Investors need more concrete economic reforms

Lord Powell of Bayswate, London

My involvement with Indonesia began when I accompanied Margaret Thatcher there on an official visit in 1985 and has been continuous since. First from No. 10 Downing Street and later as a businessman, I have watched Indonesia evolve from the fragile stability of the 1980s, based on an authoritarian style of government which could not last, because it lacked internal consent and external acceptability, through the turmoil of the difficult transition years to the success of last year's fully democratic Presidential election.

Lasting political stability is one of the key elements on which foreign investors base their investment decisions. I believe that Indonesia has now demonstrated beyond reasonable doubt that it has achieved the durable stability in its political life, and established a solid foundation for sustained economic growth. That is a great tribute to President Susilo Bambang Yudhoyono in particular.

On the economic front, obviously the recent fluctuations in the rupiah are a worry. But the decision to raise interest rates -- overdue but very much the right decision -- shows a reassuring determination to tackle inflation and support the currency.

One might ask why Indonesia is not receiving fuller and more gracious international recognition for the tremendous strides which it has made in its own governance.

The heartening international response to the tsunami disaster was actually a way of acknowledging what has been achieved, and in Britain we do understand the magnitude of the changes which have taken place.

But I have no hesitation in saying that Indonesia deserves more credit, especially from the United States, where selective self-righteousness seems to govern the attitude of some members of the U.S. Congress who are denying Indonesia even modest help with training for its military officers. That needs to change and change soon. The gains for all of us from Indonesia's success can be enormous.

So my judgment is that the political foundations are in place to sustain an attractive investment climate and for Indonesia to start realizing its full potential.

However -- and there are always however in life -- the picture is not yet so positive when it comes to the machinery of government and administration and all the hurdles which foreign investors have to cross or find a way round. Here there are still significant problems, though Indonesia is not unique in facing them.

The first -- and most vital from the point of view of foreign investors -- is the erratic performance of Indonesia's courts and justice system. Some recent decisions can serve only to deter foreign investors. Companies and individuals will not invest unless they have the assurance that their rights will be protected by fair and impartial judges. They also want transparency in the laws and regulations governing them.

It's a similar story with taxation. Investors want taxes and duties which are applied fairly and consistently not arbitrarily and penally. When the Tax Court or the Supreme Court reaches a decision in favor of a taxpayer, it must be promptly and effectively honored.

Then there are the bureaucratic obstacles, which investors have to find a way round:

* Restrictions on foreign access to extractive industries, particularly oil and gas. There is a desperate need to speed up the review process for investments in oil and gas, which could boost Indonesia's exports;

* Foreign investment procedures which are complex, expensive to meet, and incredibly time-consuming. Indonesia should have a Registration System not an Approval System for investment;

* Immigration permits which take up to one year to renew. Also it really doesn't make sense to compel expatriates to work as technical advisers rather than operating executives. That's old thinking.

* Differing requirements for foreigners' registration between national and regional governments need to be sorted out so everyone knows where they stand;

* Indonesia's labor laws need to be made more flexible if they are to encourage not deter job creation.

These problems simply have to be tackled. It's fundamentally a competition issue. However warm the political welcome for foreign investment in Indonesia, investors have many other options and will ultimately go where their life is made easiest: where they find the simplest regulations and maximum fairness and where the incentive packages for foreign investors are best.

Indonesia has to compete in that league. I give the Indonesian government full credit for recognizing what needs to be done. I found what President Susilo had to say on all these issues, in his refreshingly frank and open way, enormously encouraging.

He recognized as never before the contribution which foreign investment can make to Indonesia's economy and remarked that being pro-business went hand-in-hand with being pro-growth, pro- jobs and pro-poor. He promised a new Investment Law, to deal with many of the current problems which I and others have identified and recognized that the accompanying regulations will be just as important as the law itself.

But good intentions alone won't do the trick. They have to be implemented. One thing which I learned at Margaret Thatcher's feet is that half-measures don't work. However difficult and sometimes unpopular it can be to go the whole hog, it's always better in the long term to do it. The momentum of regulatory reform has to be kept up.

So my advice to Indonesia's excellently qualified ministers is: Strike while the iron is hot! The tide is flowing Indonesia's way. There is a will nationally and internationally -- to see you succeed. Take the tough decisions now and the pay-back will come rapidly, whatever the grumbles of a minority of entrenched interests and old-fashioned ideologues.

Lastly a word about our own experience in Jardine Matheson. We are fortunate in being long-established in Asia generally and in Indonesia in particular.

But we too have choices to make when it comes to new investments in the region, whether it be China, Singapore or Malaysia. In fact our largest and currently most successful investment in recent years has been in Indonesia, in one of its major corporations Astra.

We have found excellent management, a lively entrepreneurial spirit and a well-run economy to which steady growth is rapidly returning. We have had our problems, including vexatious law- suits. But we have steered through them and are confident about the future of our investments generally, which, as well as Astra, range from real estate, to retailing to hotels and much else besides. I hope other companies will follow our example and share our positive experience.

The years of drift in Indonesia are over and there is a real feeling of dynamism and of optimism about the future in the air.

Now is the time for investors to take advantage of that new mood: And for Indonesia's government to respond to the concerns which I have outlined by doing what's needed to make Indonesia the Chelsea, the Arsenal or the Manchester United of investment destinations in Asia. It can be done. It must be done. Because while foreign investors will benefit, Indonesia itself will benefit most of all.

Lord Powell of Bayswater was private secretary and advisor on foreign affairs and defense to British Prime Ministers Lady Margaret Thatcher and John Major from 1983 to 1991. He has also served as a member of the board of Jardine Matheson Holdings, Ltd. This article was taken from his presentation at the Indonesian Global Investment Forum held in London last week.