Big challenges of improving investment climate
Friday, July 08, 2005 Vincent Lingga, The Jakarta Post, Jakarta
Although the government claims otherwise, Indonesia remains the least attractive among East Asian countries for foreign direct investment (FDI).
Its political stability -- one of the strategic factors for a good investment climate - did in fact strengthened after the peaceful, clean and fair general elections last year. But most other fundamentals for a conducive investment climate remain acutely weak.
True, FDI has started flowing in, but most of it has been for acquisitions and not green-field projects, the very kind of FDI the country badly needs to create new productive assets and jobs.
Judging from the presentations by panelists from developed and developing countries at the Organization for Economic Cooperation and Development's (OECD) two-day Conference on Investment for Asian Development that ended here on Wednesday, the challenges are indeed formidable for Indonesia to regain investor confidence.
Most of Indonesia's fundamentals for a conducive investment climate -- macroeconomic stability, legal certainty, policy consistency and predictability, and good basic infrastructure -- are still very weak. And the government would be well advised to realize that special incentives for foreign direct investment (FDI) are no substitute for sound macroeconomic policies and a conducive investment climate.
This clearly shows the crucial role of the government in creating a good investment climate. While the government has limited influence on natural resources and other fixed factors such as geography, its policies and behaviors play a key role in shaping the investment climate. Put another way, good governance reduces the costs and risks of doing business and minimizes barriers to sound competition.
Its rationale is that strong and consistent law enforcement is key to minimizing government policy-related costs and risks -- which are quite high in this country -- as well as those regarding regulations on taxation, customs, labor, local autonomy and basic infrastructure.
Strong legal certainty in turn helps build the credibility and certainty of government policies and curb corruption and other forms of rent-seeking behavior.
Policy credibility, certainty and predictability, which also are acutely lacking in Indonesia, are vital for both domestic and foreign investors because direct (not portfolio) investment is inherently forward-looking and long-term in nature.
Investors expect risks associated with changes in such factors as competition, customer behavior, and market preferences, but the government can offset these risks by helping to maintain a stable and secure environment for business operations.
A stable regulatory and policy environment apparently is not sufficient to woo FDI, especially in such countries as Indonesia with strong nationalistic sentiments. Even though the benefits of FDI in developing countries have been well documented, an atmosphere of supportive public opinion is also necessary to nurture conducive political and social conditions for FDI operations.
The experiences of China, Thailand and Vietnam, which have had great success in attracting FDI, shows that investment promotion cannot just be aimed at foreign investors. Such campaigns should also be targeted at local consumers and workers to persuade them to accept the presence of FDI and for all branches of government to convince them of the advantages of less and more efficient regulation of business.
Vietnam, a socialist country, which experienced long and bitter experiences with foreign colonialists, is the paragon, attracting US$48.5 billion in FDI in 5,500 projects between 1987-2004. Vietnam's investment officials Nguyen Van Cuong and Nguyen Huy Hoang recounted this at the conference, that enlightening their own people of the benefits of FDI has been central in their investment promotion campaign.
This is highly relevant for the Indonesian government that is drafting legislation for both domestic and foreign investment to replace the 1967 FDI law and the 1968 domestic investment law. Providing equal treatment to both domestic and foreign investment, as the new legislation is being designed to do, is a politically sensitive issue that needs a strong public-opinion support at the House of Representatives.
Another strong opinion emerging out of the conference warns the government against putting too much emphasis on the development of a "one-stop service center" for investment licensing, because what is designed as a one-stop shop often turns into just another additional stop with an extra bureaucratic layer.
The government's recent decision to dilute the authority of the Investment Coordinating Board (BKPM) and put it under the oversight of the trade ministry was seen an appropriate move, especially in light of regional autonomy.
BKPM, like most similar agencies in most developing countries, has never been able to operate as a one-stop service for investment licensing because most line ministries resist ceding their regulatory authority to another agency.
It would be much better for the government to purse a more direct approach by improving the efficiency of each individual ministry responsible for particular aspects of investment approvals and increasing the institutional capacity of investment bureaus at the provincial and regency-level administrations.
It would be more appropriate for the BKPM to function mainly as an investment promotion and facilitation agency and as a central source of all practical information for businesses, including as a matchmaker for joint-venture projects.
But then, however important investment is for generating growth and reducing poverty, it is not a panacea for specific poverty alleviation policies, especially in a country like Indonesia where the level of inequality in society is quite high.
