JP/13/Y-Invest

Investment climate still weak; brighter outlook ahead

Dadan Wijaksana The Jakarta Post/Jakarta

Despite all the efforts to help revive the business climate here, little improvement has been made this year as direct investment remains weak and is struggling to get back to the pre- crisis level.

While signs of improvement are apparent, direct investment lags way behind the rapid pace of recovery seen in portfolio investment in the stock market, which until early December was the best performer in Asia.

Although domestic investment approvals were on the rise in the January-October period this year as compared with the same period in 2003, the Investment Coordinating Board (BKPM) reported that foreign direct investment (FDI) approvals dropped by 11 percent during that period.

Overall, however, net investment in the country rose by 8.3 percent during the first semester, much higher than the 0.4 percent posted during last year's second semester.

As of October, domestic investment approvals had risen by 46.6 percent to Rp 28.8 trillion compared to the same period last year. However, FDI approvals fell to US$8.85 billion from $9.94 billion despite a rise in the number of foreign-funded projects to 969 from 876.

FDI is very important to the country, it not only helps create new jobs, but also provides financing for the development of projects, especially for infrastructure, which are crucial to ensure sustainable economic recovery.

Various studies by both domestic and foreign experts have confirmed that the unfavorable business climate is attributable to the sluggish growth in investment.

For instance, the World Bank, and its private lending arm the International Finance Corporation (IFC), have pointed out that legal uncertainty, security issues, and poor implementation of regional autonomy were all major turn-offs for investors -- adding to the already die-hard problems of endemic red tape and corruption.

"Despite signs of recovery, Indonesia's investment climate remains weak compared to regional competitors," the World Bank's Doing Business Survey 2005 showed.

It pointed out as an example that it takes 151 days in Indonesia to start a business due to the long process of licensing, against 33 days in Thailand, 30 days in Malaysia, 56 days in Vietnam, 50 days in Philippines and 41 days in China. (see table)

The report said that, to reach a 6 percent growth in the period 2007-2008 -- "on the assumption that the pace of reform is at a historical average, investment growth would need to average approximately 20 percent."

Investment was one of the country's main economic engines before the late 1990s financial and political crisis. Now, investment accounts for less than 20 percent of the country's gross domestic product (GDP).

In the latest economic data released by the Central Statistics Agency (BPS), investment accounted for 18.3 percent of GDP in the third quarter of the year.

Still, one would be forgiven for thinking that the prospect of investment in times to come is not that bleak.

The remarkably peaceful, democratic, and trouble-free elections this year should send out strong signals to the international business community that the country can proceed with its democratic process, without shaking up the political and security stability.

Many experts have said that the election would pave the way for the return of investment to the country, due to rising investor confidence in Indonesia.

Investors and industry players are also encouraged by pledges made by president-elect Susilo Bambang Yudhoyono and his administration, that efforts to boost the investment climate would top his list of priorities.

Among other measures, the government will soon be introducing a one-stop investment service, which is expected to help cut the time needed to obtain necessary licenses in opening a new business.

Under the new concept, investors will only have to send an application form to the BKPM, which will handle the processing with related offices, including investment authorities at the regional level.

This is a further development of the existing one-roof system, under which investors still have to go a number of agencies, aside from the BKPM in order to get approvals for their business licenses, despite the fact that they are all coordinated by the BKPM.

Progress has also been made in the form of legislation that could positively affect the investment climate, most of which should be credited to the previous administration of president Megawati Soekarnoputri.

For instance, the high-profile Bankruptcy Law was amended in September, which requires the approval of the minister of finance to declare an insurance firm bankrupt.

Many hailed the amendment as a step forward in addressing concerns of investors, sparking optimism that controversial cases such as those against giant foreign insurance firms Manulife and Prudential would no longer occur.

Another piece of legislation was the Decentralization Law, which was seen to have posed more obstacles than incentives for investment. The long-awaited amendment of the law was endorsed by the House of Representatives in September.

The amendment to the Fiscal Decentralization Law should also open up more opportunities for investors to invest funds in the regions, as it allows local governments to issue bonds in rupiah as long as they gains approval from local lawmakers and the minister of finance.

All of the above should lay the foundation for an upbeat outlook on the country's investment showing in the near future. It could have even been brighter had the drafting of the crucial investment bill gone smoothly.

BKPM chief Theo Toemion said that the investment bill, which promises some "sweeteners" and ensures equal treatment for local and foreign investors, was crucial to speed up investment recovery.

However, the process has been stalled because of various reasons, including "sectoral ego" that prevails among certain ministries -- perhaps knowing that their authority would be reduced if the bill becomes law.

"We are facing tough competition from other countries in attracting investment. Any incentives or sweeteners would help us compete with them," Theo said.

One such sweetener includes the removal of an existing ruling requiring foreign investment companies to divest part of their shares to local investors after a certain number of years of operation.

Also, the bill aims to scrap the 30-year limit on the validity of business licenses for foreign investors, allowing them to carry on their business as long as they deemed economical. It will also lift a ruling that foreign investors divest their projects to local partners after a certain period.

Acknowledging the slow progress in the drafting of the bill, the World Bank urged an acceleration of the process to "provide the legal framework for both domestic and foreign investors."