Treat current investors well, and others will come calling

Wed, 16 Apr 2003, 00:00 WIB

By Carol Hessler

President, AmCham Indonesia

Indonesia has the potential to be a magnet for investment, as the
government has done an excellent job in restoring macroeconomic
stability.
This entailed a tremendous effort on the part of the government,
and AmCham can understand why there might be some frustration as
officials review the continuing negative numbers on foreign
direct investment (FDI).
Investors are now waiting for Indonesia to tackle some of the
microeconomic issues that remain a serious concern. This list of
issues has been presented many times in various forum but should
be repeated: legal, tax and customs reform and transparency.
Other barriers to investment include poor policy and
legislative development, congested ports, over-stressed
infrastructure and a high cost economy. These are the issues that
are disturbing investors and dissuading them from the large scale
investment that Indonesia needs to recover from the economic
crisis.
In these uncertain economic times, global investment numbers are
down. Indonesia is competing for fewer investment dollars than
were available before the crisis. Investment capital goes where
it can get the best returns.
At present, Indonesia is not competitive for large-scale
investment. It is our hope that progress can be made on these
microeconomic issues to improve the investment climate in the
medium to long term.
It is the view of AmCham that, in the long term, decentralization
is positive for Indonesia. As the regions start to compete for
capital investment, this competition will drive reform since
capital will move to those regions with the best track record.
Small and medium sized companies are already taking advantage of
the investment opportunities offered by decentralization and, in
the medium to long term, decentralization will provide increased
investment opportunities as regions compete for capital.
In the short term, though, decentralization has presented many
obstacles for investors. The mining industry has been severely
impacted as the central government, provincial and local
governments all insist on applying their own taxes and other user
fees.
At present, mining investment has all but stopped. It also does
not appear that the government is focusing on this problem since
there are so many other pressing issues. Until these issues are
resolved, however, large scale investment will remain on the side
lines.
This is a large task that could take years to accomplish. To
this day, in the United States the courts argue about the role of
the 50 states versus the role of the central government. There
need to be clear and unambiguous regulations that spell out, in
detail, the role and authority of the central government and the
provinces down to the city level.
There also need to be clear rules on the transfer of goods within
Indonesia between the various authorities. These rules need to be
implemented at the central level and then the provincial
legislatures must to craft regulations that fit within the
overall umbrella of central government policy.
There surely will be sound competition between provinces
and districts to attract investment. After the legislature sets
the central framework and establishes the role of the central
government regarding taxes, environmental compliance, safety and
performance standards among others, the local governments will
have to compete within that framework to attract capital.
For instance, if the central government applies a 10 percent tax,
investors will look to go to the provinces that have the lowest
tax rate at the local level. This is just one example.
Competition will result in greater transparency and improved
economic performance as provinces witness the flow of capital to
those markets that are the most competitive in terms of
investment returns.
A large portion of U.S investment in the past has been in the
oil, gas, mining and power sectors. These industries remain
difficult for investors due to the micro economic factors listed
above.
Indonesia could be attractive to these industries given the
country's ample natural resources, but it must be underlined that
potential does not attract investment, competitive policy does.
For now, many investors are waiting on the sidelines for
improvements in the microeconomic climate and the articulation of
improved policy and implementing regulations still to be passed
by the government.
It is AmCham's hope that, as the government develops laws and
implements regulations, private sector input will be welcomed in
the aim to create competitive laws and regulations that attract
rather than repel capital.
Unfortunately, the economic crisis that struck in 1997 was not
kind to Indonesia and past Indonesian governments did not always
honor international agreements. Despite the government's
macroeconomic achievements, Indonesia suffers from the perception
that it does not follow its own laws and regulations. The legal
problems and judicial harassment of Manulife is a blatant
example.
The best marketers for Indonesia are the investors that are
already here. However, Indonesia appears more focused on
marketing to the outside world than on solving the problems of
present investors. Working with current investors to solve
problems and resolve issues is the most effective action that the
country can take to attract new investment.
In addition, implementation of the ASEAN Free Trade Area (AFTA)
provides outstanding opportunities for Indonesia if it resolves
its microeconomic problems. Otherwise, the country will have only
itself to blame.

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