Canceled investment

The latest data on investment projects released by the Investment Coordinating Board at a coordinating conference last Wednesday, besides indicating a steady increase in new investment approvals, contained a disturbing trend. Foreign investment projects canceled by the board in the first six months of this year increased by 212.5 percent in terms of projects and by almost 1,500 percent in terms of value, compared to the same period last year.

It was regrettable therefore, that the board's chairman, Sanyoto Sastrowardoyo, canceled a news conference originally planned for after the meeting. Sanyoto did not explain the reason for the last-minute cancellation. Hopefully it was not his lack of knowledge of the details of the canceled projects but simply a last-minute call to a more urgent appointment.

We nonetheless see it as rather strange that the chief investment administrator could not have found the time to explain so worrisome a trend in the investment sector. So drastic an increase in the value of investment projects canceled -- the figure is US$458.5 million for January to July 1996 -- requires thorough public examination. By the board's rules the canceled projects were probably licensed before June 1993 as investors are granted three years in which to start realizing their projects before the board can move to annul their investment licenses.

A thorough investigation would have told the board much about why the investors had not started their projects after spending vast amounts of time and money on feasibility studies and processing the many licensing requirements. If the main reason for the cancellations was internal corporate problems such as difficulties in arranging investment credits then the board cannot be blamed. However, if the main reasons were related to regulatory requirements, they would be valuable inputs for the board and other government agencies when considering how to further improve the investment climate.

The problem is that even though the board has significantly improved its services, it has yet to function fully as a one-stop licensing office for investment ventures as it has been supposed to do since the overall realignment of investment licensing procedures in 1978. True, coordination is difficult and, sometimes, a delicate problem within the government bureaucracy in developing countries, but in Indonesia it is often the biggest hurdle and needs to be addressed.

The problem has further been exacerbated by the fact that the competence and authority of the Provincial Investment Coordinating Boards are often extremely poor. These are supposed to be the one-stop administration centers for the processing of local permits related to location, building, land acquisition, prevention of public nuisance and several other licenses but are often anything but a one-stop service center. This is partly caused by many governors' lack of awareness of the benefits of attracting direct investment to their provinces, due to the country's too centralized administration. They rarely feel any need to compete for such ventures and usually focus on securing government projects. There have been many cases whereby investment projects which had been licensed by the national board (BKPM) failed to be implemented because of lengthy delays encountered in obtaining local permits.

The central government has realized the need to streamline licensing procedures in the provinces but has been very slow to improve things by decentralizing its authority.

The large amount of licensed investments canceled during the first semester should give a stronger message to the government that much needs to be improved in order to attract investment to the country. The government should no longer be misled by the perception that the country's huge potential market and abundant natural and human resources will by themselves woo investors.

The government should instead realize that within the next seven years the domestic market in Indonesia will turn into an ASEAN market when the region becomes a free trade area in 2003. That means new investors planning to operate in Indonesia will take into account competition from other ASEAN countries when making their production calculations.