The government should design an investor-targeting strategy focusing on stimulating a defined set of investment to selected categories of industries the government wants to develop in line with its objective to promote development with equity.
Such a strategy also allows the government to choose the kinds of FDI it wants and direct them to support its objectives related to employment, technology transfer, export competitiveness, skills development and other development goals.
---------------------------
Government gears up to bite the bullet
Monday, September 05, 2005
Vincent Lingga, The Jakarta Post, Jakarta
The initially negative market reaction to the policy agenda of President Susilo Bambang Yudhoyono could soon turn into positive sentiment as technical details on how and when the reforms will be implemented begin to be unveiled on Monday.
The market, predictably, was disappointed with the package of measures on fiscal and monetary management, energy and investment Susilo unveiled last Wednesday because they lacked specifics and were not as bold as expected.
Nothing was actually new about the "new policy directives" -- in fact they had always been central to the reform package prescribed for Indonesia by the International Monetary Fund between 1998 and 2003.
Many analysts were even puzzled over the circumstances in which the policy agenda was decided. The package was first deliberated in a plenary Cabinet session on Tuesday night but was later fine-tuned by a smaller team of ministers on Wednesday.
The absence of chief economics minister Aburizal Bakrie from the final process, and from the grandstanding ceremony in which President Susilo announced the major policies in a nationwide television address on Wednesday afternoon, raised many eyebrows and strengthened speculation about an imminent Cabinet reshuffle.
Why did Susilo hasten the policy announcement without waiting for the return of Vice President Jusuf Kalla?
A move that unnecessarily raised questions amid the mounting demand for the replacement of the economic team of the Cabinet.
After all, Kalla, who chairs the economic team, had decided to cut short his visit to China and entirely canceled his engagements in Japan to be able to return to Jakarta on Thursday morning.
Susilo's move could nevertheless be understood if it was set against the immensely intense pressures he was facing due to the steady melting of the rupiah since mid-August.
This situation had forced the President either to act immediately or at least to decide on and announce something to help calm the market, otherwise the crisis of confidence in the government's economic management could have escalated into panic.
But the Cabinet meeting Susilo again convened on Thursday -- also attended by Vice President Kalla, chief economic minister Bakrie and almost all members of the economic team seemed able to repair some of the damage caused by the President's haphazard showmanship the day before.
The more conducive would it have been for the rupiah and macroeconomic stability if the technical details for the action plan on fiscal and monetary management, energy and investment had been voted on by the market as economically and politically feasible.
The Cabinet's decision to propose to the House of Representatives on Monday several scenarios on how to phase out fuel subsidies, which could explode to almost US$14 billion this year, is quite strategic. Such a move would prevent political turbulence as observed last March, when the government raised fuel prices by about 30 percent.
Anyway, the new fuel policy will exact major changes in the current and next year's state budgets, and all this process has to be approved by the House.
The President's directive that the gradual removal of fuel subsidies should be started only after a credible social-safety net mechanism to compensate the poor is in place is similarly vital to prevent social unrest and to minimize protests and demonstration. The government should indeed ensure fairness by protecting the poorest segment of society from the brunt of higher prices.
Therefore, as the President has hinted, the phasing out of fuel subsidies could begin only after October. November (after the Idul Fitri celebrations) may be the most appropriate time for ushering in the painful measure because the government needs more time to establish a credible social-safety net program and to precondition the people to the brunt.
Raising fuel prices this month or in October (the fasting month) after the 29 percent increase last March could be political suicide for Susilo's government.
The next two months are more than enough time for the government and the House to deliberate and agree on amendments to the current and next year's budgets to accommodate the new fuel policy.
The next few weeks also will be sufficient time for the government, business leaders, including bus companies, to discuss and calculate the impact of the higher fuel prices and work out what additional reforms are still urgently needed to cut the costs of doing business in order to offset the higher costs of energy and to further stimulate investment.
The central bank needs more time to introduce additional monetary measures to cope with anticipated stronger inflationary pressures after October.
These preparations are all necessary to prevent a reaction of panic. At a time when many people are still suffering from the brunt of the economic crisis and millions of others are either unemployed or underemployed, additional burdens stemming from higher fuel prices could easily incite public anger.
Massive street demonstrations, such as those in early 2003 and last March, would only make things murkier, injecting a factor of uncertainty. This in turn could press down the rupiah exchange rate and set off a vicious circle within the economy.
