiah relatively stable on the foreign exchange market. It is the foreign portfolio investment that also has fueled the bullish sentiment on the Jakarta stock market despite the projected weakening of the world economy.

The problem, though, is that these portfolio investments do not contribute much to economic expansion as they are invested only in financial instruments, not in fixed, productive assets. They instead make the rupiah highly vulnerable to speculative attacks as the hot money can fly out instantly at the slightest sign of trouble or even wild rumors.

Some investors have acknowledged the significant progress made through several sets of reform packages launched since early last year. But the problem is that Indonesia still lags far behind many other countries in Asia even in the most basic rules or procedures for doing business.

Eurocham vice chairman Leonard van Hien rightly observed last week that Indonesia, though abundantly endowed with rich natural resources and lucrative business opportunities, has been suffering from negative perception among foreign investors due to extensive corruption, an unreliable justice system and excessive red tape in business licensing.

Starting up a business in Indonesia still takes more than 100 days, as opposed to one or two weeks in most other Southeast Asian countries, and complying with the numerous regulations imposed by the central government and regional administrations is not only time consuming but also costly as the red tape at every step of the bureaucratic process requires the payment of official fees or bribes.

What about the one-stop licensing system promised by the new investment law that was enacted last April? This facility is still on the drawing board as the government regulations regarding the division of licensing responsibility among the various ministries and between the central government and regional administrations are still being drafted.

Besides red tape and regulatory excesses, inadequate basic infrastructure and the utterly poor condition of roads and seaports due to years of under-investment and neglect caused by an acute lack of maintenance budget have been cited as the biggest barriers to new investment.

But only one or two of the dozen major infrastructure projects such as those in power plants and toll roads which have been offered to investors since 2005 are now under construction because investors who made the plunge into this field have been frustrated by red tape and regulatory excesses. Lack of roads and poor port-handling services certainly have increased business costs at a time when companies are now groaning under steeply rising fuel prices.

Most businesses have complained that higher fuel prices have increased their production costs by 10 percent and consequently eroded the competitiveness of their products on the international market.

Unfortunately, it is labor-intensive manufacturing companies such as those which produce textile, garments, shoes and electronics which are suffering the most because they must rely on imported basic materials and parts and components and compete within a very thin profit margin.

It is needless to reiterate the imperative need for bold reform measures to strengthen our economic competitiveness and improve the business climate amid the weakening global economy and uncertainty in the international financial market.

The government should not be lulled into behaving as thought it is "business as usual" by the steady, significant increase in non-oil exports over the past ten months because these gains have been generated mostly by steep rises in the prices of natural resource commodities as coal, palm oil, pulp, rubber and other minerals.



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