Attracting investment to Indonesia

Attracting investment to Indonesia

The following is the first of two articles based on an address
by John Arnold, chairman of the British Chamber of Commerce in
Indonesia, on Jan. 18 at Hotel Sahid Jaya, Jakarta.

JAKARTA: For Indonesia to recover from the financial and
monetary crisis, attracting foreign investment back to Indonesia,
whether it be portfolio investment or direct investment, is an
issue of crucial importance. New investment, foreign or domestic
in origin, is vitally important to provide the engine for
restoring economic growth and all the benefits that will flow
from it.

I do strongly believe that a holistic approach should be
adopted. International competition for the investment dollar is
intense. The ability of any one country to attract foreign
investment is dependent not only on there being conducive
regulations and incentives but on the total business environment
of the host nation.

In a global market place, it is those countries that are best
able to offer a complete package that are winning out. If a
particular country is weak in some aspects it must be able to
compensate elsewhere.

Britain's contribution to Indonesia's development through
direct investment has been significant. Cumulatively, according
to the Investment Coordinating Board's (BKPM) figures, Britain
ranks second in total investment approvals at over US$21 billion
and was the leading investor over the last two years. The actual
realization is not known (though I might humbly suggest that it
should be), but it is undoubtedly large.

The BKPM's figures take no account of other major investments
made in the financial services sector, oil and gas and hard rock
mining which are licensed separately. Britain's investors tend
not to dominate any particular sector, but its strength is in its
diversity, extending across manufacturing; consumer goods;
pharmaceuticals; utilities; power generation; telecommunications;
insurance; banking; tobacco; mining for gold, coal and copper;
oil and gas; agribusiness and tourism, to name only some.

In each of these sectors British companies are among the major
players. Some of the companies have been in Indonesia well over
100 years.

Britain is one of the largest foreign investors in virtually
all Commonwealth countries and throughout the Americas as a
whole. It is an important investor in all countries of the
Association of Southeast Asian Countries.

Why therefore should anyone invest in Indonesia? But also why
should they not? The attractions of Indonesia are many. By rights
it should be and I am sure someday will be, one of the richest
countries in the world. It has vast natural resources on land and
in the sea.

It is the fourth most populous nation on earth. It lies in one
of the world's most vibrant economic regions that is rapidly
recovering from the crisis of two years ago.

It had, by the time of the onset of the monetary crisis,
developed at least in the conurbations in Java, a good physical
infrastructure in terms of energy, telecommunications, office and
residential accommodation.

The same conurbations now contain a middle class with
significant disposable income. It has a huge and ever growing
pool of low cost labor. Investment laws and regulations that
formerly restricted the activities of foreign investors, have
been progressively relaxed in recent years.

As well as opportunities to invest in green field projects,
new opportunities are now available to acquire distressed assets
under the supervision of the Indonesian Bank Restructuring Agency
(IBRA) together with state owned enterprises scheduled for
privatization.

Despite these many advantages and opportunities, new foreign
investment over the last two years has dried to a trickle. A
recent survey of readers made by the Asian Wall Street Journal,
showed that 57 percent of respondents voted Indonesia as the
least favorable country in East Asia for foreign direct
investment.

While I believe that we will see some improvement in the year
2000, the question remains, what is required to encourage Britain
and other nations to list Indonesia once more as a favored
destination for their investment funds?

Indonesia's international image is regrettably one of a
bankrupt, lawless country on the brink of disintegration.
Anything the President's overseas tours can do to redress this
will be to the good. Exaggerated though the image may be, it does
contain some basis. Until solutions are found to the problems in
Aceh, Ambon and other regions, concerns will persist.

Lawlessness in remoter provinces is a very real problem for
investors particularly for the mining, oil and gas and
agribusiness sectors.

Not all incidents are reported in the media, but they still
may be well known to those companies that have operations in
remote areas. Indonesia needs a well planned and well executed
public relations effort to alter its international image, backed
up by examples of real progress in problem areas.

Until there is demonstrable progress in improving the security
situation, potential investors may conclude that matters are more
likely to get worse before they improve. This is not only an
issue of physical security of a company's assets and operations.
The ability to persuade key expatriate management personnel to
accept assignments to start up new investment projects may also
be constrained. Whether the perception of the security situation
in Indonesia from overseas is correct is not important. It is
there and an appropriate response must be made.

The issue of legal certainty has been discussed widely in the
media. This impacts all sectors of the community in Indonesia and
applies to criminal as well as civil justice. This, is as
important to foreign business as it is to any other sector of the
community.

The need for a well trained, independent and objective
judiciary supported by a strong legal profession is of paramount
importance. Foreign investors who cannot recover debts in the
normal course of business, do reasonably expect to be able to
obtain swift and reliable redress through a court system. The
problems associated with the Indonesian legal system were
identified long before the current crisis. The crisis, has
crystallized those concerns.

The failure of the implementation of the new bankruptcy law is
but one example. Britain's economy is generally accepted to be
one of the more robust in Europe. Inflation is less than 3
percent, the unemployment rate is among the lowest in Europe. The
economy is growing at around 3 percent per annum -- acceptable
for a developed country. In the UK in 1999, according to Dun &
Bradstreet, 43,365 companies went bankrupt or were wound up --
around 830 every week!

Many other companies, in financial difficulty will have
reached accommodations with creditors to avoid bankruptcy
proceedings commencing. No one welcomes bankruptcies, but the
point here is that bankruptcy is a normal occurrence in an
efficient economy. In Indonesia over the same period, the number
of known bankruptcies can be comfortably counted on one pair of
hands.

Bankruptcy is the price that must be paid for poor risk
management. The free enterprise system is about risk and reward.
You cannot have an efficient market mechanism where failure is
not punished. If there are no risks to business we could all be
millionaires. Unfortunately a business class developed in
Indonesia in the past some of whose success was based on the
rentier system and for who there was no risk.

It may be sensitive in some quarters, but I do wish to argue
that the issue of ownership of assets has generated much
misplaced emotion. Whether either foreigners or new domestic
investors take over the assets of bankrupted companies should be
of no consequence.

Of far more importance is that new owners are quickly found
for distressed assets. The assets can then be put to work,
employment is preserved and consumers can buy goods at the lowest
possible prices. Those previous owners who were not true
capitalists deserve no sympathy. Providing an appropriate
regulatory framework is developed, backed up by an independent,
objective judiciary, there should be little danger of foreign
investors controlling the domestic economy.

On the contrary a new class of efficient creative domestic
entrepreneurs should quickly emerge.

The key is legal certainty or the rule of law. I believe most
foreign investors will applaud the Indonesian government's
decision to stop the State Electricity Company's (PLN) apparent
attempt to elicit the support of the Indonesian courts to avoid
its contractual obligations to the private power producers.

The principle of sanctity of contracts must be maintained.
That this is explicitly confirmed by the new government will of
itself have been an important step in re-establishing confidence.

That does not prevent the parties negotiating in good faith
when circumstances change. If corruption, collusion and nepotism
(KKN) did influence the award of some of the contracts that
should be prosecuted through the criminal courts. Those found
guilty, whether they be foreigners or Indonesian citizens, should
be punished with the full force of the law. If foreigners have
broken laws in their own countries, they should be punished by
those courts also.