Attracting investment, lessons from China

Attracting investment, lessons from China

Bahtiar Arif, Center for Indonesian Reform (CIR), Jakarta,
bahtiararif@yahoo.com

As the Prophet Muhammad said "Seek knowledge in the country of
China".

As our foreign direct investment (FDI) fell by 59 percent or
Rp 1.67 billion in the first five months of the current year
compared with Rp 3.98 billion for the same period last year,
this would be a good time to learn from China.

The report from the Investment Coordinating Board (BKPM) shows
less hope for the economy, which last year had relied
significantly on domestic consumption. Most of our revenue is to
pay interest payments while domestic investors are mostly being
taken care of by the Indonesian Bank Restructuring Agency.

China, meanwhile, has successfully taken first place among
developing countries in utilizing foreign capital for its
development in 1997. The World Bank Development Report 1999/2000
states that from worldwide stock of foreign direct investment in
1997 of US$3,456 million, China held 6 percent, while Indonesia,
for example, obtained 2 percent.

Xiaoqiang, the director general of Foreign Capital Utilization
Department in 1998 also reported that foreign capital in China
had climbed steadily, in which the contribution from FDI was
higher than foreign loans. Not only does it give better financial
leverage to the government, but also it stimulates economic
growth, decreases unemployment and removes budget distress.

FDI in China has focused largely on the general processing
industry, apart from real estate, hotels and restaurants, and
energy, transportation and urban infrastructure.

China seems to have successfully encouraged investors to
invest in infrastructure projects instead of having such projects
financed from the government budget.

China has encouraged FDI in several ways. Chinese electric
corporations were publicly listed in the Hong Kong and New York
stock markets. The government has also approved built-operation-
transfer (BOT) and joint-venture for some power plants. Other
infrastructure projects for transportation, telecommunications
and water supply were also financed by FDI.

Chinese experience in attracting FDI can be learned from,
although some policies may not fit here, two important policy
issues in particular may be considered. First, how does the
Chinese government attract foreign investors to put their money
into infrastructure? Second, how does the government cope with
security, economic stability and public interest because
infrastructure is vital for the public and national needs.

The Chinese government has divided infrastructure projects
into three types. The government still provides 100 percent
financing for railways, power grids and water transport and
network projects, and in administration and operation of public
telecommunication. Some projects like hydropower stations,
nuclear power plants, oil and gas pipelines, air transportation,
airports, public wharves, and metro railways have been shared
investments, between the government and foreign investors. In
sectors such as coal power plants, water plants, expressways and
mobile telecommunication there have been no limit placed on
foreign shares.

The government has applied a routine service charge (price)
evaluation and approval system for the public sectors regardless
of the type of investments in order to prevent monopolization and
to protect public welfare. But the government has allowed foreign
investors to charge higher than state-owned firms. Balancing
properly the public and foreign investor' benefits may be the
most crucial job for the government.

There is no limitation in achieving a rate of return on
foreign investments. The government has also provided incentives
such as tax holidays, preferential land price, and low import
duty on infrastructure project equipment. In addition, the
government has been much more flexible in permitting foreign
investors to enlarge their scope of business, even far from their
core business.

Finally, a conducive investment climate such as political
stability, law enforcement, security, transparency, business
certainty, easy access to information, good governance, low
investment costs (no bribery and other informal costs), and clean
government have been first provided and maintained. These are the
necessary conditions to be fulfilled before the government
applies other policies.