Bill Guerin – Indonesian investors are to be wooed in a deliberate effort to release the potential of the domestic economy and get money flowing through the business infrastructures.

This week Minister of State Owned Enterprises (SOEs) Laksamana Sukardi and his teams from the Indonesian Bank Restructuring Agency (IBRA) organized an investment seminar, appropriately enough in Bali, and announced a brand-new initiative.

Will domestic private investors be convinced that if they invest their money it will result in an improved economic outlook, more market opportunities and a general prosperity?

Indonesian entrepreneurs have seen for themselves that the elusive economic revival has been hampered by inconsistencies in government policy and a pronounced lack of coordination and planning in the last two administrations. Since Suharto stood down in 1998, substantial sums of money have been parked in Singapore banks while the owners of the funds, mostly Chinese-Indonesians and recalcitrant ex-bankers, wait and wait for the promised better times.

Attracting these funds back has been a consistent IBRA target since 1999 and partly explains the agency's earlier softly-softly approach to uncooperative debtors who collectively owe more than US$13 billion. Syafruddin Temenggung, the seventh head of IBRA in three years, has like his predecessors tried reconciliation with the ex-bankers. Syafruddin has promised for weeks to take legal action against debtors and said in Bali that the latest deadline is now next Friday, November 15.

The urgency of Sukardi's extraordinary initiative was underscored by a government announcement a day later that next year's asset sales revenue target for IBRA will be raised yet again to Rp18 trillion (US$1.95 billion) from Rp12 trillion.

The agency has sold 70 percent of its assets but still has control over investments theoretically worth billions of dollars. Among countless non-performing loan portfolios, it holds shares in six of the country's top 10 banks and in property. As of last month IBRA has secured Rp40 trillion out of its 2002 revenue target of Rp45.6 trillion out of Rp600 trillion worth of assets taken over from ailing banks and companies after the financial crisis. Its main task is to sell these assets and return them to the private sector.

Investors have long been nervous about the same basic problems in Indonesia. A recent World Bank report concludes that the main investor concerns were security, the legal system, taxation, customs administration, labor laws and bureaucratic red tape. Put another way, investors have long been concerned not only with their investments but their general safety and that of their employees, worried about the endemic problems in the laws of the land, the problem of relatively high wages married to low productivity levels of Indonesian workers, and the minefield of relationships with local partners. The endemic red tape encountered by investors not only frustrates their project planning and deadlines, but also significantly adds to the costs because of the hidden expenses that everyone knows about but few can do anything about.

South Korean and Taiwanese investors have voted with their feet in recent months and left for friendlier shores. The Korean Chamber of Commerce complained that Indonesia is fast losing its competitive edge.

The lack of supremacy of the law, and its compliance and enforcement, breaches of business contracts and unpredictable court decisions are all matters of concern to an investor, whether local or foreign.

Will the new drive to attract Indonesians to invest in their own country spell out just how these concerns will be addressed and dealt with?

Domestic investors, at least before the Bali bombings, could be expected to be more responsive to the continued instability of the domestic political scene and the economy than foreign investors. The increasing level of sentiment against foreign control of local assets would scarcely have bothered them. But the main worries summarized by the World Bank remain the same for local or overseas investors.

Sukardi apparently believes otherwise. "The momentum is just right after the Bali blasts for local investors, who look at much more than a snapshot of conditions, and consider the bigger picture. There is a tremendous potential for domestic investments," he said.

The "bigger picture" is that of a country severely restrained by severe levels of debt, a soaring budget deficit, and implicit threats by its major creditors that it must put its house in order. It is a snapshot of a nation with a low per capita income, a massive amount of unemployed and a substantial amount of its production potential no longer fully operational.

For Sukardi the new task may just be a refreshing change from countless lost battles to clear the decks in the largely comatose BUMN (state company) arena and encourage professionalism and a capitalistic business-is-for-profit ethic among these large, top-heavy organizations.

