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.