Fri, 14 Feb 2003

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 Soekarnoputri'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-US 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 recent forum of the Consultative Group on Indonesia 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 this week in Jakarta. The country is seeing declining investment as a share of gross domestic product and the World Investment Report 2002 (UNCTAD) rated Indonesia 138 out of 146 countries in terms of investment attractiveness.

"So what?", some 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. The leadership must stop the lip service, 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.