'Indonesia still attractive, but has many problems'

'Indonesia still attractive, but has many problems'

Johannes Simbolon, The Jakarta Post, Sydney

Despite the numerous problems now confronting the country, Indonesia remains attractive to many foreign investors. But, Indonesia has to work hard to revive investors' confidence before they are willing to return to the country with the same amount of enthusiasm they demonstrated for several decades prior to the economic crisis, Australian economists and investors say.

HSBC Bank Australia Limited chief economist John Edwards said here on Monday that honoring contracts with foreign investors was key to the Indonesian government reviving investor confidence.

"In order to restore Indonesia's status in the global economy, it needs to convince the world that contracts are enforceable and the government is acting in a way to welcome investors," Edwards said here at a workshop with Indonesian journalists.

Edwards did not specify the contracts in question, but many investors, particularly in the energy, power and mining sectors, have often criticized the Indonesian government for failing to honor their contracts.

In the wake of the 1997 financial crisis, the Indonesian government suspended most of the 27 contracts between independent power producers (IPP) and state electricity company PT PLN as part of the retrenchment measure to deal with the economic crisis. Some of the IPPs took the case to international arbitrators who later ordered the Indonesian government to pay compensation to the investors.

Last year, the government revived all the contracts to avoid more arbitration proceedings and to ensure power supplies in the future.

In the mining sector, dozens of foreign investors have been complaining for years over the Forestry Law of 1999, which bans them from developing open-cast mines in protected forests, and the Ministry of Forestry's decision to designate the contract areas as protected forests. The investors regret the fact that the policy came years after they had conducted exploration. They accuse the government of failing to respect their contracts.

Edwards said that due to Indonesia's failure to enforce the contracts investors still preferred to avoid Indonesia. This was despite the government's recent achievements in stabilizing the rupiah and restructuring the financial sector.

"Indonesia has been punished by investors the same way they rewarded it with a superior economic growth for 20 years prior to the economic crisis," Edward, the former principal economic advisor to former Australian prime minister Paul Keating, said.

Also speaking in the same forum, Bruce Munro, the president of PT Thiess Contractors Indonesia, the subsidiary of Australian construction giant Thiess Pty Ltd., said the Indonesian government's unwillingness or inability to maintain law and order as well as rampant corruption were among the main negative factors for investors.

"We believe corruption will still exist in Indonesia in 2010," Munro said.

The increasingly active labor unions had also added to the troubles, while existing labor laws failed to address labor unions' demands and the government was unwilling to take action against unlawful union actions, he said.

"In fact, Minister of Manpower and Transmigration (Jacob Nuwa Wea) supports unions," Munro said.

The implementation of regional autonomy, which investors believe would create a better investment climate in Indonesia in the long term, still caused headaches for investors as regional governments abuse it to enrich themselves, Munro said.

The fear of terrorism threats and the nightmarish memory of the Bali attacks continued to haunt investors in Indonesia, making them feel insecure.

Thiess is one of the largest construction firms now operating in Indonesia's mining, energy and telecommunications sector with the existing contract value totaling US$2.7 billion.

Both Edwards and Munro however maintained that despite all the problems, investors believe that Indonesia still has a lot of advantages to lure back international investors, compared to many developing countries.

"It (Indonesia) is not like, for example, Nigeria, which also has natural resources but nothing else. No agriculture, no manufacturing, no disciplined workers, no education," Edwards said.

Edwards said investors appreciated the fact that Indonesians considered education highly. Investors also found it attractive that Indonesia had a diverse industrial base, had managed to carry out a transition from agriculture to industry and had recorded 20 years of superior economic growth until the 1997 economic crisis, Edwards said.