Investors await improvement of business climate

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.

"Decentralization, for example, has not clarified such key
business concerns as the security of mining franchises or what
levels of taxes or fees businesses might face," he said.

"Political developments have also been accompanied by
uncertainty with respect to security. Even in the capital, since
1998 there have been periodic episodes of widespread threats to
personal security."

He said that in Indonesia, investment had also been hindered
by a growing awareness of the costs of poor governance,
especially corruption.

Pande said that even though the government was trying to
promote investment by declaring the 2003 as the "Investment
Year", such a promotion would be just an illusion as long as the
government had not introduced a new investment law that would
guarantee the security of investors, the safety of their
businesses and the repatriation of their profits, he said.

"The government's appointment of a national team to protect
investment also will not be effective because the State
Secretariat has not handed over a draft bill, which would offer a
attractive business climate, to the House of Representatives for
deliberations," he added.

The government agreed last November on the establishment of
the national investment team but its establishment thus far has
failed to materialize because legal and technical problems are
barring it from issuing a presidential decree for that.

"What can such a team do if it has no legal basis to offer an
environment conducive for new investments," he said.

He said that the trend of capital flight was likely to
continue, or even to intensify, in the coming months until a new
legitimate president was elected directly by the people in
general elections next year.

Minister of Finance Boediono also acknowledged that a number
of investors were now still waiting for the results of next
year's general elections before making new businesses in the
country.

"Investors want to see the results of next year's general
elections, who will become president, who will sit in the cabinet
and who will strengthen the cabinet's team of economics," he told
reporters last Friday.

Pande said the new president would have to listen to the
complaints of investors and address them if he or she wanted the
business climate to improve.

"I don't mean that the new president must meet all the demands
of the complaining investors but an equilibrium should be sought
to balance the meeting of the respective interests of investors
and the country," he said.

Only then would investors be ready to take a risk by applying
for business licenses at the BKPM and pledging to make new
investments in the country, he added.