~FOR GENERAL ISSUE: INDUSTRIAL ESTATES -- WEDNESDAY

~FOR GENERAL ISSUE: INDUSTRIAL ESTATES -- WEDNESDAY
Checked by Rich
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ANPAc..r..
Industrial-Estate-HKI

"Govt not serious enough in attracting foreign investment"

The uncertainty in the world's economy combined with the legal
and security problems in Indonesia have seriously hampered the
inflow of foreign direct investment into the country. Below are
excerpts taken from an interview with Basroni Rizal, the chairman
of the Indonesian Industrial Estates Association (HKI) on his
views about the problem faced by the country's industrial
estates.

Question: The flow of the global direct investment is expected
to further decline amid the growing uncertainties in the world
economy. How it will affect the industrial estates in Indonesia?

Answer: The unfavorable situation in the world economy will
certainly mean an adverse impact to Indonesia's industrial
estates, which still rely much on foreign direct investments to
fill their vacant industrial plots, in addition to the relocation
of manufacturing companies, logistics and distribution centers,
which are now still located in the center of the city.

The relocation of several manufacturing plants to other
countries due to the worsening of the investment climate as a
result of the legal and security uncertainties and the inability
of the government to cope with the high-cost economy, has also
threatened the existence of even the long-established industrial
estates.

Q: Besides the unfavorable condition in the world economy,
what are the real domestic factors that hamper the flows of the
direct foreign investment into the country?

A: The main problem that hampers investment activities
actually lies on the inability of the government in coping with
the legal uncertainties in the country. The unclear status of a
bonded zone area is one of the examples indicating the legal
uncertainty in Indonesia. In the early 1990s, under the
Government Regulation: PP 22/86, the companies operating in a
bonded industrial zone were given a number of fiscal incentives
such as tax reduction as part of the government's efforts to
encourage the inflow of foreign investors into the country.

However in 1996, the government, through its regulation No:
PP33, removed the incentives, abolishing the exclusive status
awarded to industrial bonded zones. The condition became even
worse after the government issued the Law No: 22/99 which paved
the way for the full implementation of the autonomy in provinces.

The law which gives the local governments more power to manage
their own economy is often counter-productive. In many cases, the
decentralization causes more disadvantages than benefits to
investors.

The condition, as described by the World Bank in an article in
The Jakarta Post on Jan. 17, remains valid still. "... The
investment climate is deteriorating. Red tape and corruption in
key government services, sharp increase in legal minimum wages,
uncertainty in labor regulations, excessive taxation by some
local governments, a looming power crisis and a weak legal system
make Indonesia an unattractive place to invest in." This World
Bank statement reflects the real condition of the country's
investment problem.

In addition to such problems, the government has also failed
to make any breakthrough in attracting foreign direct investment
despite the fact that this year has been declared as the
country's Investment Year.

Q: How should the government cope with such uncertainties and
to further attract foreign investment?

A: I think it is time now for the government to thoroughly
study the problems arising in all the business sectors case by
case.

The solution that must be taken to cope with the problems in
each business sector should be based on the latest development in
the country's international and domestic trade. The solution
should be then used as the basis for the formulation of a grand
strategy and as a reference point for revitalizing all the
country's business sectors such as manufacturing, trade,
infrastructure and the development of new economic growth
centers.

We can perhaps take South Korea as a model. After being hit by
the monetary crisis in 1997, South Korea issued a new foreign
investment law which is known as the 1998 Foreign Investment
Promotion Act and at the same time also launched the Korean
Investment Service Center. This new agency which was established
under the Korean Trade-Investment Promotion Agency (Kotra) has
the task of eliminating the source of friction and supporting
foreign investors from consulting to post-management service.

The Korean government also established an Investment Ombudsmen
within KISC to address grievances and difficulties of foreign
investors. At the same time, this agency also provides input to
improve the existing regulations in accordance with international
standards.

Under the new foreign investment law, South Korea offers a
wide range of incentives to foreign investors. A company
operating in a foreign investment zone will, for example, be
given a 100 percent exemption from income tax payments for up to
seven years after the company books its first profit and a 50
percent reduction for the following three years.

The company is also exempted from local tax payments for
between 8 to 15 years at the discretion of the local authority. A
company can get such tax incentives if it meets certain criteria
set by the South Korean government.

This is why in every occasion, I appeal to the government also
to address the much needed fiscal incentives in the proposed
foreign investment law in a bid to further attract foreign
investment into the country.

In addition, the government should also merge the Investment
Coordinating Board (BKPM) with the National Agency for the
Promotion of Exports (BPEN) into a single body such as a Trade
and Investment Promotion Agency to ensure that the promotion of
both investment and trade could be conducted more effectively.

The new agency should focus its activities more on providing
services, assistance and facilities to investors who meet certain
criteria, rather than on giving investment licenses. Industrial
estates should also be given incentives to enable them to improve
services to companies operating in their locations. At present,
the government spends most of its energy in meeting the economic
reform targets set by the International Monetary Fund (IMF),
rather than addressing the growing problems faced by the
country's real sector (trade and investment).

Last but not least, the investment incentives already
implemented should not be removed because the abolition of such
facilities can create another problem. Forgive me for the all of
that, as I have no intention of teaching the government how it
should handle the investment problems in the country. As we know,
this year has been declared as Indonesia's Year of Investment,
and I think this is the right time to get the momentum going for
the government to make a breakthrough in restoring foreign
investor confidence.

Q: How about domestic investors?

A: Manufacturing companies in big cities such as Jakarta and
Surabaya have been encouraged to relocate their factories into an
industrial estate. Sooner or later, such companies should move
their factories into an industrial estate and this will be, of
course, quite positive for industrial estate developers, although
they have to compete with the secondary market. For example, many
companies such as Sony and Aiwa which have relocated their
investments to other countries have actively offered their ex-
factories to existing foreign and local investors. -- Hendarsyah
Tarmizi