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.