Attracting new investment to Indonesia

Attracting new investment to Indonesia

The following is the second of two articles based on an
address by John Arnold, chairman of the British Chamber of
Commerce in Indonesia, at a discussion held by the Indonesian
Business Club on Jan. 18 at Hotel Sahid Jaya, Jakarta.

JAKARTA: Some cynics argue that without corruption it would be
impossible to turn the wheels of the over bloated bureaucracy. An
already slow machine would grind to a halt. If there is any truth
in such an assertion, the answer is to change the machine.

Corruption is a cancer which eats into the very fabric of
society. It distorts business decisions and results in serious
misallocation of resources. What is more it scares away many
potential foreign investors. Some simply don't know how to handle
it and don't want to handle it. Others worry about the risk in
their home countries that outlaw payments of bribes whether paid
at home or overseas.

The equivalent of the U.S. Foreign Corrupt Practices Act is
soon to be adopted by all countries in OECD (Organization for
Economic Cooperation and Development). The pressures for
multinational companies to adopt best practice corporate
governance with ever more pressure for transparency, means that
countries that suffer from endemic corruption will become 'off
limits'. The risks for investors eventually simply outweighs the
potential rewards.

The Indonesian government is acutely aware of the importance
of the need to reduce, if not eliminate, corruption. A major
adjustment of salaries for government officials is an important
step, though it is may be controversial.

This is a cumbersome heading, but so is the problem. As a
business consultant, I have had on many occasions to advise new
investors of the time necessary to complete the lengthy process
of establishing a company, finding a partner or negotiating a
contract.

While I try to advise that patience will be rewarded, we are
living in a very fast paced world. Elsewhere administrative
processes are speeding up out of all recognition. Shareholders in
more developed countries, reasonably or not, expect almost
instant gratification.

High level negotiations to obtain licenses are extremely
costly in terms of management time and professional assistance.
These resources are scarce throughout the world and must be put
to the most effective use.

One random example, I may mention, is of a client, a British
company, which had after five years negotiated and barely started
to execute an infrastructure contract in Indonesia. An almost
identical project in terms of cost and technical difficulty had
been negotiated, financed and satisfactorily completed by the
same company within six months, in a country in West Africa. That
company has concluded that for the moment it cannot afford to do
business in Indonesia.

It is understandable that the Indonesian government wishes to
decentralize many aspects of government. Some investment approval
processes have already been delegated to regional offices of the
BKPM (Investment Coordinating Board). Nevertheless there are
serious concerns among investors that the decentralization will
take place prior to establishment of checks and balances to
ensure that corruption, collusion and nepotism and other negative
practices are controlled.

There are also concerns that the relatively sophisticated
needs of foreign and indeed domestic investors will not be
understood at district or even provincial level. Foreign
investors will need to be reassured that their business risk has
not been increased as a result of devolution.

Prior to the crisis, if you had surveyed the concerns of
foreign investors, an issue near the top of most lists would have
been the availability of quality human resources both at
management and artisan levels. Because of its scarcity, the cost
of good human resources soared beyond its value in a global
economy. The crisis has to some extent enabled a correction to be
made, but in the longer term, if strong growth is to return, this
issue must be addressed.

In the meantime, foreign investors will require expatriate
manpower to supplement local resources. I wish to urge government
to relax as far as possible the restrictions and levies that
apply to the employment of foreigners.

Expatriates are universally relatively expensive to employ.
Many multinationals extensively employ expatriates who are third
country nationals. All employers are responsible to their
shareholders for their bottom line performance. It makes no sense
to employ expatriates if equivalent local nationals are
available.

I believe that no major international company will hire
expatriates unless it believes it is essential to ensure the
profitability of its operations in Indonesia. The mechanism of
the market will as ever be the most efficient arbitrator of the
employment of the expatriates. Please minimize red tape and
levies that only serve to increase the cost of doing business.

The other great cry pre-crisis was taxation. The main concern
was the administration of tax rather than the framework of law.
Those concerns remain and of course are linked closely with my
earlier comments on corruption and legal certainty.

Taxation will soon loom large as an issue for all of us. The
government faces a huge shortfall in its budget. There will be
pressure from multilateral institutions to increase revenues from
local sources. We may reasonably expect an intensification of tax
collection. There will be a temptation to raise rates.

I believe everyone should pay their fair share of tax
according to the law. However, Indonesia must be globally
competitive in the area of tax. The existing structure of tax is
barely so. The often irregular and inefficient administration of
taxes, especially tax audits and processing of refunds makes the
tax cost of doing business very high.

Further increases in rates will only increase the temptation
to avoid or evade payment. Should the expected intensification of
collection of taxes target expatriates and foreign companies more
than other groups of tax payers, this will work against efforts
being made elsewhere to promote and encourage foreign investment.

It may also result in only marginal increases in the
collection of revenue. Policy developments in one area should not
frustrate important objectives being set elsewhere.