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Indonesia's investment
woes
By 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.
(©2002 Asia Times Online Co, Ltd. All
rights reserved. Please contact content@atimes.com
for information on our sales and syndication policies.)
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