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 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.