Tuesday, November 07, 2006

Indonesia needs to do more to attract investment

The Business Times
7 November 2006

The reason why investors hesitate to invest in infrastructure projects, or in any other area for that matter, is the legal uncertainty that characterises South-east Asia's largest economy

By THANG NGUYEN

AS AN attempt to show investors that it means business, the Indonesian government put on the Indonesia Infrastructure Conference and Exhibition 2006 which ended last week. It was the sequel to the Infrastructure Summit 2005, which is considered less-than-successful.

This conference is an effort to lure investment for at least 10 infrastructure projects. Ranging from toll roads and seaports to telecom networks and power plants, these projects are worth about US$4.5 billion. Compared with the 91 projects exhibited at last year's summit, the scaled down number of projects at this year's conference shows that the government has learned its lesson.

'This year's event will be different from the previous one. We have made improvements to our preparations and the tender process for the projects,' Suyono Dikun, deputy to Indonesia's coordinating minister for the economy, was quoted as saying.

The criticism of last year's summit is not without substance. According to The Jakarta Post, of the 91 projects, worth US$22 billion, offered during last year's summit, only '24 deals worth US$6 billion have so far been clinched, with eight others still under negotiation'.

When asked about the dismal outcome of last year's summit, Chris Kanter, who is the chairman of the Indonesian Chamber of Trade and Industry (KADIN), said: 'What we offered back then was simply a list of projects from the ministries (sic), several of which were still at the 'raw proposal' stage. The ministers back then were also relatively new in their posts, and were busy with the tsunami disaster at the time.' To be sure, last year the Susilo Bambang Yudhoyono (SBY) cabinet was still on the learning curve and had to deal with the aftermath of the Asian tsunami of December 2004.

During the same period, however, 23 new shopping malls, numerous luxurious apartment buildings, and many other private properties popped up like mushrooms in Jakarta alone.

And at the same time, the Jakarta monorail was started. But, alas, as of now, the funding for the project has stopped; all that can be seen of it are half-built cement columns standing in the middle of Jakarta's main roads. And why is it that government projects, like the Jakarta monorail, do not get funded easily or - for that matter - completed as quickly as those offered by the private sector?

For one thing, bureaucracy prevents government, or public, projects from getting done quickly. No one would be surprised to learn that red tape is one of the biggest problems facing the Indonesian economy and investors, both foreign and domestic. To deal with this issue and get their projects done, investors don't have much of a choice other than resorting to paying bribes.

Depending on the size of their projects, investors often find themselves giving bribes - in cash or in kind - to government officials and other parties involved. Unfortunately, bribes, or 'facilitating payments' as they are sometimes called here, do not solve the red-tape issue.

To be sure, the SBY government has launched a visible anti-corruption campaign since it assumed power two years ago. Thus, corruption seems to be less prevalent these days; however, it is still well and alive beneath the surface.

Actually, corruption in Indonesia today is worse than what it was during the Suharto era because there are more parties that investors have to bribe than there used to be. Worse still, there is no guarantee that, after paying big bribes, investors get what they want.

As the Australia National University economist Andrew MacIntyre puts it: 'The only thing worse than 'organised corruption' is 'disorganised corruption'.'

But uncertainty in corruption is only part of the problem facing the business community in Indonesia. The main reason why investors hesitate to invest in Indonesia's infrastructure projects, or in any other area for that matter, is the legal uncertainty that characterises South-east Asia's largest economy.

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 courts, and other law-enforcement authorities to respect the laws that they are sworn to uphold.

What is more, uncertainty also lies in the government's policies towards investment in Indonesia. There is no such thing as investment without risks; some investment projects have more or higher risks - and thus high gains - than others.

One of the risks that investors encounter in Indonesia's infrastructure projects is that there is no written guarantee of returns (or profit). This risk is normal and acceptable, however.

A bigger - or political - risk is a change of government or its policies towards ongoing investment projects. When this happens, a contract's terms of reference or agreement often fail to be honoured. Thus, together with bureaucracy, corruption, and legal uncertainty, political risks in Indonesia kill investor confidence that the economy badly needs.

To be fair, the Indonesian government recognises this. It will need, however, to provide investors with more substance, incentives, and a more business-friendly environment to gain their confidence than just holding conferences on infrastructure and other investment projects.

Otherwise, these conferences will end up being, as Indonesians like to say, NATO, or No Action, Talk Only.


The writer is a Jakarta-based columnist.

Copyright © 2005 Singapore Press Holdings Ltd. All rights reserved.

4 Comments:

Blogger Indi said...

Indonesia needs to do more to attract investment.

Here is a tip:

1. ban Golkar.
2. replace all attorneys and judges.
3. replace all TNI officers with new ones.

6:06 AM  
Blogger Parvita said...

Coming from oil industry background, SBY and Purnomo had their speeches in IPA Annual Convention 2007 in May. They stated how important to attract investors in this business.

Following up, there was a talk from Kardaya Warnika, the President of BPMIGAS, who was a guest speaker. He said that BPMIGAS has now improved their system and speeded up their AFE approval to 2 weeks (instead of months). AFE is like a form of expenditure that needs to be filled in, in order to get cost recovery at the end.

The fact is, it is not, speaking from my experience. BPMIGAS is still as unorganized as ever, no coordination and the beaurocracy is still as complicated as ever.

I attended SEAPEX (Southeast Asea Petroleum Exploration) conference in April 2007 and hearing from the talks, I'm sure Vietnam will be far ahead of Indonesia soon.

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7:51 PM  

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