-------------------------------
Serving both stockholders and stakeholders
Monday, September 12, 2005
Vincent Lingga, The Jakarta Post, Jakarta
While many, if not most, large companies in Indonesia are still struggling even just to comply with current laws, an increasing number of business leaders in developing and developed countries have been promoting the principles of corporate social responsibility (CSR).
CSR has many definitions. Some call it simply: socially responsible investing. Others promote the concept as good corporate governance. But the essence is the same -- it is no longer sufficient for companies to comply with the laws if they are really serious about sustainable development in the long term, which will contribute to poverty alleviation.
The basic tenets of the CSR concept are by and large similar to the nine principles in the areas of human rights, labor and environment, which the United Nations has been promoting through its Global Compact Initiative.
Panelists at the 4th Asian Forum on Corporate Social Responsibility in Jakarta, which ended on Friday agreed that companies should go beyond simply making profit, beyond complying with the laws and beyond philanthropy.
The buzz-words at the two day conference -- organized by the Manila-based Ramon V. del Rosario/Asian Institute of Management Center for Corporate Responsibility -- were "socially responsible", "ethically right" and "environment friendly business practices".
But how can companies live up to these CSR principles in the real business world and still serve the interests of their shareholders by making a profit. Any way one looks at it, a business is not sustainable without profit.
The business environment in developing countries, where laws are mostly inadequate, the governments are corrupt and law enforcement is weak, is often not conducive to the implementation of CSR.
Most speakers, who are corporate chief executive officers, stressed community development through the transfer of business skills to rural people, the urban poor or small and micro-enterprises as the most effective, sustainable way of implementing CSR.
Donating to a worthy cause, though appreciated, is considered less effective than consistent efforts to empower the local community to provide for itself.
Bryan Dyer, Managing Director for Operations at PT PP London Sumatra Indonesia, a plantation company listed on the Jakarta stock exchange, emphasized the need for companies to issue not simply a financial report, but a development balance sheet that accounts for financial (economic) performance and achievements in social and environmental development.
Other panelists from such large companies as Shell Group, Unilever, Gujarat Ambuja Cements Ltd. and Jakob Oetama, Chairman of Indonesia's Kompas-Gramedia Group, presented CSR practices in projects designed to transfer business, technical and social competencies to people.
Companies, which cannot do CSR projects by themselves, manage the jobs in partnership with professional organizations or institutions.
Put another way, CSR is about capacity-building for sustainable livelihoods. It therefore respects cultural differences and seeks to find the business opportunities in building the skills of employees, the community and the government.
Building competence is the main objective, not merely throwing money around, as most state companies in Indonesia have been doing through their small and micro-enterprise development programs.
But capacity-building requires perseverance and even patience because social and business competence grows similar to a healthy economy, not by leaps and bounds, but by percentages. The main hallmarks of this process is that it utilizes, as much as possible, local labor, local contractors, suppliers, even when subcontracting the jobs elsewhere could be easier and less expensive.
The economic rationale is that good behavior is good business because having prosperous businesses side by side with slums or poor communities fosters resentment and eventually resistance. This means that a company's best defense is its reputation in the society.
There are, indeed, real limits imposed upon businesses by the short-term nature of the market. But research has shown that sustainable value creation follows from steady, quiet investment over a period of time rather than chasing every quarter's figures for publicity.
CSR case studies presented at the conference also showed how social responsibility can become an integral part of the wealth creation process and still, with proper management, is able to enhance business competitiveness.
CSR then is often about how company directors resolve the dilemma of conflicting stakeholder demands that requires delicate judgment.
Sometimes, especially in developing countries, it is about leadership and educating shareholders on the imperative of CSR because it is the shareholders who can decide to integrate CSR programs into the business mission and strategies for the management board to implement.
----------------------
Strong political mandate, weak economic performance
Monday, October 17, 2005
Vincent Lingga, Jakarta
Judged against the strong political mandate Susilo Bambang Yudhoyono obtained in last September's presidential election, Indonesia's economic performance during the first year of his administration has been quite disappointing.
His government failed to make best use of its significant political capital to quickly regain investor confidence in Indonesia's economy through bold reforms in priority areas of greatest concern to businesspeople.
Early on during his first week in office last October, Susilo made the right remarks. He signaled quick action in the top priority areas of his programs by making working visits to the Attorney General's Office, and the directorate generals of taxation and customs.
He demonstrated his understanding of the formidable economic challenges the nation is facing by immediately holding meetings with Bank Indonesia's board of governors and with business leaders.
