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.