~FOR GENERAL ISSUE: INDUSTRIAL ESTATES -- WEDNESDAY

~FOR GENERAL ISSUE: INDUSTRIAL ESTATES -- WEDNESDAY Checked by Rich ;JP; 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