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."