Investment climate still walking a tightrope<\/p>\n
Urip Hudiono
\nThe Jakarta Post\/Jakarta<\/p>\n
\"Philip Morris buys Sampoerna for US$5.2 billion.\"<\/p>\n
If there was one sentence that could summarize Indonesia's
\ninvestment sector in 2005, that could well be it. The U.S.
\ntobacco giant's purchase in March of a 97 percent stake in
\nIndonesia's third largest cigarette producer was clearly the
\nevent of the year for investors and the business community.<\/p>\n
The new administration of President Susilo Bambang Yudhoyono,
\nwho came to office promising to improve the country's investment
\nclimate, touted the deal as proof that investors had regained
\ntheir confidence in Indonesia.<\/p>\n
Investment is indeed once again becoming a main driver of
\nIndonesia's economic engine, along with consumer spending and
\nexports, after having collapsed in the aftermath of the 1997-1998
\nmonetary crisis.<\/p>\n
According to the Investment Coordinating Board (BKPM), actual
\nforeign direct investment (FDI) from January to October more than
\ndoubled to US$8.6 billion on 785 projects, from $3.2 billion on
\n421 projects over the same period last year. Realized domestic
\ninvestment also showed an upward trend, rising 36 percent to Rp
\n16.6 trillion (some $1.66 billion) on 178 projects, from Rp 12.2
\ntrillion on 88 projects.<\/p>\n
These investments provided jobs for 226,096 people as of
\nOctober, compared to 206,258 in 2004.<\/p>\n
Along with direct investments in the mining and financial
\nsectors, which are outside the control of the BKPM, Indonesia's
\ninvestment sector grew by 12 percent as of the third quarter of
\n2005, accounting for 21 percent of gross domestic product. Last
\nyear, direct investments grew by 18 percent, accounting for a
\nsimilar share of the GDP.<\/p>\n
Meanwhile, portfolio investments in Indonesia's stock and bond
\nmarkets also saw vigorous growth in 2005. The highlight here was
\nthe government's two global bond offerings -- $1 billion in April
\nand another $1.5 billion in October, with both offerings
\noversubscribed.<\/p>\n
And despite a few ups and downs due to the economic shock of
\nsoaring global oil prices, inflation and interest rates,
\ninvestors maintained their interest in Indonesian stocks, with
\nthe country's composite index managing to stay above the 1,000-
\npoint threshold for the entire year.<\/p>\n
Indonesia's improving economy over the past few years, along
\nwith peaceful elections in 2004, can be credited with creating
\nthe political and economic stability needed for the business and
\ninvestment sectors to thrive.<\/p>\n
In terms of winning back investor confidence, Susilo's new
\nadministration went as far as attending investment forums in
\nworld financial centers such as London and New York, as well as
\nmaking state visits to Australia, the U.S. and China, among other
\ncountries, to drum up possible investments.<\/p>\n
At home, the government held in January the first \"Indonesian
\nInfrastructure Summit\", a major event that gave private investors
\nthe opportunity to help develop the country's infrastructure.<\/p>\n
However, as always with any good news, there will always be
\nthat one joker in the crowd who blurts out: \"So what's the bad
\nnews?\"<\/p>\n
In the case of Indonesia's investment sector, there is still
\nunfortunately a lot of \"bad news\". One can start with the
\nInfrastructure Summit itself, which underlined that promotional
\nefforts alone will never succeed in luring more investment if
\nthey are not accompanied by concrete policies to create a more
\nfavorable business and investment climate.<\/p>\n
As of October, only six toll road projects out of a total of
\n91 projects worth $22.5 billion offered at the Infrastructure
\nSummit were in the bidding process. Although one could argue that
\nthe offered projects were long-term ones, problems of land
\nacquisition, lengthy bureaucratic procedures and unsatisfying
\ninvestment rates of return have plagued the projects from the
\nstart.<\/p>\n
Add to this the recent economic slump that has turned off
\ninvestors and the first Infrastructure Summit is beginning to
\nappear as nothing more than an overhyped event. As a result, the
\nsecond Infrastructure Summit, which was slated for November with
\nanother $57.5 billion worth of projects to be offered, has been
\ndelayed until February.<\/p>\n
In the portfolio investment sector, Indonesia's newly
\ndeveloped mutual fund industry nearly crashed from massive
\nredemptions in September.<\/p>\n
Fortunately, the government moved quickly to remedy the
\nsituation, issuing a presidential regulation providing incentives
\nfor private participation in infrastructure development --
\nincluding tax incentives and risk management support -- to
\ncomplement an earlier presidential regulation on land acquisition
\nfor infrastructure projects.<\/p>\n
Nevertheless, Indonesia's investment climate is still plagued
\nby such \"classic problems\" as legal uncertainty, red tape and --
\nironically -- poor infrastructure, all of which should have been
\naddressed five years ago. It is difficult for any investment
\nforum, seminar or workshop to generate much excitement as long as
\nthe government and the public seem to lack the will to reform.<\/p>\n
The latest update of the World Bank's \"Doing Business\" study
\nconducted in 155 countries placed Indonesia among the most
\nfrustrating places in the world for doing business.<\/p>\n
Although an improvement from last year's 155 days, setting up
\na business in Indonesia still takes some 80 days, far above the
\nglobal average of between 40 days and 50 days, and even farther
\nfrom the government's own 30-day target.<\/p>\n
A separate study by Regional Autonomy Watch found 297 of 881
\nbylaws issued in recent years have impeded trade and discouraged
\ninvestment, although the government -- invoking last year's
\namendments of the Law on Decentralization -- has since moved to
\nreview and revoke 60 of the bylaws.<\/p>\n
In an interview earlier this year with the Post, Sampoerna's
\nnew president director, Martin King, said that although investors
\nwere generally optimistic about the government's commitment to
\nreform, they underscored the importance of supportive legal and
\nregulatory framework, particularly a framework that provides a
\nlevel playing field between all businesses and a level of
\npredictability.<\/p>\n
Speaking of legal revisions, one revision that has recently
\nbeen of particular public concern is the ongoing deliberation of
\nthe tax amendment bills. The business community has complained of
\na perceived inequality between taxpayers and tax officials in the
\nbills, which they say give tax officials too much authority in
\nthe assessment and collection of taxes. They warn this could lead
\nto abuses of power that would hurt the country's business and
\ninvestment climate.<\/p>\n
Meanwhile, nothing has been heard of the much-awaited Law of
\nInvestment, with Minister of Trade Mari E. Pangestu and BKPM
\nchief Muhammad Lutfi only saying it is currently in the final
\nstages of drafting for submission to the House of
\nRepresentatives.<\/p>\n
The bill, which will combine the existing foreign and domestic
\ninvestment laws, is needed to improve Indonesia's investment
\nclimate by addressing such important issues as equal treatment
\nfor investors, a clearer and simpler negative investment list,
\nand improved dispute resolution.<\/p>\n
Dispute resolution is probably the most important issue here,
\nas the government has not been able to resolve the prolonged and
\nhigh-profile investment debacles involving Karaha Bodas, Exxon
\nand Cemex.<\/p>\n
It is not yet clear that investment is a sustainable source of
\neconomic growth, as investment has slowed along with the recent
\nrises in inflation and interest rates.<\/p>\n
Despite this year's \"success\" for the investment sector, much
\nmore work has to be done to improve the sector and make it more
\nsustainable. If this happens, in the future we may be able to
\nread about investment success stories without having to look for
\nthe bad news.<\/p>",
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