Investors await improvement of business climate

Rikza Abdullah Contributor Jakarta

The Investment Coordinating Board (BKPM) has reported mixed indications on approval of commitments for direct investments but skepticism remains on the real flow of capital into the country in the near future.

The board, in its latest report, published on its website www.bkpm.go.id, says that foreign investment commitments approved during the first quarter of this year (for projects in business sectors other than the financial, oil and gas industries) surged by 90.7 percent to US$2.49 billion from only $1.3 billion in the same period last year, while commitments for domestic investment declined by 35.35 percent to Rp 2.26 trillion (about $250 million) from Rp 3.49 trillion.

The most attractive sector to foreign investors, according to the report, was trading and repair (with 96 projects approved), followed by the metal, machinery and electronics industries (25 projects), and the hotel and restaurant business (14 projects). Meanwhile, among the committed domestic investors, five planned to establish projects in the metal, machinery or electronic industry, five in the chemical or pharmaceutical industry, four in the food processing industry and another four in the textile industry.

The report seems to indicate that foreign investors are more enthusiastic than domestic ones in making new businesses in the country.

But senior economist Pande Radja Silalahi of the Center for Strategic and International Studies (CSIS) has expressed skepticism that more investment will really come to Indonesia this year.

"This year's trend is that the amount of investment flying out of the country will remain higher than that coming in," he told The Jakarta Post in a recent interview.

"This trend has actually lasted for a long time, long before the U.S. invasion of Iraq and the spread of the Severe Acute Respiratory Syndrome (SARS) disease in various countries," he said.

Pande said that investors' reluctance of doing business in Indonesia was caused by conditions and incidents that significantly reduced its competitiveness since the start of the economic crisis a few years ago, while at the same time other countries were improving their competitiveness.

According to BKPM, approvals on foreign investment steadily declined from US$33.81 billion in 1997 to $13.58 billion in 1998 and to $10.89 billion in 1999 before increasing back to $15.42 billion in 2000. But they declined again to $15.05 billion in 2001 and to $9.74 billion in 2002. Approvals on domestic investment fell from their peak of Rp 119.87 trillion in 1997 to Rp 57.93 trillion in 1998 and to Rp 53.12 trillion in 1999. They increased to Rp 92.41 trillion in 2000 but fell back to Rp 58.81 trillion in 2001 and to Rp 25.26 trillion in 2002.

Pande said that apart from the security problems, the government's inconsistency in the enforcement of laws, particularly those related to businesses, and its unwillingness to base its policies on principles of economics -- like its recent policy on the supply of sugar -- had caused business uncertainty.

The Asian Development Bank's country director for Indonesia, David Jay Green, also warned the government in an inter-agency meeting in Jakarta earlier this year that there were many factors that undermined investor sentiment.