Package Policy to Improve Investment Climate, Announced

by Tuti Sunario

Finally, the long awaited Investment Policy package, that was promised to boost investments was announced on 2 March. Presidential Instruction No. 3 of the year 2006 aims to strengthen services provided by investment institutions; synchronize laws and bylaws between the national government and local governments; improve rules and regulations pertaining to tax, customs, manpower, and Small and Medium Scale Enterprises (SMEs) and cooperatives; as well as ascertain rules and regulations on the environment . The package specifies target dates and clear measures to be taken by the government to improve Indonesia's investment climate.

Among these is the simplification in processes to establish a new company and obtain an operating license. This targets a gradual cut in the entire red tape, to be considerably shortened from a lengthy 150 days to a mere 30 days. And, in order to achieve this target, the government decided to delegate authority to approve company license to the Provincial office of the Department of Law and Human Rights.
Furthermore, Minister for Finance, Sri Mulyani Indrawati explained that through simplifying customs regulations it is hoped to fast track the creation of a single window service, through modernization efforts. Which will include increasing the number of companies to be given the green line priority, that will greatly reduce inspection of goods. Other measures include (b) strengthening the role of bonded areas, (c) continue the fight against smuggling; and (c) further reduce bureaucratic intervention in customs.

In the area of Taxation, measures include (a) tax incentives for investments; (b) implementation of the self-assessment system to be executed more consistently; (c) revise value-added tax to promote exports; (d) protect the rights of companies and persons being taxed, and (e) promote transparency and disclosure.
In the area of Manpower, measures include (a) create an improved industrial climate to support expansion for increased labour opportunities; (b) protect and increase placements of workers overseas; (c) Solve industrial conflicts fast, cheaply and fairly; (d) accelerate the process in the issue of permits for labour; (f) create breakthroughs in the development of transmigration projects, aimed to increase and expand opportunities for labour.

In the area of Small, Medium Enterprises ad Cooperatives, the government will further empower and increase the units of small, medium enterprises and cooperatives.

Cabinet Ministers are responsible for successful implementation
In all these areas, clear instructions are issued to particular Ministers to be in charge. For example, to finalize the Bill on Investments, this is the responsibility of the Minister for Trade, while to identify and separate responsibilities between the national government and the Regions in the framework of investments, this is the purview of the Minister for Home Affairs, whereas, improving institutions, is entrusted to the Coordinating Minister for the Economy.
While, simplifying customs procedures is entrusted to the Minister of Finance, as are procedures and incentives involving taxation. And, reduction of taxes levied by local governments is to be implemented under the auspices of the Minister of Home Affairs.

Indeed, Coordinating Minister for the Economy, Boediono, commented that Ministers identified in this Presidential Instruction are held responsible for the completion of each area, and thereby, stake their personal reputation and credibility. Thus, in Cabinet Meeting, President Yudhoyono specifically instructed Ministers to heed schedules specified in Presidential Instruction No. 3 of 2006. The President further instructed Coordinating Minister Boediono to closely monitor its implementation, since, the President underlined, it is the implementation of the intentions that will determine its success.
Minister Boediono further added that the Bill on Investment will be submitted to Parliament this March. The Bill aims to further strengthen government policies as described in the Package for Investment as well as in the 2006 Infrastructure Policy Package.

Businessmen welcome package but await Implementation
Meanwhile, after a meeting with 30 business leaders from 14 Asian countries in Jakarta, Trade Minister, Elka Pangestu, informed the press that the international business world responded positively to the package, since through the Investment Package, Indonesia has given "positive" signals. Nonetheless, businessmen urge that for Indonesia to attract more foreign investment, her policies must be even more aggressive when compared to Malaysia and Vietnam. Today, business awaits its implementation, which includes improvements in the labour system, improved tax and customs processes, and in particular the implementation of a one stop customs service.

Chairman of the Investment Board, Muhammad Luthfi, meanwhile, foresees that investments in 2006 will improve by 15.2%, compared to 2005, that registered total investments of
Rp. 613.5 trillion, led by the Industrial Sector. In the meantime, a survey of Overseas Business Operations by Japanese Manufacturing Companies in 2005 found that industries considered to be best investments in Indonesia are in chemicals and automotive, where Indonesia is expected to offer potentials as production basis for these two industries.

In the latest development, Economic Observer, Aviliani, in an article in Media Indonesia of 13 March, deems that Presidential Instruction no. 3 of 2006 is aimed to increase aggregate demand through fiscal stimuli, expecting that through this measure economic growth will be maintained, since the government is resolved to keep a tight money policy into the second semester of this year.
To accelerate the investment process, the Instruction stresses the need to delegate authority to the regional governments, whilst measures in customs and taxation are to achieve the government's improved and friendlier stance vis-à-vis the business community. Aviliani feels that sectoral departments, such as industry, and trade, must bear part of the blame for negative sentiments, since none have come up with a clear blue print on how to develop the range of industry from upstream to downstream, and have, therefore, been unable to propose tax incentive schemes for the different categories. Along the same line, local taxes levied by regional governments have contributed significantly to Indonesia's high cost economy.
While, concerning labour policies, Aviliani expects that there will be widespread resistance to the new policies from the side of labour, since any changes in policies are seen as lowering their present bargaining position.
Aviliani, therefore, suggests that a number of steps must be taken ascertain that the positive measures as contained in the Instruction will be more effective, as follows:

Firstly, there is an urgent need to establish a long term plan, such as the former plan which was known as the National Development Guidelines (GBHN), but which has now been replaced by a five-year development plan only. Whereas, investments are necessarily long term by nature.

Secondly, the Bill on Foreign Investments has yet to be submitted to Parliament. This fact reduces certainty to investors. Thus, the Investment Bill should not only be general in nature, but should already mention chief priorities to be included, among which are resources based industries, such as agriculture, fishery, plantations, and others.

Thirdly, she said, Coordinating Minister for the Economy and related ministers must make it their first duty to identify priority sectors that urgently require investors.

And lastly, there must be provided better assurances to investors for doing business in Indonesia. These assurances must cover both the physical safety and security of investors and their investments, as well as provide legal certainties. Such measures are bound to attract more investors.

However, first and foremost, and above all, Aviliani opines that, in order to create positive breakthrough, the President must dare to push his ministers to be more aggressive in creating the needed change.

(Data sources: Kompas, Bisnis Indonesia, Media Indonesia)
This article originally published in Indonesia Digest, no: 08.06, dated 13 March 2006.