Investment climate still walking a tightrope

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.