The market initially gave the benefit of the doubt to the uncomfortable mix of technocrats and politically-connected businessmen in Susilo's Cabinet.
He promised to resolve high-profile disputes with foreign investors -- the Cemex company of Mexico, Karaha Bodas, Exxon Mobil and Newmont of the United States. None of them has been settled, further validating the notion that Indonesia is an unpredictable place to do business.
Susilo made a strategic decision to proceed with the plan to hold an infrastructure summit in January, less than three weeks after the devastating earthquake and tsunami in Aceh province and Nias island, North Sumatra.
Infrastructure deficit has indeed become one of the biggest hurdles to investment in Indonesia as poor infrastructure impairs the competitiveness of the economy as production and distribution costs are made much higher than those in other countries. The prospect of imminent power shortages hangs over many provinces.
Economic performance during the first six months (October, 2004 to March, 2005) was fairly impressive with gross domestic product growing by 6.65 percent on a yearly basis in the fourth quarter of last year and 6.35 percent in the first quarter of this year.
The quality of growth also increased significantly with a much stronger foundation as the prime movers shifted more to investment and export. Investments (mostly domestic) grew by 15 percent, as evidenced by a 40 percent robust increase in capital goods imports, and exports expanded by 13 percent.
However, promises and symbolic moves, though needed, are not enough to maintain the momentum of market confidence.
Investors require concrete, consistent measures because only consistent and effective implementation can give credibility to government policies. Unfortunately, it is these two factors that are acutely lacking in the Susilo government.
Most foreign investors remained on the sidelines, waiting for consistent policies and strong evidence of credible decision-making. Some foreign investment did flow back into the country but mostly in portfolio capital, which is skittish and can fly out any time at the slightest sign of problems.
Only about five of the around 90 infrastructure projects offered during the summit were eventually taken up by private investors because the government failed to enact more than a dozen rulings badly needed to strengthen legal certainty, straighten out taxation issues, improve the commercial viability of investment in infrastructure and set up a viable tariff system.
Economic growth slowed down to 5.54 percent in the second quarter, the balance of payments prospects worsened amid the steady decrease in foreign reserves caused by the huge need for oil imports and the lack of political courage to reduce the fuel subsidy. Most analysts now foresee a growth of 5.5 percent to 5.7 percent this year, still respectably higher than last year's 5.1 percent.But this year's economic expansion could have been much faster.
When the government finally decided to bite the bullet in March, it seemed too little, too late. The 29 percent price hikes were rather meaningless in controlling fiscal deficit and fuel export smuggling and the market became increasingly jittery about fiscal sustainability.
The worsening economic conditions forced the government to amend the 2005 budget twice, while most of the reform agenda Susilo promised in such important areas to investors as customs, taxation, logistical arrangements and other basic infrastructure remained mere declarations of intent.
The entirely unrealistic budget for 2006 that Susilo proposed to the House of Representatives in mid-August was the last straw. Even though the draft budget was immediately revised, the damage had been done as the market lost trust in the government's ability to meet economic challenges.
The market immediately and severely punished the government, attacking the rupiah and pushing it down at one time to a five-year low of Rp 12,000 to the dollar in early September, thereby unleashing enormous inflationary pressures from imports. This forced Bank Indonesia to raise interest rates to as high as 11 percent now.
Worse still, only about 18 percent of the 2005 development (investment) budget had been spent as of last month due to bureaucratic inertia, thereby further tightening the contractive impact of the already austere budget.
The market hailed the bold Oct. 1 decision to double fuel prices in order to bring them closer to their economic costs. However, this long-delayed measure could be too bitter for the economy to swallow if the government is not able to cushion the shock impact of the inflationary pressures within the next few weeks.
One may argue that it is not fair to judge the Susilo government by ordinary yardsticks, given the devastating natural disasters in northern part of Sumatra late last year that preoccupied the government for almost two months early this year. The steady rise in international prices to historical highs is also completely beyond his control.
Investors, however, don't expect instant results in all areas. What they really want to see is a steady progress in the right path of a consistent reform process. Everything does not have to be fixed at once.
It is also well advised for the government to realize that an economic policy cannot be sold in a vacuum. The environment should support the credibility of the policy and the government, notably its economic team.
No one doubts Susilo's integrity. But the market now has low trust in his economic team and several economics ministers have perceived conflicts of interest.
The first anniversary of his administration seems to be opportune for a reshuffle of his Cabinet.
The writer is a senior editor at The Jakarta Post.
0 comments:
Post a Comment