Government has much work to do to lure investors

Moch. N. Kurniawan and Novan Iman Santosa, The Jakarta Post, Jakarta

The government must reform the legal system to reverse the declining trend of foreign direct investment (FDI) in the Indonesia, investors and analysts said on Monday.

According to analysts Raden Pardede of Danareksa Research Institute and Didik J. Rachbini of the Institute for Development of Economics and Finance (Indef), the government should start reforming legal system to lure more investors, who needed it to minimize their long-term risks.

"Law reform is the most important thing to do now as I see the government is on the right track with its fiscal and monetary policies," Pardede told The Jakarta Post.

Small inflation and slow growth of base money were among the good indicators, he added.

Jakarta Japan Club Foundation chairman Tsutomu Nakagawa said that the Indonesian investment climate must be improved as many foreign investors had "lost their appetite and see no reason to come here".

Investors need legal certainty and transparency to protect their investments, he said.

Japan is one of the largest investors in Indonesia with a total investment of US$37 billion.

Trust against the country's legal system plummeted after last month's controversial bankruptcy ruling against Canada-based insurance company PT Asuransi Jiwa Manulife Indonesia.

The Central Jakarta Commercial Court declared Manulife bankrupt over unpaid 1999 dividends although the shareholders approved the firm's proposal to withhold the dividend.

Under the bankruptcy law, a company can only be declared bankrupt if it failed to pay a matured debt.

Pardede said the government should learn to honor business contracts to eliminate the image that the country was a haven for contract and legal violations.

The government should also replace corrupt judges with clean and educated judges to further clean up the judicial system, he added.

"In the New Order era, our legal system was actually weak, but certain as former president Soeharto became the law himself. Thus, we could get lots of foreign investments although the investors must collaborate with Soeharto's family," Pardede said.

After the economic crisis hit the country in 1997, the Soeharto regime fell in 1998 followed by a break down of law and order.

Foreign investors were scared to invest their funds here and some existing companies even left the country.

In 1997, FDI inflows to Indonesia still stood at US$4.677 billion, but dropped to -$356 million in 1998, -$2.745 billion in 1999 and -$4.55 billion in 2000.

Between 1998 and 2000, Indonesia experienced net outflows of investment due to huge divestment and steady pressure for corporate restructuring.

FDI, along with domestic investment, consumption and exports, is the prime mover of the country's economy.

Higher FDI will open more job opportunities, thus reducing unemployment, and lead to economic growth. According to Didik, if the FDI is able to make gross domestic product (GDP) increase by one percent, some 400,000 new jobs will be created.

But such a hope will cease as the data from the Investment Coordinating Board (BKPM) showed that FDI approval between January and May plunged by 59 percent to $1.67 billion from $3.98 billion in the same period of last year.

Both Pardede and Nakagawa suggested the government manage the implementation of regional autonomy well as it caused confusion on taxation among investors.

"Most companies are now confused where to pay tax because most of the regional administrations insist that the taxes should be paid to them instead of the central government," said Pardede.

Meanwhile, Nakagawa emphasized the importance of training officials to avoid possible multiple interpretation of the regulations.

"Without proper training, the regional administration officials will interpret the regulations their own ways thus opening doors for KKN practices," Nakagawa said referring to the widespread corruption, collusion and nepotism.

Regional autonomy is good but the central government should keep the control, he said.

Nakagawa said most new Japanese investors preferred to go to China for its excellent infrastructure and services.

"There should be an extra output of 15 percent in electricity. But unfortunately Indonesia faces imminent power shortages if there were no new investment in power sector."