Investment climate still walking a tightrope

Urip Hudiono, The Jakarta Post, Jakarta

"Philip Morris buys Sampoerna for US$5.2 billion." If there was one sentence that could summarize Indonesia's investment sector in 2005, that could well be it. The U.S. tobacco giant's purchase in March of a 97 percent stake in Indonesia's third largest cigarette producer was clearly the event of the year for investors and the business community.

The new administration of President Susilo Bambang Yudhoyono, who came to office promising to improve the country's investment climate, touted the deal as proof that investors had regained their confidence in Indonesia.

Investment is indeed once again becoming a main driver of Indonesia's economic engine, along with consumer spending and exports, after having collapsed in the aftermath of the 1997-1998 monetary crisis.

According to the Investment Coordinating Board (BKPM), actual foreign direct investment (FDI) from January to November more than doubled to US$8.7 billion on 831 projects, from $3.7 billion on 456 projects over the same period last year. Realized domestic investments also showed an upward trend, nearly doubling to Rp 26.9 trillion (some $2.69 billion) on 192 projects, from Rp 13.6 trillion on 104 projects.

These investments provided jobs to 244,996 people as of November, compared to 206,298 in 2004.

Along with direct investments in the mining and financial sectors, which are outside the control of the BKPM, Indonesia's investment sector grew by 12 percent as of the third quarter of 2005, accounting for 21 percent of gross domestic product. Last year, direct investments grew by 18 percent, accounting for a similar share of the GDP.

Meanwhile, portfolio investments in Indonesia's stock and bond markets also saw vigorous growth in 2005. The highlight here was the government's two global bond offerings -- $1 billion in April and another $1.5 billion in October, with both offerings oversubscribed.

And despite a few ups and downs due to the economic shock of soaring global oil prices, inflation and interest rates, investors maintained their interest in Indonesian stocks, with the country's composite index managing to stay above the 1,000- point threshold for the entire year.

Indonesia's improving economy over the past few years, along with peaceful elections in 2004, can be credited with creating the political and economic stability needed for the business and investment sectors to thrive.

In terms of winning back investor confidence, Susilo's new administration went as far as attending investment forums in world financial centers such as London and New York, as well as making state visits to Australia, the U.S. and China, among other countries, to drum up possible investments.

At home, the government held in January the first "Indonesian Infrastructure Summit", a major event that gave private investors the opportunity to help develop the country's infrastructure.

However, as always with any good news, there will always be that one joker in the crowd who blurts out: "So what's the bad news?"

In the case of Indonesia's investment sector, there is still unfortunately a lot of "bad news". One can start with the Infrastructure Summit itself, which underlined that promotional efforts alone will never succeed in luring more investment if they are not accompanied by concrete policies to create a more favorable business and investment climate.

As of October, only six toll road projects out of a total of 91 projects worth $22.5 billion offered at the Infrastructure Summit were in the bidding process. Although one could argue that the offered projects were long-term ones, problems of land acquisition, lengthy bureaucratic procedures and unsatisfying investment rates of return have plagued the projects from the start.

Add to this the recent economic slump that has turned off investors and the first Infrastructure Summit is beginning to appear as nothing more than an overhyped event. As a result, the second Infrastructure Summit, which was slated for November with another $57.5 billion worth of projects to be offered, has been delayed until February.

In the portfolio investment sector, Indonesia's newly developed mutual fund industry nearly crashed from massive redemptions in September.

Fortunately, the government moved quickly to remedy the situation, issuing a presidential regulation providing incentives for private participation in infrastructure development -- including tax incentives and risk management support -- to complement an earlier presidential regulation on land acquisition for infrastructure projects.

Nevertheless, Indonesia's investment climate is still plagued by such "classic problems" as legal uncertainty, red tape and -- ironically -- poor infrastructure, all of which should have been addressed five years ago. It is difficult for any investment forum, seminar or workshop to generate much excitement as long as the government and the public seem to lack the will to reform.

The latest update of the World Bank's "Doing Business" study conducted in 155 countries placed Indonesia among the most frustrating places in the world for doing business.

Although an improvement from last year's 155 days, setting up a business in Indonesia still takes some 80 days, far above the global average of between 40 days and 50 days, and even farther from the government's own 30-day target.

A separate study by Regional Autonomy Watch found 297 of 881 bylaws issued in recent years have impeded trade and discouraged investment, although the government -- invoking last year's amendments of the Law on Decentralization -- has since moved to review and revoke 60 of the bylaws.

In an interview earlier this year with the Post, Sampoerna's new president director, Martin King, said that although investors were generally optimistic about the government's commitment to reform, they underscored the importance of supportive legal and regulatory framework, particularly a framework that provides a level playing field between all businesses and a level of predictability.

Speaking of legal revisions, one revision that has recently been of particular public concern is the ongoing deliberation of the tax amendment bills. The business community has complained of a perceived inequality between taxpayers and tax officials in the bills, which they say give tax officials too much authority in the assessment and collection of taxes. They warn this could lead to abuses of power that would hurt the country's business and investment climate.

Meanwhile, nothing has been heard of the much-awaited Law of Investment, with Minister of Trade Mari E. Pangestu and BKPM chief Muhammad Lutfi only saying it is currently in the final stages of drafting for submission to the House of Representatives.

The bill, which will combine the existing foreign and domestic investment laws, is needed to improve Indonesia's investment climate by addressing such important issues as equal treatment for investors, a clearer and simpler negative investment list, and improved dispute resolution.

Dispute resolution is probably the most important issue here, as the government has not been able to resolve the prolonged and high-profile investment debacles involving Karaha Bodas, Exxon and Cemex.

It is not yet clear that investment is a sustainable source of economic growth, as investment has slowed along with the recent rises in inflation and interest rates.

Despite this year's "success" for the investment sector, much more work has to be done to improve the sector and make it more sustainable. If this happens, in the future we may be able to read about investment success stories without having to look for the bad news.