Cutting through the red tape to attract foreign investment

T.N. Machmud, Jakarta

An interesting article appeared in the Post on Nov. 21 titled Indonesia needs big bang reform to woo investment. The article referred to the World Bank's recent 2-day workshop on improving Indonesia's investment climate. I did not attend that workshop but I did attend, and indeed was asked to be a panelist at, a Symposium conducted by the Indonesian Association of Petroleum Engineers (IATMI) at the ITB campus in Bandung on Nov. 18.

It is remarkable how the messages coming out of these symposiums, workshops and conferences are all the same. Business people everywhere apparently all say the same thing. Loud and clear ... we have to reduce the size, and change the mind-set of, the bureaucracy if we seriously want to attract investment!

In Bandung, the message was: If we want to increase our production of crude oil (which, by the way, is an absolute must if the oil sector wants to reduce the remaining subsidy burden and make a meaningful contribution to the national economy), we must change the mind-set of our bureaucracy and reduce the red tape now weighing down on crude and gas producers. In Bandung, the panel called for out-of-the-box or "business unusual"-type thinking.

For proper and effective reform, a new approach, a new mind- set on the part of officialdom is needed. A more entrepreneurial- type mind-set instead of the present bureaucratic way of thinking. As the Post article on the World Bank points out, in Korea and Malaysia, this kind of reform transformed those countries into favorite global investment destinations.

What we are talking about here is reducing the number of permits, licenses, procedures and regulations that bother investors and for the bureaucracy to be streamlined. Not all regulations are bad. There needs to be sensible rules that help the markets to function properly. However, in this country, things seem to work in the opposite direction. Worse, now we have regional autonomy, which often aggravates the problem, although the basic idea of regional autonomy is a good thing in itself. However, it creates new burdens when implemented wrongly.

For business to function properly, we need a government that is made up of people who understand business, both at a central level and at a regional level. We need policy makers who are business friendly, who understand that the private sector is the lifeblood of the national economy.

There is a tremendous potential that could be unleashed if the bureaucracy got off the back of business and let them do their thing, whatever that is. Don't try to regulate everything, as if the private sector is made up of a bunch of dummies.

These people know what they are doing. If they didn't, they go would go bankrupt and there would be nobody to bail them out. That is a powerful incentive to succeed. We have this tendency to over-regulate. Bureaucrats have to justify their existence and power, and they will therefore regulate, whether this is needed or not.

Regulatory compliance, however, is a cost of business and it may also delay operations to a point where the cost of delays on a discounted cash flow basis may even render the project or the business uneconomic. This is the what our investors come up against in their daily operations.

The government has been informed of these concerns. The government has been literally inundated with information on how and what to improve. It is not that they have turned a deaf ear. At the highest levels in government there are many positive signs of an awareness of the need for improvements in the investment climate, but at the moment investors are still adopting a wait- and-see attitude.

What business needs, says the Post article, is strong political will and leadership on the part of the government to remove all the impediments that stand in the way of business. Concrete action and steady, if small, progress, are the right kind of signals that the business community needs to latch onto in order to encourage investment.

The main problem seems to be inertia on part of the lower levels of the bureaucracy -- its mere lip service, its unwillingness to make real reforms and resistance from vested interests. There are so many examples. In the oil and gas industry, for instance, there is a crying need for better coordination among state agencies.

Pertamina and the State Electricity Company (PLN) report to the minister of state-owned companies. BPMigas (upstream oil and gas regulatory agency) reports to the President. The oil and natural gas directorate general reports to the minister of energy and mineral resources. Financial policies in the field of oil and gas come within the purview of the finance minister.

In particular, problems in the fiscal arena result in investors staying away. There is a distinct lack of urgency and of coordination, not only in the oil and gas sector, and this clearly hampers business development.

Business is like fish in the water. If the temperature is right, business will flourish. If not, it will go elsewhere. Countries like Vietnam and Cambodia are already cashing in on our failure to keep the momentum of business going. As the saying goes: money goes where it is most wanted. Portfolios will be diverted to other places.

This is already happening at the moment. Once the investment money goes away, it will be very hard to get it back. We need to proactively compete for the investment dollar but we are finding it increasingly difficult as time passes.

In many instances, Indonesia is off the radar screen for the simple reason that our investment climate is one of the worst. Our country risk index is also one of the worst. President Susilo Bambang Yudhoyono is doing his best to campaign for investment in this country. What is needed is that BIG BANG reform that the Post was referring to.

That, as the Post says, will call for tough leadership and some very unpopular decisions, and it will mean cutting red tape, reducing the size of the bureaucracy and improved intra- governmental coordination. We need to all of this now. We are already out of time and we do not want to lose whatever opportunities that remain to us.

The writer is the former CEO of ARCO Indonesia and a lecturer at a number of business schools in Jakarta.