Treat current investors well, and others will come calling

Treat current investors well, and others will come calling

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.

_____________________________30_______________

1