Investors need more concrete economic reforms

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.