Indonesia's Drive for Foreign Investment Threatened by Red Tape

Business Materials 12 November 2007 05:02 (UTC +04:00)

Indonesia's drive to increase foreign investment in ports, power plants and bridges may be strangled by red tape.

A year after 10 projects worth $4.5 billion were offered to private companies, not one has started because the government has been unable to publish bidding rules. Southeast Asia's biggest economy has a target of $22 billion in infrastructure spending annually through 2011.

``We are getting increasingly frustrated,'' said James Thomas, vice president of engineering at OneEnergy Group, a venture between Mitsubishi Corp. and Hong Kong's CLP Holdings Ltd. that wants to bid for a $1.2 billion coal-fired power plant. ``It doesn't engender a lot of confidence in Indonesia.''

Failure to attract investment threatens President Susilo Bambang Yudhoyono's efforts to sustain the fastest economic growth in 11 years and alleviate poverty in Asia's third-most populous nation. Indonesia's spending on infrastructure is among the lowest in the region relative to gross domestic product, as lack of clarity on laws and government policies prompts foreign investors to turn to India, China and Vietnam.

Private participation in infrastructure projects ``is still missing out prominently,'' said Mahendra Siregar, deputy to Indonesia's coordinating minister for economic affairs, Boediono, 64. ``The complexity of the matter is, we realize now, more than we expected.''

Indonesia's program is an attempt to reverse a decade of under-investment that followed the onset of the Asian financial crisis in 1997. The economy shrank 13 percent in 1998, the region's worst recession, amid street protests that ended former president Suharto's 32-year rule.

Growth accelerated to 6.3 percent in the second quarter of this year as commodity prices surged to records. Indonesia is the world's biggest producer of palm oil and exporter of thermal coal, and the second-largest grower of rubber.

Should commodity prices decline ``it could mean a considerable slowdown in growth,'' said World Bank Country Director for Indonesia Joachim von Amsberg. Indonesia can expand ``in the 8 percent range if the players and stakeholders can come together and bring about more investment for infrastructure and more rapid reform for the investment climate.''

Indonesia scrapped $4.7 billion of projects after the crisis, double the amount canceled by neighboring Malaysia, according to the World Bank. The country still spends less than 4 percent of GDP on building roads, bridges, ports and power plants, compared with about 7 percent for China, Thailand and Vietnam, the bank estimates.

Lack of roads and ports hampers companies' access to overseas markets, affecting investment in chemical, footwear and paper plants. Indonesia, with an economy six times larger than Vietnam, attracted about $6 billion of investment to build factories and set up plantations last year. Vietnam lured $10 billion. For the first eight months of the year, Indonesia received $8 billion.

Yudhoyono, 58, plans to spend 100 trillion rupiah ($11 billion) from the government's budget next year on road and port projects, after saving money by reducing fuel subsidies in 2005. He also plans to build 10,000 megawatts of coal-fired power plants.

``That's a big help but we are only talking about a few billion dollars,'' said James Castle, who runs Jakarta-based CastleAsia, which advises companies on investment opportunities.

It's not just red tape that's an obstacle to investment. The nation's labor rules make it more difficult to hire and fire workers than in civil-war stricken Sudan, deterring investment, according to the World Bank.

Political opposition has stalled attempts to relax labor laws in Indonesia, where the 10.4 percent jobless rate is the highest in Asia-Pacific.

``We are step by step trying to do something, but not as fast as we would like to,'' Mari Pangestu, Indonesia's trade minister, said in an interview on Nov. 9. ``Some things take time, if it's opposed by the parliament and people.''

Until the government can convince parliament and unions to sanction change, companies have to pay 108 weeks' wages to fire a worker, the most in Asia after Sri Lanka, the World Bank said.

``Indonesian companies need to provide severance pay to fire'' people even if the employee is caught stealing, said Gita Wirjawan, senior country officer at JPMorgan Chase & Co. ``Why should the companies pay?''

Considering the challenges, the World Bank in July set its recommendation for infrastructure spending at $6 billion in Indonesia, where 40 percent of people have access to piped water and a third don't have access to electricity.

Indonesia won't get the investment it needs ``unless the government finds a formula to mobilize private both foreign and domestic-sector investment,'' said Castle. ``The government just doesn't have the capability.'' ( Bloomberg )