Jakarta turns off investors, big time!

The Business Times

Singapore, 31 August 2007

Dark clouds a-gathering: Business-unfriendly laws, corruption, lack of infrastructure and political and legal uncertainty raise the costs of doing business for investors in Indonesia and may drive them away

By Thang D. Nguyen

SOMETIMES, when things appear to be better, they are actually worse. Recent events in Indonesia show that this is the case with the country's business climate.

In late April, Newmont - the world's second largest gold miner - was acquitted after being accused three years ago of dumping unsafe levels of waste in a bay on Sulawesi island.
Not only was this a vindication for Newmont Indonesia and its chief executive, Richard Ness, but it was also a positive development that the business community in Indonesia gladly welcomed.

More importantly, the government of Indonesia initiated a number of economic reforms earlier this year in an effort to boost investment in Indonesia. Specifically, these reforms were designed to improve tax and investment laws and therefore create more incentives for investors in South-east Asia's largest economy.

The business community viewed these reforms as well as the Newmont verdict positively as they showed that Jakarta was serious about making Indonesia a more attractive place for investment.

But before it can show progress on these reforms, the government has already built another hurdle for businesses.

In late July, Indonesian lawmakers passed a bill that makes corporate social responsibility, or CSR, mandatory for businesses - particularly resource-based industries - in Indonesia.

The bill, of course, met resistance from the business community.

'CSR programmes should be (voluntary). They should not be made a corporate responsibility,' said Sofyan Wanandi, chairman of the Indonesian Employers Association (Apindo).

Despite opposition, the bill was passed, making Indonesia the only country in the world where CSR is a duty, not a choice.

For one thing, CSR is a form of social contribution, not a tax. Thus, it is unclear why the bill was drawn up in the first place and then passed in Indonesia's House of Representatives.

Furthermore, there is no point making CSR a duty for businesses in Indonesia when many companies are already doing it as a matter of corporate practice. But most importantly - now that the CSR bill has been passed - it will only be a burden for the business community and another barrier for investors in Indonesia.

Let's face it. Investors, both foreign and domestic, already have more than enough laws and regulations, among other issues, to deal with in Indonesia.

The last thing they need is another law that makes their business in Indonesia more difficult and costlier.

By passing the CSR bill, Indonesian lawmakers might have meant well and seen the good of CSR for society.

Making it a duty, however, is likely to discourage investors from Indonesia and thereby hurt the country's investment as they might find it better and cheaper for them to do business in another country where they don't have to deal with this law.

Thus, not only does the CSR remind us of how challenging Indonesia's business climate still is, but it also shows Indonesia's lack of competitiveness in today's global economy.

In addition to its business-unfriendly labour and investment laws, investors face a host of issues in Indonesia, including corruption, the lack of infrastructure, political instability and legal uncertainty.

Together, these issues raise the costs of doing business for investors in Indonesia and may drive them away.

To be fair, the Susilo Bambang Yudhoyono administration does recognise these problems. Since assuming power in October 2004, Dr Yudhoyono's administration has taken a number of initiatives to improve Indonesia's investment climate.

For example, it has held two major conferences to lure foreign investors to infrastructure projects in Indonesia. But, alas, little has resulted from these events.

Likewise, Dr Yudhoyono, who campaigned, among other things, on the platform of fighting corruption, set up the Corruption Eradication Commission (KPK).

For about three years, the KPK did its job, tackling a number of high-level corruption cases. But earlier this year the KPK was dissolved, as though its job were completed.

Does that mean that corruption in Indonesia is eradicated? Far from it! If anything, now is the time when the government needs to do more, not less, to carry out its economic, legal and social reforms.

Just as importantly, the government has to ensure that investment laws, such as the CSR law, that the Indonesian parliament passes do not clash with its efforts to improve the business and investment climate in Indonesia.

If not, it will create distrust among investors and drive them away, and that will make FDI not 'Foreign Direct Investment', but as The Economist put it, 'Foreigners Ditching Indonesia'!

The writer is a Jakarta-based columnist. His articles are available at http://www.thangthecolumnist.blogspot.com/