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.