Indonesia, with its abundant natural and human resources, once

Indonesia, with its abundant natural and human resources, once ranked as an exotic choice for investment, but the unrelenting bureaucratic, social, economic and political problems of the last five years have pretty much put paid to that designation. It's an uphill struggle for the Investment Coordinating Board (BKPM) in trying to bring some sunshine to the investment climate, especially as it lacks the political clout to take effective measures. According to BKPM's 2002 annual report, approvals on foreign investment projects in business sectors aside from the financial, oil and gas industries declined from US$33.81 billion in 1997 to $9.74 billion in 2002, and those for domestic projects from Rp 119.87 trillion ($49.9 billion based on a conversion rate of about Rp 2,400 per dollar) to Rp 25.26 trillion ($2.8 billion based on the conversion rate of about Rp 9,000 per dollar). The figures do not necessarily indicate the real amount of money being invested because the implementation of investment projects has always been low, averaging less than 20 percent for domestic projects and 60 percent for foreign ones. BKPM chairman Theo F. Toemeon acknowledged that developments of foreign and domestic direct investments in recent years resulted from a set of difficult, complex domestic issues unfolding since the start of the Asian economic crisis in 1997 and the restoration of legislative democracy in the country. Current global conditions, marked by the U.S.-led war against Iraq, overall weaknesses in major world economies and intense competition for new foreign direct investments (FDI) with countries like China and some regional neighbors, have put more pressure on Indonesia's efforts to improve its investment performance. Repercussions from the epidemic of severe acute respiratory syndrome (SARS) are proving another burden. Toemeon said he was confident Indonesia retained its "exotic" investment status and that a lot of investors would like to do business in the country, "but the establishment of political stability, security as well as law and order is prerequisite for the conducive environment for investment". He noted that he could not go it alone in the effort to win over investors. "It will take some time to fully restore investor confidence. We need our central government and local administrations to recognize and accept that investment, together with exports, is the key to our sustainable economic recovery and job creation," Toemeon told The Jakarta Post in a recent interview. He said the country needed large amounts of investments to create employment because about 40 million members of the workforce were now out of jobs, while about 100 million people were living below the poverty line. "The central government and local administrations, therefore, must improve coordination and collaboration to generate new investment and protect the existing ones," he said.

Toemeon's remarks are particularly apt because the business climate in a decentralized Indonesia is affected by a host of complex problems, including those partly related to the central government and partly to local administrations. Some of the problems, as cited on the U.S. Embassy website in information for American investors, include the unknown impact of political and fiscal decentralization, the unreliable judicial system, political uncertainty, uneven implementation of economic reform commitments, security issues and the treatment of existing investors. On fiscal decentralization, for example, a newly amended law on local taxation has given local administrations the freedom to impose new taxes and levies within certain limits. Many of the new taxes target foreign investors and trade with other regions. Investment rules and procedures also remain unclear as many local administrations have criticized Jakarta's slow pace and lack of consultation in formulating and implementing regulations for the decentralization laws. For security issues, investors, particularly those operating in plantations and mining, frequently encounter problems such as looting, occupation of land by squatters and illegal mining. Concerning the judicial system, the government has taken some steps to foster judicial independence by the promulgation of the law that transfers most of the administrative and regulatory functions related to the court system from the former ministry of justice to the Supreme Court, and also by forming an independent national law commission. Nevertheless, the government still has not announced a thorough plan for judicial sector reform, and the system continues to be dogged by a lack of fair and impartial protection for investors. Indonesia ranks among the lowest in transparency and corporate governance assessments of Asian countries. "When I started my office (in 2002), I established a task force and invited about 500 foreign and domestic investors. Everybody cried out but I could not help solve their problems," Toemeon said. "Some of the investors experienced problems related to different departments and some had problems related to different offices of coordinating ministers," he said, adding that other complaints extended to taxation, customs and security. After the Bali bombings last October, Toemeon also gathered investors on the shattered resort island. "I was surprised that most of the complaints were not about the bomb blast but about tax harassment," he said. An administrator of an international school, for instance, complained that soon after the school had bought a plot of land from the Indonesian Bank Restructuring Agency (IBRA), tax officials demanded payment of Rp 3 billion. After tough negotiations, the school was "allowed" to pay about Rp 300 million. "When asked about the use of the money, the tax officials told the school administrator, 'We have to pay Rp 120 million to the country and the remainder to our boss who will retire'," Toemeon said. Unfortunately, the school backed down on its complaint after Toemeon reported the case in a hearing with the House of Representatives (DPR). "They withdrew the complaint because they were threatened by the tax people," he said. In facing such complex problems, involving various ministries and other government institutions, the task force -- which was established and overseen by BKPM, an institution lower in rank than ministries -- lacked the power to make definitive decisions. The board has proposed the establishment of a national team for the protection of investments and President Megawati Soekarnoputri approved its proposal in a Cabinet meeting last November. However, it has failed to materialize due to legal and technical problems. To make it effective, the team is supposed to be chaired by the President and to have ministers as its members, with the BKPM chairman acting as secretary-general. However, a coordination problem is almost certain to occur if the BKPM chief remains of lower rank than ministers. While a presidential decree on the establishment of the investment team cannot be issued without the necessary change in status of the BKPM chairman to a minister, the President seems reluctant to add another member to her Cabinet, whose tenure ends next year. While waiting for the issuance of such a decree, the BKPM chairman now leads an investment working group that comprises senior officials from various ministries. This group deals directly with investors' issues and if it cannot solve certain problems alone, it would then forward them to the team, if and when it is established. Toemeon said BKPM was also preparing mechanisms for providing one-stop services to investors and formulating measures to simplify licensing procedures. It would cut out the bureaucratic runaround and the likelihood of graft being exacted on investors who want to start a business in the country. "This facility at the BKPM will help speed up the processing of documents related to investment," he said. "At the same time, we are reviewing the existing approval process to streamline and reduce bureaucratic requirements on investment and related operations." In other efforts to curb graft, the BKPM will introduce measures to avoid face-to-face contacts between investors and its officials. For example, investors would only need to meet officials at its front office, with no opportunities for contact by other officials. Toemeon also said that he, in his support of the Feb. 27 declaration of 2003 as the Year of Investment, had finalized an action plan to reorient BKPM to compete for new investment and improve the outreach to existing investors. "In our action plan for investment, we focus on four key strategic goals: the improvement of institutional and legal coordination, communication and 'investors' after care', proactive promotion and better linkages to the legislature, local governments and overseas agencies." He said his office would take the lead to address conflicting and confusing legislation, policies and procedures that affect investors, including those by local governments. Investors would now have a single channel of contact to address the issues through BKPM, bolstered by its role in the investment working group and the national investment team. BKPM will also soon set up an investors relations center to handle investors' queries and grievances, he said. Proactive investment promotion within the country and overseas will also continue to be central to Toemeon's strategy. "An important part of our foreign investment strategy is to cultivate the return of overseas entrepreneurs of Indonesian origin," he said. "A program is being worked out to target many of these entrepreneurs to reconsider bringing back their capital for investment in an improved political and security environment." BKPM is also planning a program to communicate to local governments on the role of investment in their regional development and on the negative impact of introducing new administrative or fiscal demands. Despite the problems, he said he was optimistic that investors, many now awaiting political certainty, would return to the country after next year's general election. 1