Taking Care of Business By Aiding Investors

Wed, 16 Apr 2003

Tsutomu Nakagawa Chairman Jakarta Japan Club General Manager Bank of Tokyo-Mitsubishi Jakarta

The approved value of foreign direct investment (FDI) in 2002 was US$9.74 billion, a fall of 35.3 percent from the previous year. Figures for other countries in the Association of Southeast Asian Nations (ASEAN) are also declining, due to the global economic slowdown, uncertainty about the world political situation, and the rising power of China. It is obvious that the Indonesian business environment has yet to reach the international standard for attractiveness. The legislated minimum wage system and increasing cost of fuel have diminished cost-efficiency merits. A survey of Japanese companies reveals that more than 80 percent prefer China for mid- term investment targets. This is in contrast to 1997, the year the economic crisis struck, when Indonesia gained a 25 percent popularity rating among Japanese companies. It dropped to 17 percent by 2001, and may well be less attractive today, particularly after the Bali bomb blasts. China is more attractive for investment over Indonesia or other ASEAN countries because of the potential future market growth, inexpensive labor force, low-cost parts and raw materials, as well as the availability of better skilled plant workers. In Indonesia, wages sharply increased in the past three years while labor productivity did not grow. Indonesian wages are about the same as that in Shenzhen, China, but productivity of the Chinese workers is much higher. In the past 10 years, the peak of approved Japanese FDI to Indonesia was 145 totaling $7.6 billion in 1996, but it dropped to 79 and $500 million in 2002. In the current world political situation, and particularly after the Bali tragedy, the sociopolitical image of Indonesia has deteriorated, and it may fall behind other ASEAN countries when they restore their investment attractiveness. Another issue is decentralization, the political concept that is opposed to control by the central government and regarded as one of the key elements for the country to create the new democratic nation. However, it is too sudden to start decentralization with power and money entitled to the local government when it is lacking good, clear-cut agreements with the central government, with no defined idea and image of a new nation. Previously, local governments had to follow instructions from the central government, but now they stand on their own feet and make their own decisions. However, there are problems in the supply of human resources to effectively run the local government. The budget income of the local government has increased but allocations for police, teachers and local government employees rose as well. Even when the budget is increased, it is much less than the required level for public investment to prepare for private investment. The function of local governments and the central government, as well as responsibility for cost allocation between local and central governments, remain. For the development of large projects, in which the local government is supposed to take the initiative, it is experiencing difficulty in the unfamiliar role of leader as such projects require financing and high-level decision making. And budgets are unclear and appear to be dispensed haphazardly. Some local governments are said to be preparing new local taxes, others have tried to impose surcharges on products manufactured by companies in their regions and there are rampant requests for "assistance" made to the private sector for government events and activities. These grasping measures are disheartening to investors, and the central government needs to push for control. Instances of corruption, collusion and nepotism in the regions are rising, again requiring central government intervention to curb the development. Dividing local authorities into many small independent units does not conform to actual needs and is proving ineffective. Provinces may suffice as the minimum unit of local government, and must introduce rules and regulations to secure implementation that matches the real needs of investors. Otherwise, with ineffective management of the budget, it will be hard to gain new investments. It is up to the central government to assume final responsibility on foreign investments in local areas even though the local government is the direct supervisory body. Security is another important issue for investors, and it is the central government's responsibility to ensure foreign investors are protected from risks. Without clear rules and regulations with regard to foreign investment and security on investment, foreign investors are unlikely to venture into investing in unfamiliar regions. Under such conditions, the prospect for new investors is limited. In fact, some companies, like Sony, decided their best option was to leave Indonesia. There are large-scale manufacturing companies such as in the automobile, electronics and other industries who have been doing business for more than 30 years in Indonesia, but these manufacturing companies must improve effectiveness and attain higher productivity in this increasingly competitive world market. The key factor is cost. The majority of parts and materials must be procured from local companies rather than from overseas, and clustering of suppliers is vital to competitiveness. To increase local contents to international quality, there needs to be foreign companies who are part of the supporting industry. As most of these are small to mid-size companies, there must be support from the government, such as of tax incentives. In other countries in Asia, including China, the government provides tax incentives, but Indonesia offers almost none. In Indonesia, inexpensive labor and fuel costs were long the main draws for investors, but they have been diminished. Instead, the long list of obstacles to investment, such as labor disputes and the business-unfriendly labor law, sharp wage increases, low labor productivity, money politics, the non- transparent legal and judicial system and deteriorating infrastructure, have reduced the appetite of foreign investors. For Indonesia, a mid to long-term industrial policy is needed, and the government must take a comprehensive approach. Investors would like to see a road map of this country toward becoming a competitive industrial nation. It must be remembered that not only foreign but also national industrial strategies are important in the aim to becoming internationally competitive. The government needs to create a business friendly sociopolitical environment, including attendant laws and regulations. Paramount among the aims must be helping the existing foreign companies become more competitive in the world market by providing them with better services. Taking care of the loyal group of investors is more important than seeking new ones in the present untoward investment climate. But the government needs to establish a one- stop service facility for foreign investors; the Investment Coordinating Board (BKPM) is an approving authority but not a service center. Investors need a place where the merits of investing in the country will be shown to them. When investors apply for new investment, it must be handled in a smooth, quick process, possibly at these one-stop service centers so that investors do not experience the "unfriendliness" of bureaucracy. The government also needs more investment in infrastructure. Roads circling major cities such as Jakarta must be well connected, and routes from industrial estates to highways and strategic ports must be well developed so that transportation of manufactured goods and imported materials is done on time. Port facilities must be improved, so goods flow faster and there is a reduction of the storage time at the port area. Electricity shortages must be solved quickly by increasing the number of power stations, reinvestment in electric power boosters and lines, as well as the provision of equipment to ensure sufficient and continuous supply of electricity to industrial areas. The government must take a serious approach to exports. It is worth considering the development of export-processing zones and maybe industrial parks, providing incentives while taking into account the terms of the World Trade Organization. In terms of labor, the government must set laws and regulations that are acceptable to foreign business and measure up to what is on offer in other competing nations. The existing manufacturing companies can be very competitive if supporting industries are clustered around such plants and provide parts and materials on time at less cost. It is now up to the government to furnish the much-needed incentives to such selected industries, while doing its part by enhancing their competitiveness with improved infrastructure.

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