Investors' stance

Investors' stance

The plunge in foreign and domestic investment approvals last
year, as reported by the Investment Coordinating Board (BKPM)
last week, served only to confirm the market perception that
Indonesia is now among the least attractive places to do
business.

The 35 percent decline in licensed foreign direct investment
has been expected, given the multi-dimensional crisis that has
been gripping the country since 1998 and the legal and regulatory
uncertainty in many provinces during the current transition from
a centralized government to local autonomy.

Yet far more worrisome was the 57 percent drop in domestic
investment approvals as it shows that even Indonesian
businesspeople who are supposed to be more capable of assessing
local risks and of treading the difficult business terrain have
increasingly been downbeat about the country's economic
prospects.

The approved investments would become much less significant if
it was set against actual (realized) capital outlays, which as a
percentage of licensed total investment, are usually less than 40
percent for foreign investment and 30 percent for domestic
investment.

The licensed foreign investment would become even more
negligible, as compared to the billions of dollars still fleeing
the country every year, either through debt payments, profit
repatriation and capital flight to safety. In fact Indonesia has
steadily suffered a net resource outflow since 1997.

Even though the board's data does not include investment in
the hydrocarbon sector, financial services as well as capital
outlays by small companies, the report portends a sluggish growth
and worsening unemployment ahead.

This development is quite worrisome as it takes place at a
time when the country, suffering from a falling rate of domestic
savings due to the depressed economy, is desperate for investment
to fuel economic recovery. Private capital outlays are badly
needed to increase the economic capacity as private consumption,
the main locomotive of growth over the last three years, has
begun to lose steam, and the government, overburdened with huge
domestic and foreign debts, is deprived of meaningful investment
capacity.

Indonesia has indeed lost most of the three fundamental
advantages it previously had to attract investment.

The first advantage, natural resources such as minerals,
fisheries, agribusiness such as plantations, forestry and
fisheries that are located mostly outside Java, is no longer
attractive to new investors due to security problems and the
imbroglios caused by the excesses of the start-up implementation
of local autonomy. The legal and regulatory uncertainty has
scared away investors as they do not have any clear guidelines to
make reasonable calculations of business risks.

The huge pool of low-cost labor, which had largely been tapped
by export-oriented businesses under the authoritarian rule of
Soeharto, has now become a major hurdle to sound business
operations.

The country has lost its competitive wage structure to other
countries such as China and Vietnam as more trade unions have
resorted to radical labor movement pressure and labor regulations
are seen has too heavily in favor of workers.

The huge potential market of more than 210 million people that
had lured many manufacturing investors for more than three
decades until 1997 is no longer feasible for new investors
because most of the existing factories have operated far below
capacity due to decreased demand.

The economic crisis has depressed domestic market demand for
almost all goods and services and virtually all manufacturing
industries are suffering from excess capacity. Worse still,
pervasive corruption and extensive incompetence within the
government bureaucracy has added a great deal to the costs of
doing business.

The government's decision last week to lift value added taxes
on power, toll roads, capital goods and services and luxury sales
tax on 23 categories of electronic goods, as well as to lower
luxury sales tax rates on nine other groups of electronic goods
would not contribute much to reducing the costs of doing
business. They would simply help stimulate consumer demand
through lower sales prices.

The gloomy investment report should serve as another alarm
bell for the government to exercise a stronger resolve to take
focused, definitive and concerted efforts to improve the business
climate if it is serious about its declaration of 2003 as
Indonesia Investment Year.

The investment climate must be entirely rife with risks and
uncertainty if even national businesspeople themselves are not
confident enough about investing in their own economy, let alone
foreign investors. Without new investment there will be no job
creation to absorb the tens of millions of people who have lost
jobs amid this economic debacle. Nor will there be any additional
capacity to fuel economic growth.

Investors are rational and realistic enough not to expect an
overnight solution to the problems described above. What they do
want to see is a steady, however small, progress under the right
set of priority programs.

Certainly, the top priority, besides stable political and
security conditions, should be a significant improvement in legal
certainty because in a highly complex market-economy, it is good
legal institutions and laws that serve as risk management tools.
After all, the ability to reasonably calculate risks is what
distinguishes business from gambling.