Sat, 04 Jun 1994

Wooing foreign investors

The deregulation of foreign investment, as announced on Thursday, is perhaps the most liberal measure ever taken regarding the treatment of foreign investors.

Though most businessmen had expected a more comprehensive reform package that would also cover manufacturing and trade, the single deregulation measure contained in Government Regulation No.20/1994 is certainly a boon to foreign investors. The new policy opens many businesses previously shut off to foreign investors, such as civil aviation, sea transport, production of potable water, mass media and railways transport.

The move addressed most of the complaints often raised by foreign businessmen and provides investors with a strong sense of long-term security.

The previous policy instrument of October, 1993, as stipulated in Government Regulation No.50/1993, did offer additional incentives to foreign investors. However these incentives were tied to many conditions. For example, a wholly-owned foreign enterprise is allowed but only when it is set up in the least developed eastern areas of the country or its paid-up capital amounts at least to $50 million. The divestment rulings also were seen by most foreign businessmen as too stringent, especially in view of the limited alternative ways for divestment.

Moreover, businessmen wondered how harsh requirements, such as the minimum paid-up capital of $50 million, had been determined and what their real objective was. Why 20 years were set as the target period during which foreign investment ventures, irrespective of their business areas, should be majority owned by Indonesian interests. This" go-and stop" policy seemed to make the bottom line of the 1993 deregulation move, in so far as foreign investment was concerned, very negative.

The government has apparently realized those shortcomings. Moreover, the urgency of further deregulation has been brought home by the marked decline in new foreign investment commitments last year. As most countries have now pursued the market-economy principle and adopted vigorous pro-business policies, the competition for international capital has also become much fiercer. Further down the line, as Indonesian labor costs are on the rise along with the progress of the public welfare, the country can no longer rely too much on the low labor costs as one of its competitive advantages. Hence, there should be additional incentives to make Indonesia attractive to foreign investors.

Despite all the seemingly attractive incentives offered by the new policy, a note of caution is still in order. Given past experience, we can assume that the announcement of deregulation is simply the start of a long and arduous process that will require good coordination among the various government agencies. The deregulation, for example, has yet to be translated into technical guidelines. Drawing these guidelines will not be an easy task, especially after such public services or utilities as civil aviation, sea transportation, railways, mass media and drinking water are now open to foreign investors. Extra care is needed because the government should see to it that the entry of foreign ventures into these areas will not harm the public interests.

But all in all, the latest deregulation move should be welcomed because it gives the right signal to the business community -- that the government is consistent in its pro-business policy and determined to simplify rulings for the business sector.