Shunned by investors

The negative assessment of the Indonesian business climate given by most of the Japanese investors surveyed by the Japan Bank for International Cooperation (JBIC) last year is yet another sign that the country is still shunned by most foreign investors.

But the survey's findings -- that Japanese small and medium- sized companies had begun relocating their operations from Indonesia to other countries in Asia -- are nonetheless greatly worrisome, as Japanese investors are usually more flexible in adapting to Indonesian conditions than American or European business investors.

The World Investment Report 2001, published by the Geneva- based United Nations Conference on Trade and Development (UNCTAD) in September, also found that an increasing number of Japanese investors in ASEAN countries had relocated their plants to China, and that direct foreign investment flows to Indonesia remained negative -- a signal that the wave of capital flight that started in late 1997 had not stopped.

Yet more perturbing among the JBIC survey findings was the fact that the Indonesian government seemed scarcely concerned about the disturbing trend, doing virtually nothing to address grievances of foreign investors.

This is alarming indeed. Without fresh foreign capital, experts said, the country will never regain the sustainable, robust economic growth of at least 7 percent a year needed to absorb the new entrants to the labor market.

The 3.3 percent growth last year, down from 4.8 percent in 2000, was fueled mainly by domestic consumer demand and exports.

But even these two locomotives will eventually run out of steam without new investment.

If domestic consumers continue spending, savings will drop steadily, and they will eventually run out of money.

Indonesian export competitiveness will also decline if existing foreign investors remain discouraged from making additional investments to retool and modernize plant equipment to improve efficiency and product quality so as to diversify product lines.

Since most big business groups are still crippled by mountains of bad debt, and the banking industry may take another three to five years to resume full functions to pump liquidity to the economy foreign investment is, in the short term at least, most likely the main source of fresh capital.

The country's main attractions to foreign investors are its rich natural resources, potentially large market and highly competitive labor wage structure.

But a host of new and old problems have made these attractions less meaningful for investment.

Legal and regulatory uncertainty is now looming over new investment in natural resources that are located mostly outside Java, especially after the launching of regional autonomy in January 2001.

The central government has given local administrations full authority to license investment in such areas as mining (outside oil and gas), fishing and forestry.

But foreign investors do not feel comfortable with making deals only with local administrations since the international community, notably suppliers and creditors, do not recognize contracts that are not ratified by the central government in Jakarta.

Worse still, basic infrastructure has begun to crumble in many provinces due to an acute lack of maintenance budget over the past four years.

Poor infrastructure increases the cost of doing business, making the capital costs of investment projects abnormally high.

The domestic market is no longer a great advantage now because of the depressed economic condition. In fact, the manufacturing industry is now suffering from a big excess capacity.

Even low-cost labor, which lured thousands of small and medium-size investors from South Korea and Taiwan in 1970 to 1995, is no longer a big positive factor either.

The increasing militancy and antiforeign investment sentiment among trade unions is scaring off investors.

It goes without saying that these problems need to be addressed immediately -- but with a properly selected priority scale. Certainly, the general business climate should be improved steadily to encourage existing investors to expand their capacities, or modernize their plants.

But this is an ongoing, gradual process.

Given the desperate need for foreign investment, contingency programs are required.

Since investment in green-field projects seems now feasible only in resource-based ventures given the excess capacity in the manufacturing industry, the government should act immediately to remove the legal and regulatory uncertainties in mining, fisheries and such infrastructure as power generation and road and port development, especially because investment in these areas has a long gestation period.

Next on the priority list is expediting the disposal of the thousands of distressed assets currently under the Indonesian Bank Restructuring Agency and privatization of state companies.

It is therefore futile for the government to expect new investment in Indonesia's manufacturing industry if these distressed assets do not get new, credible investors.