JP/13/Y-Invest

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."