Investing in Indonesia is strewn with ironies. Take the case of the Indonesian Regional Investment Forum (IRIF 2008), which took place at the end of May, and which was aimed at attracting between $6 billion and US$8 billion in investment.
During the conference, the forum committee claimed that local governments had greatly improved their strategies to attract foreign investment. However, this view was not shared by some of the forum's participants.
Business people we spoke to simply could not believe that some local government officials were not able to come up with basic information, including business plans and Return on Investment (ROI) data.
Other complaints came from some government officials with limited scope of knowledge in the various projects that were being tendered.
We were informed that one Central Java regent did not even have an email address, and worse, some officials chose to speak on their mobile phones rather than converse with investors. Furthermore, we heard claims that many of the regions did not send their top officials to the gathering.
This is particularly perplexing to us given there were about 200 investment projects on offer worth a total $18.9 billion.
And speaking of ironies, what about the monorail project.
This has run aground on a failed tenure program and due to the government's lack of involvement. It is hard to perceive the success of a public mass-transit system like the monorail project solely owned by the private sector.
In our view, for a project of this magnitude and importance, the public sector must come up with strong support, ranging from bond issuance to ruling on land clearing issues.
A more serious irony in Indonesia's investment profile is the fact that productive investment (i.e. machine, equipment and transportation) makes up less than 20 percent of total investment, while building takes the lion's share.
Hence, even though overall investment trends provide encouraging signals, as the total investment rate was up to 22.9 percent in first quarter of 2008 from 20.1 percent on average in the 2001-03 period, the productive investment rate is still low at about 3.7 percent of GDP.
This poses a serious constraint on Indonesia's medium-term competitiveness.
Having said that, concerted efforts must be sustained to improve the investment climate in order to lift the country's economic potential toward the 7 percent level, as in the 1967-1998 period (see chart).
So what can be done? Government officials, more specifically decision makers, need to spend more time planning in order to create better investment deals.
This would include making headway in areas where corruption is deeply-rooted and establishing a clear roadmap for structural reforms to achieve higher GDP growth rates and to lower unemployment.
We recognize that in 2007 Indonesia managed to push forward a structural reform agenda with several important pieces of legislation passed by the cabinet, including the March 2007 new Investment Law.
However, more needs to be done for the medium-term to attract higher sustainable non-debt creating foreign capital inflows and increase investment further in the economy. The most contentious issues lie with the restrictive labor legislation and uncertainty in the legal framework.
Labor groups oppose the proposed changes in the social security insurance scheme to ease retrenchment costs while amendments to the onerous 2003 Labor Law, which imposes heavy severance pay and lay-off procedures often cited as a major deterrent to both domestic and foreign investment, are unlikely to be passed in 2008 or 2009.
The legal and judicial system, the coordination between ministries and between the central and the regional governments all need further improvements. With the business climate needing a boost, there is every reason for the government to stay focused on painful reforms.
Unfortunately, with the prospect of the presidential and legislative elections next year, the pace of reforms is likely to slow. Until these investment-related issues are ironed out, Indonesia's economic growth potential will remain below the 6.7 percent average achieved in the 1967-1998 period.
The writer is the senior vice president and head of research at PT Bahana Securities