This is actually his second time in the post, having been sacked by previous president Abdurrahman Wahid on vague, unproved allegations of corruption. The minister is rightly respected for his sterling efforts but has seemed for all the world like a single fighter, blocked and thwarted at every turn. Acute problems with local government officials who have power over the jurisdictions where state enterprises are based, vociferous employees and managers of the companies, and the increasing resistance from within parliament have, for months, frustrated the best efforts of Sukardi to right the wrongs.

With more than 100 SOEs on the auction block, widespread allegations of inefficiency, cash cows, dens of corruption, et cetera, have made the job of selling them off well almost impossible. Sukardi has been unable to free the state from the stranglehold of the BUMNs. Sukardi downplayed the priority when saying in Bali that the government was still committed to selling state-owned companies but only when the "price was right". Clearly, it will be a very long time before the priority shifts back to offering these to the market.

Foreign direct investment approvals were abysmally low last year at a mere $9 billion, less that a third of the 1996 total of nearly $30 billion. Central-bank figures show only $2.5 billion in new investment in the first half of 2002, down from $4.2 billion for the period a year earlier.

The amounts approved have little value as an indicator. Even Investment Coordinating Board (BKPM) chairman Theo Toemion admits the government has never had a clear indication of just how much is realized from the many investment approvals issued. It is thought that actual investment realized, where projects proceed to fruition, is less than 40 percent for foreign investment approvals and under 50 percent of approved domestic investment.

Will local investors think and act any differently?

The received wisdom in Indonesia has been that entrepreneurs, companies or conglomerates investing money into enterprises in the country will be here to stay and will not run away at the first sign of setbacks in the path to stability and security.

Unfortunately, the Kuta bombs and the rise of Islamic militancy have concentrated minds and put a new slant on that idea. Indonesians living abroad who might otherwise be attracted to invest in the country will be as spooked as any foreigner by recent events.

The private sector is generally agreed to be the real engine of economic growth and Indonesia's huge domestic market is certainly an attraction. As a member of the Association of Southeast Asian Nations (ASEAN) Free Trade Area – where duties are to reduce to just 5 percent in trade between members – there will always be those ready to invest. As much as 70-75 percent of gross domestic product (GDP) has been derived from domestic consumption over the past few years.

However, manufacturing to service domestic and regional markets has been stifled to a large degree by labor conflicts, poor security and rampant smuggling. Some 187 small-to-medium enterprises (SMEs) producing textiles have been forced to shut down this year by rampant smuggling. These were all companies oriented to the domestic market that could not compete with cheaper illegally imported products on the Indonesian market.

So far there are no specific details of the deal from Bali and it is not known whether the initiative will be accompanied by breakthrough tax incentives such as tax holidays or lowering import taxes, as well as a drive to thwart the smugglers.

Will there be fiscal incentives designed to attract investors into parts of the economy that are ripe for revival and to woo domestic savers into banks that can then lend to new domestic investors? Few domestic banks have their assets fully deployed and they are known to be extremely pleased with the ability to park their deposits at high interest rates with the central bank rather than lend to businesses in the real sector.

The slow progress in the IBRA bank-restructuring program has also meant that the banking system is not geared up to channel credits into productive investment.

A market-friendly business environment is the key to attracting any investment – local or foreign – and the lack of confidence in the business environment in Indonesia is linked to the major issues confronting the country such as trade and fiscal deficits, low GDP growth, unemployment, poverty. These in turn are all linked, inextricably, to the success, or lack of it, in attracting investment.

Sukardi concluded his Bali speech with the words, "We ourselves need to jump-start the confidence and exploit domestic activity as one of the main factors for economic growth."

As in so many instances in Indonesia's recent past where hope sprang eternal, it may be too early for such well-intended optimism.

The overall missing ingredient in the master plan for recovery is direction. The tactic of facing up to issues when they arise but without making and announcing clear-cut medium- and long-term goals has been the hallmark of the Megawati Sukarnoputri administration. Continuous forecasts on macro-economic markers such as growth rates and inflation rates are not what the country needs to get out of the mire. The need for direction and leadership is more compelling now than ever.

This is what is at stake on this last throw of the dice before IBRA is disbanded in 2004 and new elections take place in the same year.