Investment and governance: A new paradigm

Investment and governance: A new paradigm

Joe C. Bartlett
Jakarta

Economic growth and job creation depends heavily on high
levels of investment. One of the major disappointments of
Indonesia's economic recovery is that the government's success in
re-establishing macro-economic stability has not generated the
high levels of investment necessary to increase per capita
income, reduce poverty, and raise gross domestic product (GDP)
growth levels.

Historically, the government has provided the capital
necessary for much of the investment in Indonesia through state
owned enterprises and state banks. There was a suspicion, if not
distrust, of private capital. However, today, the government
does not have the funds, let alone the ability, to be the main
driver of economic development. The government must switch gears
to fulfill its new role as the facilitator of investment and
financial flows rather than the role of its principle provider.
Now, more than ever, the government must work in partnership with
the private sector to facilitate investment, job creation,
economic growth.

In spite of macroeconomic stability, a sampling of recent
events informs us that:

* New foreign direct investment (FDI) approvals have dropped
yet again for the first six months of 2004. However, it is
important to note that the decline was somewhat offset by an
increase in approvals for investment project expansions by
existing investors.

* Oil and gas exploration activities have significantly
declined over the past several years. Indonesia is a net oil
importer. Mining exploration is at a standstill. Electrical power
capacity and access to telecommunications are less than the
public and business require.

As these few items indicate, Indonesia needs new, private
investment capital, and must address the issues that are
hindering the country from attracting it.

Investors are attracted to stable and predictable policy
environments, where private sector counsel is sought and included
in policy formulation. Investors are deterred by surprises and
inconsistencies. Equally important, investors are attracted to
places where current, existing investors are successful and
enthusiastic about their business' future.

From an investor's point of view, major concerns in Indonesia
are transparency and the quality of regulations, the control of
corruption, the rule of law and regulatory certainty as well as
overall government effectiveness, especially policy development
and coordination across government ministries and between the
national government and the provinces and regions. These are
government-created sources of business risk and uncertainty that
have reduced Indonesia's competitiveness, increased the
perception of risk and inhibited the inflow of capital.

There is a misperception that business climate can be improved
simply by issuing new laws and regulations. Actually, the major
problems investors face are often not with the actual rules
themselves but with their implementation throughout the
bureaucracy which is badly in need of streamlining,
rationalization and discipline.

Rules and regulations can always be improved. But these
improvements will not bear fruit unless the regulations in which
they are embedded are consistently and transparently implemented
by the relevant government institutions.

There is a strong perception in the foreign investor community
that the problems deterring investment here are ones of attitude
and mindset. As a submission by the International Business
Chamber to the Ministry of Finance states:"More than just
superficial changes are required to reverse the damage which has
been done to Indonesia's image and economy. New thinking is
required, including the adoption of new paradigms and mindsets
towards direct investment, regardless of whether it is foreign or
domestic in origin."

As the first president directly elected by the people, the
incoming president and her/his Cabinet will be uniquely
positioned to introduce a new paradigm towards private investment
and governance. We wish to offer a few proposals:

* Upon taking office, the President should personally issue a
statement of unequivocal support for private sector investment,
in which the central role of business, be it a small, medium and
larger enterprise, in economic development is clearly recognized.

* Current investors are Indonesia's best advocates. Within
100 days of taking office, the President should convene a working
session with the business community, to be followed up with
quarterly meetings thereafter. The purpose of the meetings will
be to jointly discuss and develop integrated, economic policies
that will encourage and facilitate private sector investment and
development.

* Reporting directly to and in the office of the President, a
national economic ombudsman office should be established with
counterparts in each Department. This office shall serve as the
coordination center for the dialogs, an open office where private
sector ideas, concerns, and complaints can be presented, and a
venue for the private sector to address difficulties across
ministries.

* Among the many specific, focused actions that should be
taken to show a new paradigm, we propose the establishment of a
new Intellectual Property Rights (IPR) agency, chaired by the
coordinating minister, and inclusive of the National Police, the
Attorney General, Customs and other relevant departments and
agencies.

The article was condensed from a presentation made by Joe C.
Bartlett, Chairman of Amcham Indonesia, at a dialog between the
Indonesian Chamber of Commerce and Industry and presidential
candidate Megawati Soekarnoputri on Aug.2.