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.