Improvement in economy brings new impetus for investment

Improvement in economy brings new impetus for investment

Investment activities in Indonesia have started to move again amid an improvement of the country's economy after significant drops during the past three years.

Economic observers said that the improvement in the macroeconomic situation as indicated by the strengthening of the rupiah against the U.S. dollar, the increase in exports as well as the decline in the interest rates would further bring a new impetus for investors to make new investments.

Pande Silalahi, a senior economic analyst at the Centre for Strategic International Studies (CSIS), said that signs of the improvement in the country's fundamental economic factors had certainly brought a new optimism.

"The improvement in the economic indicators as the result of the strengthening of the rupiah and the rise in exports has certainly brought a positive impact on the country's investment activities," he said.

But Pande warned that the government should make a serious effort to maintain the positive signs by continuing to reform and encouraging investors with policy decisions.

According to a report issued by the Investment Coordinating Board, foreign investment approvals including for expansion projects showed a significant increase during the first four months of this year.

The value of new foreign investment approvals rose by about 170 percent to US$3.13 billion during the period between January to April, this year from US$1.86 billion during the same period of 2002.

Domestic investment approvals, however, declined to Rp 4.3 trillion during the January-April period, this year from Rp 8.96 trillion during the first four months of last year.

But the domestic investment trend from month to month has been very positive. The value of the monthly investment approvals which dropped to Rp 472.7 billion in February from Rp 1.03 trillion in January showed a positive trend in the following two months. The value of the domestic investment approvals rose to Rp 1.007 trillion in March and to Rp 1.82 trillion in April.

Total foreign investment approvals which totaled US$ 39.89 billion in 1996, plunged to $13.6 billion in 1997 and dived further to $10.88 billion in 1998 following the crisis which hit the country in the middle of 1997. The figure slightly increased to $16.07 billion in 2000 but in 2001 and 2002 it dropped again to $15.05 billion and $9.79 billion, respectively.

Economic observers believed that the increase in the new investment commitments during the first four months of this year was also partly a result of an improvement in the business climate in the provinces.

Regional governments are generally more positive towards the implementation of the regional autonomy, which has been blamed for the increase in investment hurdles.

P. Agung Pambudhi, executive director of the Monitoring Committee of Regional Autonomy Implementation (KPPOD), said although lots of extra fees and taxes and other red tape were still rampant in some areas, the regional business climate had significantly improved.

Many local governments are aware that abusing their power would be detrimental for their future economic growth, so "Many regencies have been very supportive of investors," he said.

Local governments in such regencies as Sawah Lunto in West Java, Pare Pare in South Sulawesi, Gianjar in Bali and Semarang municipality have made great progress in improving their business climates.

Local authorities in these regencies have not only eliminated the unnecessary fees, but have also provided a one-stop service to investors in a bid to speed up the licensing process.

Agung said that many regencies, particularly those located in a particular area, had worked together to attract investors. "Rather than fighting each other, it will be more useful to join forces in attracting new investments," he said, adding that neighboring Pematang Siantar and Simalungan regencies in North Sumatra were working hand-in-hand to promote their investment potential.

"This kind of synergy should also be followed by other regions," Agung said. He believed that all regencies would eventually leave behind their short-term policies, such as the imposition of unnecessary taxes to increase their budgets.

Regional autonomy was introduced in early 1999 to mark the transfer of greater authority and functions from the central government to regional governments. The decentralization was hailed as an innovative breakthrough for the empowerment of regional economies, which had for years been dictated to and controlled by the central government.

Vested with stronger administrative powers, regional governments are expected to be able to determine the direction of their own economic policies, including investment regulations.

Investors and businessmen alike hope that regional autonomy would help create a healthy competition among regional governments in attracting new investments.

The implementation of the regional autonomy was widely criticized during the first two years of its implementation. The lack of financial sources to finance their budgets -- including the salaries of civil servants who, prior to the introduction of regional autonomy, were paid through the central government's coffers -- has created financial difficulties for many regional governments.

The local governments, in fact, have received cash from the central government's budget to help finance their activities. But this money, called the general allocation fund (DAU), is far from enough, even to pay the salaries of provincial civil servants.

This financial problem encouraged regional governments to find new sources of revenue, and the easiest way was to impose various kinds of user charges or taxes on businesses within their jurisdiction. This short-term fiscal policy has only created uncertainties among local businessmen and potential investors.

The worrying condition in the investment climate in the provinces has prompted the Indonesian Chamber of Commerce and Industry (Kadin) to form an agency called the Monitoring Committee of Regional Autonomy Implementation (KPPOD) to monitor those activities of regional governments that could further hamper business activities.

Kadin chairman Aburizal Bakrie said that the establishment of the KPPOD had indirectly brought a positive impact on the regions' investment climates.

Findings made by the committee are sent to all of Kadin's chapters every six months as a guideline for the organization's members in seeking new investment locations. The findings are also used in determining the investment climate rating of each region. "Any region that fails to meet the minimum rating requirement will automatically be left behind by investors," he said, he said.

Aburizal said that if the regions did not eliminate investment red tape, they would automatically be excluded from Kadin's investment radar.

"So," he advised regional governments, "please improve physical and investment infrastructure, if you want investors to come."