Bill Guerin, Jakarta – A former aide to Indonesia's pro-business President Susilo Bambang Yudhyono took over the reins of Indonesia's powerful Investment Coordination Board (BKPM) last week, at a time when it was officially confirmed that investment approvals in Southeast Asia's largest economy had almost doubled in the first four months of this year. The Central Statistics Agency (BPS) reported that in January to April, US$4.94 billion of investment was approved compared with $2.59 billion in the first four months of last year.
Muhammad Luthfi, a former chairman of the Indonesian Entrepreneurs Association (HIPMI), replaces Theo F Toemion, who resigned after allegations that he had gone on a violent rampage at the Jakarta International School on April 18 made international headlines.
Doing business in Indonesia
The Indonesian cabinet includes several former businessmen, and high on the wish list of the business community has been that coordinated leadership in the new, pro-business government will lead to firm action, not just mere pledges. The most pressing task for Luthfi will be to help finalize the long-awaited draft investment bill, which is expected to expedite coordination among relevant ministries and should slash the time needed to start up businesses.
According to the World Bank's survey, "Doing Business in 2005", Indonesia is one of the slowest places in Asia to start a new enterprise, enforce a contract or go through the process of insolvency. The survey shows that it takes an average of about five months to start up a business in Indonesia. Coordinating Minister for the Economy Aburizal Bakrie has reportedly set a target of cutting the time needed to start up businesses to only 30 days.
"We expect the new BKPM head to immediately finalize the investment bill under the coordination of the trade minister, as domestic and foreign investors have long been waiting for the new legislation," Bakrie said during the official ceremony to install Luthfi. "There is no point in having numerous new investment approvals if none of them materialize."
Minister of Finance Yusuf Anwar and State Minister for Planning and Development Sri Mulyani have both promised to improve legal certainty. Mulyani has said her office and other ministries are working hard to complete infrastructure-related regulations. Of the 11 regulations planned, only three have been completed so far – those on energy, toll roads and water. She also said the new investment law, when enacted, would give better protection to foreign investments by treating them equally and abolishing the current requirement for divestment to Indonesian-owned enterprises after a specified period of time.
Promotion needed
The United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) says in its recent study titled "Asia Pacific Trade and Investment Review" that it is important for a potential host country to undertake investment-promotion policies to "fill in information or correct perception gaps that may hinder foreign direct investment inflows".
Japan has invested more than $283 billion in Indonesia since 1967 and Prime Minister Junichiro Koizumi is scheduled to sign an investment agreement with Yudhoyono in Tokyo later this month. Singapore and Indonesia plan a joint investment mission to Japan before the end of the year. Singapore is one of the top five investors in Indonesia, and the two countries signed an investment guarantee pact in February. The UK is the second-biggest investor in Indonesia after Japan, with last year's total $1.32 billion up slightly from 2003's $993.2 million. The Indonesian Chamber of Commerce and the British Committee of Industry (KIKI) plan a road show in the UK in June to promote business opportunities in Indonesia.
So far, however, there has been no mention of any planned go-it-alone investment promotion on the part of the government. The UN body also said that developing countries should undertake investment-promotion policies, increase budgets for investment promotions to attract more foreign equity, and establish one-stop investment promotion agencies that could facilitate foreign inflows by lowering administrative delays and costs.
In Indonesia, BKPM had previously acted as such a one-stop shop and was authorized to process all investment permits and many other licenses related to businesses. However, hand in hand with the reshuffle at the top, the government has now reduced the status of the BKPM, stripped it of its licensing authority, and put it under the Ministry of Trade.
No details have been announced on any new plans to facilitate licensing applications for businesses, though some reports suggest that in the future public notaries will be authorized to do the entire running around between the various ministries and departments to help speed up the process and obtain all necessary permits, thus saving investors the trouble of doing the footwork.
Billions expected
Indonesia's need for foreign investment is particularly acute. The country will need some $150 billion for infrastructure development projects over the next five years. The government is only ready to finance less than 20% of these, with local and international investors expected to put up the rest. Some 91 projects worth $22 billion were offered at the so-called Infrastructure Summit in Jakarta in January and several more, worth around $57.5 billion, are expected to be offered in November.
Bakrie has said that these projects should return around 15% on investments, a view at variance with that of at least one major building contractor. Australian Ray Hodgson, president of PT Leighton Contractors Indonesia, though conceding that investment opportunities in Indonesia are abundant, particularly in infrastructure, said the risks are still high and returns need to be more attractive. "Risk is the key in determining a project's viability and the government tends to underestimate the multitude of risks involved," he told delegates at the Indonesia-Australia Business Conference in Bali last month. Indonesia, he noted, has quite a high investment risk. So investors demand returns in the range of 20-30% a year.
Minister of Transport Hatta Rajasa raised a few eyebrows last week when stating that although five investors had expressed interest in buying a large stake in state-owned Merpati Nusantara Airlines (Merpati), he was not willing to allow foreign airlines to dominate the country's airline sector. "I am against selling up to 49% of a state company, especially an airline, to foreign investors," Rajasa was quoted as saying.
Whether this remark could be taken as evidence of likely parliamentary resistance to the sale of government assets – not an unusual sentiment in Indonesia's corridors of power for even debt-ridden units like the ailing Merpati – is arguable. But the government will need the full support of legislators to run with its plans to help restore investor confidence. It's not so much a lack of policies that discourage investors – it's more the inconsistency in implementing existing policies. The same goes for the legal system. It's a consistent and transparent implementation of existing laws that is lacking and has led in the past to such a high-profile negative image of Indonesia as a place to make large investments.
Yet Vice President Jusuf Kalla told investors at a Singapore business forum last week that the government hoped to make policy changes. "We hope that within two years, we will be making a lot of changes," he said, assuring them that the government would follow through with its pro-business policy. Such a new momentum could all turn out to be very good news on the investment front, if the planned measures are all properly coordinated but, unfortunately, there is a sting in the tail. Any required reforms and legislation that may be needed to make good on pledges and promises made by the government could easily get bogged down in parliament.
Trade Minister Mari E Pangestu said the government was pushing for the new investment bill to be deliberated this year, as it has not yet been listed on the schedule of bills to be debated by the House. The bill will provide guarantees against nationalization and expropriation, and guarantee the right to repatriate profits. "Considering that improving the investment climate is one of the cabinet's priorities, we are seeking ways to put the bill on the legislators' schedule for deliberation this year." The hardest task may be getting legislators to even turn up to debate the bill.
The 550 legislators in the House of Representatives (DPR) are broadly split into two groups – those who support the president and the government, and those who do not. But they have been so busy arguing that they have not passed any laws since taking office last October. Very few bills have been drafted and a plenary session was adjourned this month as fewer than 100 lawmakers were present.
[Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has worked in Indonesia for 19 years as a journalist. He has been published by the BBC on East Timor and specializes in business/economic and political analysis in Indonesia.]