Taking Care of Business By Aiding Investors

Taking Care of Business By Aiding Investors

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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