Governance, infrastructure main barriers to investment

Governance, infrastructure main barriers to investment

David Green, Jakarta

Last November I said in The Jakarta Post (Nov. 25, 2004) that
the long decline in investment spending might turn around. It
did: Both domestic and foreign business spending appear to be
picking up. The turn-around is certainly welcome and will support
generally faster overall growth.

The call -- that investment would pick up -- was made on the
assumption that the extraordinarily calm and smooth national
elections in Indonesia would encourage businesses to invest in
the future. The clear progress in establishing broad based
democratic institutions, I felt, would put to rest old fears that
the instability, political and economic, seen in the Economic
Crisis in 1997-1998, would return.

Instability is deadly to business investment. People do not
generally invest in a new manufacturing facility if they fear it
could be destroyed in communal strife. Equally people do not
invest if they fear unpredictable inflation would raise wage or
input costs above product revenues. We have had clear progress on
ensuring businesses of continuing stability.

Unfortunately this is not sufficient to encourage high
business spending in a sustainable fashion and to turn the
present 'boomlet' into a long period of prosperity. There remain
a large number of issues that face potential investors. These
problems exacerbate legitimate business risks and discourage
people from long-term investments.

We know this because we have been actively speaking with
business people. Staff from the Asian Development and the World
Bank, partnering with the Coordinating Ministry for Economic
Affairs and the Central Board of Statistics, conducted a survey
of more than 700, generally large or medium-sized firms operating
in Indonesia. The core of the survey asked firms to report on
obstacles they face in their operations.

The survey was conducted in 2003 and has not captured many
important changes that have occurred. This is especially true
with respect to stability. As I said above, events over the last
year represent real progress. However, in other areas there are
mixed results and there are clear needs and opportunities for the
Government to change, clarify, or revise policy to improve the
environment facing investors. Problems were faced in two broad
areas; (i) governance and institutional capacity and (ii)
infrastructure.

Governance and institutional strength refers to such issues as
transparency in regulation and the balance with respect to labor
market regulations between the interests of workers and
management. Regulatory certainty is a big issue. Starting up a
business, for example, apparently takes longer and is more
expensive in Indonesia than in regional comparator countries.
Compounding this, it was said to take 151 days to establish a
company in Indonesia, more than 2-1/2 times what it takes in any
other Southeast Asian country.

Labor issues are always on the table when firms are asked what
their problems are and to some extent this needs to be seen as
only listening to one side. However, when the complaint is that
labor regulations are being applied in a non-transparent fashion,
this hurts both sides. Close to half the firms surveyed consider
labor regulations to be moderate to very severe obstacles.

These problems are compounded by the perception that
corruption is a serious barrier to business. The survey reported
that local and national corruption were both near the top of the
list of the most important obstacles faced by businesses. The
firms queried reported that between 9-10 percent of revenue is
handed over to corrupt officials in informal payments.

Infrastructure complaints referred especially to the
difficulties experienced in ensuring adequacy of communications
and transport systems and the availability of electricity and
water. Although there have been clear improvements in
telecommunications over the last decade, other countries have not
stood still. Indonesia's ratio of fixed and mobile phone
connections to the population is a fraction of that found in most
of Southeast Asia. Electricity supply is perhaps the most obvious
problem with firms reporting production losses equal to 4 percent
of revenues due to supply problems.

None of these problems are new to any observer. Nor are they
new to the Government. This administration has been quite
forthright about the problems the country faces and has shown a
clear determination to face problems. The Infrastructure Summit
held in the midst of the national agony over providing relief to
the people affected by the tsunami in January was a clear
indication that the Government understands that infrastructure
investment must be encouraged. The recent actions by the
administration to deal with allegations of corruption by
government officials or in state-owned enterprises will also have
a longer-term impact if carried through and followed up.

The hard work on political and economic stability has borne
fruit in a greater willingness of people, both domestic and
foreign, to invest in Indonesia's future. We can encourage this
to continue, but only if we continue to address the other
problems that face businesses.

The writer is Asian Development Bank (ADB) Country Director.
The article is a personal view.