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Innovating Indonesian Investment Regulation: the need for further reform
OCCASIONAL PAPER
Considering Indonesia's continued economic resilience during and following the global financial crisis the economic outlook for the archipelago should be rosy.
Recent data from the government's statistics agency showed economic growth in the first quarter of this year to be 6.5%. Coupled with limited export exposure to American and European markets in favour of ASEAN nations and China, Indonesia saw relative investment stability throughout the global financial crisis.
The contribution of foreign direct investment to economic growth is clear because it provides countries with the necessary finance to build infrastructure and grow industries that employ workers and pay taxes. However, with other countries slowly pulling themselves out of recession the environment for accessing investment finance is going to become increasingly constrained and governments are going to need to continue reform to make them a safe and attractive destination.
Indonesia's recent history provides good foundations that should be built on. Since the mid-1980s successive governments have progressively liberalised government restrictions to make it a more attractive destination for foreign investment. The 2007 investment reforms that granted national treatment for foreign investors and established a transparent ‘negative' list for out-of-bounds investment sectors were considered a watershed in Indonesia's economic strategy. But the job is not done.
Concurrent with pro-investment regulation reform nationally, immature local governments are increasing investment burdens, often through opaque measures, that are creating perceptions of risk. And these perceptions are being exacerbated by politics. These perceptions couldn't come at a worse time and are being confirmed by international ratings agencies. Earlier this month, Standard & Poor's released a report examining 2009 investment reforms, concluding that subsequent regulations provide 'greater clarity' toward a negative impact on the mining sector caused by decentralized decision making, which could hit bottom lines.
Without improvements, these perceptions of investment risk could make it significantly harder for attracting private investment. But it could also flow through to projects of government priority.
With national plans outlining that the government is expecting 64 % of all capital for infrastructure projects to come from the private sector it is going to need to look at innovative financing and ownership structures such as public-private partnerships.Having legislative and regulatory requirements for shares of government ownership naturally lends itself to sovereign risk when the priorities of governments and foreign investors collide. The situation is made worse when local and national authorities are also fighting.
Instead of trying to manage these priorities the government should be looking toward further investment law reforms that consider the benefits of removing government ownership investment requirements all together. Liberalizing investment ownership laws doesn't preclude the government securing their share of the dividend of exploiting Indonesia's scarce natural resources which can still be secured through well-designed licensing agreements.
Choosing to focus government interests through contracts rather than ownership is also replicable irrespective of investment type and avoids fostering risk perceptions from the government involving itself where it has little expertise.