Tue, 19 Aug 2008
From: The Jakarta Post
By Todung Mulya Lubis, Jakarta
A conducive investment climate is desired by all economies looking for an inflow of foreign capital. However, such an environment is not only in the interest of foreign investors but also for domestic investors as their financial outlay is no less sizable.

Unfortunately, the government seems to believe those who need a positive business environment are, first and foremost, foreign investors. Such a fallacious perception certainly makes domestic investors seem less attended to, whereas it is a fact that the country's economy is supported and driven by domestic capital which until recently was firmly encased in savings.

Does Indonesia have a postive investment climate? Despite the government's claim of a surge in foreign investment, the truth is that complaints about our business climate have never diminished.

A fair number of foreign investors, chiefly those in the mining sector, continuously complain about how onerous it is to do business in this country; they say there are way too many hurdles, ranging from permit, tax, and labor issues to legal certainty.

A report recently launched by the OECD confirms such an unfavorable investment climate in Indonesia. The report criticizes Indonesia for being too restrictive which discourages foreign investment. The OECD suggests Indonesia further open its economy because the Indonesian people in general will ultimately benefit.

This liberalization will reduce market distortion, for a restrictive market is prone to monopolistic practices and market abuses, particularly when the state is present as an economic player-cum-regulator.

I think the OECD report bears much truth, inconvenient though it is, because the country's investment climate is indeed far from positive, if not poor. Common complaints are local legislatures placing further tax and retribution burdens on businesses when they are already taxed by a national law.

It is not clear whether such further tax and retribution is aimed at improving the genuine regional income (Pendapatan Asli Daerah) or at "reimbursing" the extremely expensive "political costs" of investment.

The business community seems to have no choice because protesting would mean potential further hurdles. In addition, the central government does annul such burdensome legislation, notwithstanding its power under the law to review and annul local laws considered contradicting higher legislation and regulations.

Another case in point is the blatant abuse of power by regents and governors at the expense of businesses' interest, such as the appointment of certain companies as "mining proxies" (kuasa pertambangan) over the "mining proxy" of another company which legally has the concession in the mining area.

This is commonplace. A number of major mining companies in South Sumatra, Central Sulawesi, Southeast Sulawesi and Central Kalimantan deal regularly with this challenge. As their excuse, the regents or governors say they cannot wait for the mining projects to materialize, so they divide the mining area and distribute the sections to a number of companies, and, unfortunately, it is often the case that these companies lack mining experience and know-how, technology and wherewithal, as well as will and commitment to the mining sector.

The purpose of "mining proxies" is to develop projects which are then sold to a third party(ies), or used as collateral for loans from financial institutions.

However, the local government gains nothing because these projects usually do not materialize. It appears the local authorities fail to understand that a mining project calls for enormous financing not easily garnered, especially by small companies or by businessmen who are essentially mining brokers. However, these local authorities may instead stand to gain from such abuse of power as the "price" for a "mining proxy" is obviously by no means cheap.

The OECD report is interesting and, augmented by relevant cases emerging from the field, may lead one to fully comprehend the truth regarding the Indonesian business environment. Whether we recognize it or not, a nonconducive, unfriendly or poor investment climate is mutually fashioned by both the central/national and the local governments -- as Raj M. Desai and Sanjay Pradhan aptly put it in "Development Outreach", World Bank Institute, 2005: "... bad investment climates don't just happen, they are made -- not because public officials lack knowledge or expertise to govern well, but because there are deeper imbalances in the ways policies are designed and implemented."

Well, of course; disharmony among policy, law, and implementation may be inevitable at some point. But in the case of Indonesia, there are other factors exacerbating the country's investment climate; i.e., none other than corruption, collusion, and nepotism.

It cannot be overstated to say that corruption, collusion, and nepotism have now morphed into a rampant plague -- formerly the privilege of those serving in the central/national government, they have now become "decentralized" and local authorities participate in the game.

Yes, pathetic, indeed ... but decentralization is not to blame, for in principle decentralization is a correct policy -- it is implementation of the policy that is at the crux of the issue.

The writer is Senior Advocate, Vice President of the Congress of Indonesian Advocates (Kongres Advokat Indonesia -- KAI).



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