Thursday, April 06, 2006

Deal with substance more than form to attract FDI

Attracting the big money: Vice-President Jusuf Kalla beating a gong to mark the opening of the International Investment Conference in Nusa Dua last month. Without equity, predictability and more rigorous leadership, the investment that Indonesia so badly needs will stay away.

Business Times
Singapore, 04 Apr 2006

Indonesia must implement economic measures, and introduce legal reforms and sanctions


ON THE surface, it looks like Indonesia is doing all the right things to attract foreign direct investment (FDI).

In January 2005, shortly after President Susilo Bambang Yudhoyono (SBY) came to power, the Indonesian government organised an infrastructure summit in which it pledged to make infrastructure development a top priority.

And now, more than a year later, the government is planning another one for this coming June.

Meanwhile, both SBY and Vice-President Jusuf Kalla, accompanied by economic ministers and Indonesian business delegations, have taken numerous trips abroad in an effort to boost the country's international standing and attract foreign investment.

But, alas, these road shows are nothing more than a Potemkin village.

In other words, these initiatives by the government amount to nothing more than broadcasting a rosy picture of doing business in the country.

Unfortunately, as many investors find out shortly after they arrive in Indonesia, the business operating environment on the ground is very different.

Of all the challenges that confront investors, the most formidable are macroeconomic instability, regulatory policy changes, corruption and legal uncertainty.

In taking a look at each of these risks, we can see that, taken together, they make Indonesia one of the least favoured destinations for foreign direct investment in the world today.

Since the 1997/98 East Asian financial crisis, of which Indonesia was a prominent victim, the macroeconomic condition of the country has been undermined, for the most part, by political instability.

The lack of stability over the past seven years has been a direct result of transitional politics and the fact that the nation has seen four presidents and administrations since the fall of Suharto in 1998.

To be sure, Indonesia's transition from authoritarianism to the world's third-largest democracy has been an inspiring story. Nevertheless, democracy is not enough. Without equity, predictability and more rigorous leadership, the investment that Indonesia so badly needs will stay away.

As a Hong Kong-based investment banker put it: 'We (businesses) don't have a problem with either a dictatorship or a democratic government in Indonesia.

'It's something between the two that we cannot accept.'

With regard to corruption, what more is there to say? Better known in the country as 'KKN' - an acronym associated with the Suharto era that stands for corruption, collusion, and nepotism - corruption is so entrenched that many doubt it can seriously be addressed until society as a whole becomes more embarrassed by it.

Until this happens, fairly or unfairly, Indonesia will continue to be dogged by the unflattering image that corruption is the rule, not the exception.

But among all the frightful risks investors face, legal uncertainty is by far the most formidable.

Laws and regulations are often contradictory, vague or antiquated. A much larger problem, however, is the behaviour of judges, lawyers, courtroom clerks, the police, and others who have the solemn duty to uphold the law.

In this system, a verdict in a commercial lawsuit or legal dispute can be purchased no matter what the respective merits of the case. If an investor involved in a legal matter is unwilling or unable to play this game, the chances of losing in court - particularly at the lower level - is high.

Some business people have even gone as far as to say that abiding by the rules only serves to disadvantage them.

Another point worth mentioning is that the Indonesian legal system operates on inconsistency. For instance, not all the laws concerning foreign investors are applied in all cases.

What is more, the speed with which the Indonesian courts process legal cases or appeals often depends on the size and perceived importance of the plaintiff or defendant.

In other words, if a case involves a big foreign business, it is likely to be heard relatively quickly. By the same token, if a case involves a small foreign business, the process can take a lot longer.

Examples abound. A case in point is that of PT Kangar Consolidated Industries (KCI) vs PT Multi Inti Trada (MIT). KCI is the Indonesian subsidiary of Owens Illinois, a US-headquartered multinational company with a modest manufacturing enterprise in the country. 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.

Although right was on the side of KCI, the East Jakarta District Court ordered KCI last November to pay MIT six billion rupiah (S$1.07 million) in material damages and another one billion rupiah in immaterial losses for 'wrongful termination' of the distribution agreement.

In reaction to the dubious court decision, KCI has reported the case to the Judicial Commission and says it intends to contest the verdict.It remains to be seen what the Judicial Commission will do with the case of KCI vs MIT and how long it will take to hear from it.

Meanwhile, one thing is certain: While they don't make headlines like US mining giants Newmont and Freeport, or Canadian insurance giant Manulife, it is smaller ventures like KCI that have stayed loyal to Indonesia through the Asian financial crisis and the years since.

So, if the SBY government really wants foreign businesses in Indonesia, it must get beyond form and start addressing the substantive issues that are damaging the business operating environment.

It should implement new economic measures and introduce legal reforms and sanctions now. Otherwise, do not expect much improvement in the investment picture.

The writer is a Jakarta-based columnist.

Copyright © 2005 Singapore Press


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