Fixing business environment is what counts

Fixing business environment is what counts

Todd Callahan and Andri Manuwoto, PT Jasa Cita, Jakarta

We are over a month into a new year and Indonesia watchers
have generally given President Megawati's administration a B+ for
sound macroeconomic management and improved fiscal
sustainability.

The government has made substantive progress in reducing its
dependence on foreign loans -- its domestic debt situation is a
different story -- and looks set to achieve a balanced budget by
2005.

Inflation, albeit still worrying, is under control and the
Rupiah-U.S. Dollar exchange rate is trading at a fair level
without being battered by the high level of volatility that has
plagued the currency in the past.

These and other macroeconomic attainments are positive and
should be applauded.

Unfortunately, the picture at the micro level is not so
encouraging.

On this score, Jemal-ud-din Kassum, the World Bank's VP for
East Asia and the Pacific, got it right when he made the point at
the CGI forum in Bali that Indonesia's investment climate is the
most significant obstacle to accelerating economic growth and
reducing poverty and vulnerability.

Andrew Steer, the World Bank's country representative, aired
similar concerns at a recent business luncheon in Jakarta.

The fact is that the country is seeing declining investment as
a share of GDP and the World Investment Report 2002 (UNCTAD)
rated Indonesia 138 out of 146 countries in terms of investment
attractiveness.

Some in the bureaucracy have suggested Indonesia does not need
much investment. It will follow its own path. Considering the
country's five years of economic crisis, this is an indictable
statement.

In the end, any decline in investment should be distressing
because business activity is what drives growth. If the country's
top bureaucrats decide they want investment, they have to realize
that attracting investment dollars is akin to competing in a
beauty pageant because companies have options.

To put it briefly, the leadership must act: they need to role
up their sleeves and fix some of the very real problems that are
so injurious to the country's image.

Does this mean the government has to fix everything and fix it
overnight?

Of course not.

Indonesia is not a car that one can take to the garage, have
its spark plugs changed and then pick up the next day.

That said, the administration must do a lot more to at least
ensure that high profile cases of corporate mistreatment do not
occur and make their way into the domestic and foreign media.

The following two cases, well known to local and foreign
business people, are symptomatic of what is broken and what
Indonesia's authorities need to remedy.

Last year's Manulife case made headlines worldwide after the
local unit of the Canadian insurance giant was declared bankrupt
by three Indonesian judges who were widely perceived to be acting
on behalf of former local shareholders who were disgruntled they
no longer controlled a stake in the firm.

The case even threatened to jeopardize the bilateral
government relationship between Jakarta and Ottawa.

The situation appeared to improve when the Indonesian Supreme
Court overturned the bankruptcy ruling and initiated
investigations into the decision of the lower court judges.

Case closed? Nope.

What is new about this case is that last month the three
judges were found innocent by the Supreme Court of all charges
against them. In short, they got off. What kind of message does
this send to the business community?

By letting the judges off the hook, it signals the
government's inability, or unwillingness as some have suggested,
to punish bad behavior.

It also serves as a reminder to business people that they live
with an increasingly predatory judiciary where judges can turn
the law upside-down and get away with it.

In another example, the failure of successive Indonesian
governments to tackle vested interests and sell state-owned Semen
Gresik to Cemex of Mexico is disappointing.

Cemex, the world's third largest cement producer, arrived in
Indonesia in 1998 at the height of the economic crisis and
eventually acquired a 25.5 percent interest in Semen Gresik.
However, due to opposition to the sale from interest groups,
primarily at the Padang, West Sumatra unit, Cemex has been unable
to acquire a controlling stake in the firm.

And yet, the Semen Gresik case is not only disappointing for
that reason. As the majority shareholder in Semen Gresik, the
government has been unable to exercise its right to hold an
extraordinary shareholder meeting at the unruly Semen Padang
unit.

Until now, the government has been blocked by a local court in
Padang from holding the shareholders meeting.

Like Manulife, the case has become so desperate that the
government has had to turn to the Supreme Court to exercise its
basic right to hold a shareholders'meeting.

One noted lawyer, Todung Mulya Lubis, has characterized this
gaming as a tyranny of the courts. If the government has to file
a case with the country's highest court just to stage a
shareholders meeting at one of its own companies, how optimistic
should ordinary business people feel?

Unfortunately, cases like these, and there are many of them,
do not provide much cause for optimism. As at least part of the
solution, it seems obvious that bad behavior and judicial
shenanigans should be punished when they occur.

When judges abuse the law and declare major multinational
insurance firms bankrupt, they should be sanctioned. If it is
difficult to dismiss them outright, reassign them to an
undesirable posting.

When the directors and commissioners of state-owned firms like
Semen Padang misbehave, deal with them swiftly and harshly. If
the authorities are weak in dealing with such groups, it will
only encourage additional challenges that create more problems.

Surely the growth and economic recovery that investment and a
good business environment produce is worth pursuing.

It is really the only way for Indonesia to achieve the level
of economic growth required to improve the lives and welfare of
its people. To do this, the government must focus on making the
operating environment more inhabitable for business people.

Before cases like Manulife and Semen Gresik become national
embarrassments, they must be dealt with and resolved.

If the government can do this, domestic and foreign business
activity will increase and the country will reap the fruits of
higher economic growth.

Todd Callahan works as a Senior Technical Advisor at PT Jasa
Cita, a Jakarta-based research consultancy affiliated with
CastleAsia. Andri Manuwoto works as a Senior Consultant at the
same firm.