The year of investing dangerously

The year of investing dangerously

Reiner S., The Jakarta Post, Jakarta

Various domestic obstacles have continued to scare foreign money
away as reflected in the 51 percent drop in foreign direct
investment (FDI) approval in the first 10 months of this year to
US$6.47 billion from $13.14 billion in the same period last year.

Experts said that without a considerable amount in FDI, the
country's economic recovery process would not be sustainable, and
would risk keeping the 40 million unemployed people here jobless
for an even longer time.

But despite this alarming set of problems and the likelihood
that the flow of investment may continue to dry up next year --
and the following years -- amid the global economic downturn, and
the growing attraction of countries like China, India, Thailand
and Vietnam, the government seems to be powerless and have no
credible plan to amend the situation.

Indonesia has fallen off many investors' radar screens due to
a veritable plethora of negative factors including security
problems, a legal system that is woefully lacking in justice,
various labor protests, poor implementation of the Regional
Autonomy Law and slow progress in the implementation of key
economic reform programs.

The latest blow to foreign investor confidence in the country
is the protracted dispute in the government's effort to sell a
controlling 51 percent stake in the state-owned cement maker PT
Semen Gresik to Mexican giant Cemex SA de CV.

The plan was again delayed due to massive protests from
certain politicians and other vested-interest groups who do not
want to see Cemex gaining control in the cement company because
they would be losing their cash-cow.

Analysts said that the delay will only further strengthen the
perception that investing in Indonesia or acquiring local assets
is very difficult and risky.

Another prime example of the damaging political interference
in asset sales occurred earlier this year when Malaysia's
Kumpulan Guthrie Bhd. nearly backed out of a high profile deal
with the Indonesian Bank Restructuring Agency (IBRA), a unit
under the finance ministry at the time, to purchase 25 oil
plantations covering about 260,000 hectares in several provinces
due to massive opposition from politicians, local businessmen and
non-governmental organizations.

Other occurrences this year that have created jitters to
foreign investment companies include land or asset looting by
local people, violent labor strikes, unilateral actions by newly-
empowered regional administrations that move against existing
business contracts and of course, the anti-U.S./Westerner
protests, launched by certain reactionary Muslim groups here
following the Sept. 11 terrorist attacks by Muslim suicide
hijackers in the U.S., which included threats to expel, from
Indonesia, any and all "bule" (Anyone of European descent),
particularly American and British citizens.

The World Bank has recently criticized the improper handling
of various disputes in the corporate sector involving foreign
investors.

"...There is a clear perception that actions by the
authorities reflect a systematic bias against foreign investors
and an unequal application of the law in favor of domestic
debtors," the World Bank said in a recent report.

One example of this is the failure of the Bank's investment
arm, International Finance Corporation (IFC), to file a
bankruptcy petition against local debtor PT Panca Overseas
Finance Indonesia (POFI) due to suspected fictitious creditors
voting in favor of POFI.

This has prompted the IFC to temporarily suspend its
investment program in Indonesia since March. The financial
institution has an investment exposure of around $720 million in
Indonesia, its seventh largest country portfolio.

FDI is very important to the country, not only because it
helps create new jobs, but also because it provides financing for
the development of Indonesia's poor infrastructure system
particularly electricity and telecommunications which are crucial
to ensure a sustainable economic recovery process. FDI will also
help stabilize the ailing rupiah.

"Indonesia desperately needs to seek foreign investment to
rehabilitate and expand the country's decrepit infrastructure,"
said James Castle, chairman of the American Chamber of Commerce
in Jakarta.

The value of inward investment has been on the decline for the
past four years. In 1997, FDI approval was recorded at $33
billion and included 790 projects. It then dropped to $13
billion with 1,035 projects in 1998 and fell further to $10.9
billion with 1,164 projects in 1999. Last year, however, due in
part to then-president Wahid's commitment to rule of law and
anticorruption, it increased to $15.4 billion with 1,508
projects, although it was still less than half the amount
recorded in 1997. The increase in the 2000 FDI was mainly
contributed by merger and acquisition activities.

Centre for Strategic and International Studies (CSIS)
economist Djisman Simanjuntak said that to be able to escape the
current economic crisis, Indonesia must at least garner around
$20 billion in FDI per year, half the figure enjoyed by China. He
said that from 1998 to 2000, average inward investment in
Indonesia stood at only $7 billion per year.

The government has taken measures to attract more FDI,
although credible actions have yet to be implemented to overcome
the main obstacles such as security and legal uncertainty as well
as to restore confidence.

President Megawati Soekarnoputri, whose accession to power
late in July this year helped create a relatively stable
political condition at home, has been making overseas trips
including to the U.S., Japan and China to try to woo investors.

A new investment bill is being prepared and would soon be
submitted to the House of Representatives for approval.

Chief of the Investment Coordinating Board (BKPM) Theo Toemion
said that the bill would ensure equal treatment between local and
foreign investors.

He also said that the new bill promised certain "sweeteners"
to lure foreign investments.

Theo said that one such sweetener included the removal of
existing regulations requiring foreign investment companies to
divest part of their shares to local investors after certain
years of operation.

"Without incentives, investors will be reluctant to enter
Indonesia, while on the other hand we desperately need the
foreign investment to ensure economic growth," said the former
legislator.

"We are also facing tough competition from other countries in
attracting investment," he added.

Analysts, however, criticized Theo's plan to centralize
investment licensing, saying such a move is a waste of time as it
would face strong resistance from various ministries and local
governments.

They said that instead of trying to restore BKPM's role as a
one-stop clearing house for investment, Theo should instead focus
on promoting Indonesia abroad and assist local governments or law
makers on the importance of foreign investment.

BKPM must work fast amid growing difficulties in obtaining
FDI. According to a report by United Nations Conference on Trade
and Development (UNCTAD), worldwide FDI flows this year is
estimated to drop by 40 percent due to the global economic
downturn.

The Asian Development Bank said in a recent report that the
events of Sept. 11, which deepened the global economic slump,
will cause FDI flow into Asia to continue to decline next year.

Competition from other countries, offering a better investment
climate and cheap skilled labor, will force Indonesia to work
harder to attract foreign money.

China is set to receive at least $40 billion in FDI in 2002,
compared to around $43 billion estimated for 2001, after entering
the World Trade Organization, Southeast Asia's biggest lender DBS
Bank stated in a recent report.

China has already removed several restrictions and approval
procedures across key industries such as infrastructure and real
estate development.