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