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.