Vagaries in investment

Vagaries in investment

Bahtiar Arif, Center for Indonesian Reform, Lecturer at the
University of Pancasila, Jakarta, bahtiararif@yahoo.com

As investments in Indonesia have currently been reported lower
than last year and undermined by the Bali tragedy, a renowned
Japanese company, Sony, decided to close its branch in Indonesia.
Regarding the closure, its branch in Malaysia will take over the
Indonesian production. At least 1,000 workers will be laid off,
indicating that this may worsen if other foreign companies follow
in Sony's footsteps. This may make the Indonesian investment
climate gloomy, and the economy may find itself on the way to
recession.

Foreigners responding to earlier articles voiced concerns
about investing in Indonesia. They argue, first, that the
investment climate has not been conducive to bringing foreign
capital into Indonesia. Second, security issues and a lack of
transparency, as well as high investment costs are also a
problem. Third, immigration and other related regulations have
been wanting in flexibility for foreign investors to live, and
conduct their businesses, in Indonesia.

Terrorists attacks can occur anywhere and investors therefore
are more concerned on a daily basis about taxes, customs, trade
and labor systems and regulations, and their practices in
Indonesia.

Not only do these uncertainties encourage high costs, but also
they make competition difficult for investors. For example, Sony
feels more comfortable investing in Malaysia, although the labor
cost there is higher than in Indonesia. Indonesia is also
considered less competitive in terms of investment compared to
China and Vietnam, where labor is cheaper.

Although the government has quickly responded to the Sony case
by establishing a new team to try and improve the investment
climate in Indonesia, this task will remain complex if the
following issues are not tackled by the government.

First, corruption, collusion and nepotism (KKN) are still
rampant and are believed to be the main causes of decline in
investment. How to eradicate KKN, however, is still unclear and
will remain so without strong commitment from high-ranking
officials.

Second, systems and regulations relevant to investments --
tax, customs, labor and immigration -- must be simplified and
made investor-friendly. The regulations have to be transparent
and clear, and must be implemented without bias.

Tax holidays might not be the best incentive. Instead, similar
to the 1997 recommendation by the Commission on Public Policy and
British Business on how to improve investment in Britain, our tax
system must move towards a "cash flow tax", in which all
expenditures -- capital and current -- can be deductible
expenses. In addition, costs of equity can also been deducted. It
should be noted, however, that this should be implemented
gradually due to the impact it may have on the government budget
revenue.

Customs and regulations must favor investment by assuring
neutrality, simplicity, transparency and certainty. Custom
services must be improved by mitigating all informal costs,
speeding the services and maintaining equality of treatment.

Labor regulations should be clear and neutral and should
benefit both investors and laborers. Moreover, other regulations
must be designed in consideration of investor interest, but
without ignoring public interest.

Immigration laws and related regulations may need to be
reviewed. Some of them are considered to be inflexible in terms
of the work permit, visa period, activities and residency. They
are largely inconvenient to foreign investors, tourists and
researchers.

Finally, strong efforts are necessary to attract foreign
investment. The government could launch a campaign called "the
year of investments" in Indonesia for 2003, in line with the
process of reforming relevant laws, regulations, the bureaucracy
and policies.