Monday, February 13, 2006

Does FDI Mean Foreigners Ditching Indonesia?

Business Times
Tuesday, January 24


By Thang Nguyen

THE huge numbers of new shopping malls, apartment buildings and hotels being built in Jakarta and other big cities in Indonesia may give the impression that the investment climate in the country is improving.

In turn, this also gives the impression that capital which left Indonesia in the aftermath of the 1998 East Asian financial crisis is coming back. And some even think such projects are part of the government's infrastructure development plan aimed at increasing foreign direct investment (FDI) in Indonesia.

All of these impressions are false, however. For one thing, Indonesia's investment climate remains gloomy as we enter the new year. A joint survey conducted last year by the Asian Development Bank and the World Bank cited macroeconomic instability, corruption, and regulatory policy uncertainty as three main areas of concern, and concluded that Indonesia needs to strengthen its efforts to improve the investment climate.

While it may be true that some capital is returning to Indonesia, much of it is investment in consumer-oriented businesses and in property. This is not, however, indicative of a growing, healthy economy as a whole.

If we look at the mushrooming number of malls and apartment buildings against the fact that Indonesia has a combined unemployment and underemployment rate of about 40 per cent, it is obvious that only affluent Indonesians can afford these luxuries.

Furthermore, these investments are not being channelled into the sort of public infrastructure the country so desperately needs to facilitate business activities and drive its economic growth. Last January, shortly after President Susilo Bambang Yudhoyono came to power, the government organised an infrastructure summit in which it pledged to make infrastructure development a top priority. A year has passed since this meeting, but nothing much has happened.

But infrastructure is only one of the many components important to a nation's economic competitiveness and attractiveness as a destination for foreign investment. Besides the quality of local labour, transportation, supplies of materials, and other logistical matters, foreign investors look for a business-friendly environment, political stability and a legal system that adjudicates commercial disputes fairly. Apart from corruption and regulatory risk, the mostchallenging problem that foreign investors face in Indonesia is legal uncertainty.

It is not that Indonesia lacks sufficient legislation governing foreign investment (it is the other way around, actually). Rather, the real impediment to legal certainty is the unwillingness of government officials, the police and courts to respect the laws that they are sworn to uphold. Indeed, some business people assert that abiding strictly by the rules only serves to disadvantage them.

Take the case of PT Kangar Consolidated Industries (KCI) vs PT MultiInti Trada (MIT), for instance. KCI is the Indonesian subsidiary of Owens Illinois, a US-headquartered multinational company and the world's largest glass-packaging manufacturer. The company worked with MIT as its local distributor until last year when it ended the distributor agreement because MIT paid late and violated other trading terms. Upset with KCI's decision, MIT filed a suit against KCI in the East Jakarta District Court.

Last November, the East Jakarta District Court ordered KCI to pay MIT six billion rupiah (S$1 million) in material damages and another onebillion rupiah in immaterial losses for wrongful termination of the distribution agreement. One of the court's justifications for this ruling was that MIT's late payments 'were still within the normal range (sic)'.

How appropriate is it for a court to excuse late payment when the trading terms were explicit? Sixty-day payment terms were specified in the agreement MIT had signed with KCI, and the agreement clearly stated that failure to abide by these terms would represent grounds for termination of the distributorship. Why was it wrong to enforcethe terms of the agreement?

As a result of cases like Kangar, other foreign subsidiaries eager toexpand their operations in Indonesia find it difficult to persuade their headquarters to go down that route. The consequence is thatIndonesia does not get the investment it requires to facilitatefurther economic recovery and growth. And this is the very real costof a dysfunctional judiciary.

Therefore, if the government wishes to retain and attract foreign investment to Indonesia, it must act to crack down on the country's wayward legal system. Otherwise, FDI will come to mean Foreigners Ditching Indonesia.

The writer is a Jakarta-based columnist. His writing can be read at