Shunned by investors

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.