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Indonesia battles to attract foreign investors

Despite a new, closer relationship forged in the aftermath of the tsunami devastation, Australia and its populous neighbour Indonesia remain poles apart on the investment front.

In the recently compiled competitiveness rankings of 60 countries published by the IMD business school, the US came in first, Australia was fourth and Indonesia came 57th, just ahead of Argentina and Venezuela.

Indonesia also finishes well down the list, with worst offenders, in the annual surveys of honest and transparent countries that Transparency International regularly puts out.

Education is the same. When the OECD published its list comparing the reading and mathematics abilities of school students, Indonesia trailed just about everyone.

Then there's the recent World Bank finding that it takes about 150 days to open a business in Indonesia, triple the Asian average.The cost of retrenching an Indonesian worker was more than 150 weeks pay, three times more than its Asian competitors.

It's the sort of environment foreign investors recoil from, as latest figures from Indonesia's investment board show. Foreign investment approvals in the first 11 months of the year were down 29.6 per cent to $US9.58 billion ($12.5 billion) compared with the same period last year.

When Indonesians elected Susilo Bambang Yudhoyono as president in September, they voted for the candidate who promised to turn these numbers around, to get investment back into the country and make a serious attempt to rebuild an economy that even before the tsunami had pushed GDP back only close to the level it was at before the Asian economic crisis.

In the wake of the disaster Yudhoyono was forced to take personal control of the relief effort, as a sympathetic world looked on aghast. But Indonesia is a resilient country, and once the crisis has eased he will be under pressure to make the most of the interest focused on his nation and begin delivering the economic growth he promised.

Earlier Yudhoyono had promised "shock therapy" in his first 100 days to tackle corruption, clean up the judiciary, improve education and make his country a better place to invest.

Late December saw a stream of business representatives from the US, Malaysia and even Sweden in Jakarta, meeting ministers and trying to decide if the president's promises will ever be delivered. Plenty more delegations are planned, bringing business as well as aid.

Many foreign businessmen here believe the omens are good for stopping the reduction of foreign direct investment.

Like most expatriates involved in business in Indonesia, Australian Darryl Hadaway from Ernst & Young is "cautiously optimistic" about the promises the Government has made.

Hadaway, who sits on the board of the American Chamber of Commerce, points out that this president at least has recognised, and talks about, the declining foreign investment, something his predecessor barely mentioned.

"You can hardly fault him for what he's done; the optimism is there and you can see the people coming through."

But he cautions that a huge amount of change is needed to make the country more attractive in investment terms.

Hadaway's list of long-standing concerns is the same most investors rattle off: "Law enforcement issues, policy and regulatory issues around tax, labour, intellectual property, crime, security, and regional autonomy plus concerns on the deterioration of, and desperate need for, infrastructure," he says.

He is hoping to address the productivity issue by helping form a productivity council.

Hadaway cites figures which show the productivity obtained from eight hours work in Indonesia could be obtained from 2.5 hours work in Thailand, 1.15 hours in Malaysia and 15 minutes in Singapore.

"Why would I come to Indonesia if it's taking me eight hours to get something done that takes 15 minutes somewhere else?" he asks.

This is one of a host of long-term issues that must be addressed to make Indonesia more attractive, but Yudhoyono has picked a few others where he hopes to make a start.

He's repeatedly talked of the crumbling infrastructure as one of the main obstacles to attracting investors, and in December was organising a summit on the topic for the new year to try and get substantial projects under way.

The two-day summit beginning on Monday will have a much more urgent focus following the devastation in Aceh in western Sumatra, although projects in the devastated province will not be offered.

After he was elected, Yudhoyono said Indonesia needed $US75 billion worth of infrastructure to restore the nation's basic infrastructure.

The Jakarta Post reports that the Indonesian government will offer a total of 91 infrastructure projects worth up to $US22 billion to local and foreign investors at the summit, more than double the 37 projects the government had previously announced would be offered to investors.

But lack of infrastructure, or its rundown state, does not worry all foreign investors.

Leighton, one of the few Australian companies bullish about Indonesia, has a construction arm as well as a mining arm in the country and reckons the lack of roads and power stations is a great opportunity to expand its business.

"We are growing again in the latest year," says Ray Hodgson, president director of PT Leighton Contractors Indonesia.

"It was fairly static for a few years but we are growing in both mining and construction.

"We are optimistic Indonesia is set for a spurt of growth in infrastructure, and all the construction that goes with that."

Mark Carnegie, co-founder of merchant bank Carnegie Wiley, is one of the few other Australian investors who are excited about investing in Indonesia.

"I'm the only one," he says. "Me and Wal King [CEO of Leighton Holdings]."

A consortium which links Carnegie with adman John Singleton and London's Ashmore Investment Management earlier this month put up $53 million for a slice of Indonesian TV station SCTV.

Carnegie's other Indonesian investments include a huge Sumatran palm oil plantation.

Carnegie reckons Indonesia must improve as a place to invest now that the Soeharto family has gone and is no longer doing its "ram raid on the economy".

"The Indonesian investment thesis is that this is not a country which is going to disappear like Haiti.

"Yes, it's anarchic and yes, it's hard to do business, and you have to rely on your partners, but it has a fundamentally strong economy and is rich in natural resources."

Carnegie says getting the right partner is more important to success in Indonesia than in most places.

"Unilever and a whole lot of oil companies have done well but that's not to say if you send in a junior guy he's not going to have his head hammered. They'll take him apart."

He says there has been a fivefold increase in the number of investors coming to look at Indonesia since the change of government.

"Indonesia is still in the early days of a new president but signs are right for addressing the outflows of foreign direct investment."

Peter Fanning from the Indonesia Australia Business Council is not so sure. A lawyer who has spent eight years in Indonesia, Fanning reckons the president has already shown signs of being too prepared to compromise.

He would like Yudhoyono to clean out the notoriously corrupt tax office to show he wants real reform in this area.

"He's spending a huge amount of money on the face of taxation but the practice has not changed one iota. We are not seeing any changes in any practice in areas of administration."

Fanning hopes the infrastructure summit will finally address the serious lack of roads, telecommunications and other basic facilities and head off the brownouts he reckons are inevitable if some new power stations are not commissioned.

While there will be plenty of opportunities to invest coming out of the summit, he says investors are looking for something more.

"The reason people don't invest is not a lack of opportunity, it's a lack of confidence the final payments will be made and, if they are not made, that the courts will enforce payment."

Indonesia's notoriously corrupt courts, and their willingness to sell verdicts to the highest bidder, are issues Fanning puts at the top of the list of problems that must be fixed before money will come back into the country.

He hopes ministers such as the new justice minister, Hamid Awaluddin, will push to reform the legal system and restore confidence levels.

So far, he says, little has happened to bring in new Australian investments since the change of government, but Australians have never been big investors here except in mining.

The new year will show if that's about to change.
Six bank sales will help privatisation

London: The Indonesian government has appointed investment banks to sell its remaining minority stakes in six lenders, the Financial Times reported, in a move the report said could raise nearly $US800 million ($1.1 billion) and mark an important step in the privatisation of the country's financial sector.

People close to the situation said JPMorgan, UBS and CLSA had been chosen with local firms to sell stakes in Bank Danamon, Bank Central Asia, Bank Internasional Indonesia, Bank Permata, Bank Niaga and Bank Lippo on the market, the report said.

The FT said the appointments were a sign of Jakarta's determination to privatise the banks and recoup some of the $US40 billion spent to bail out most of the country's financial sector after the 1997-98 Asian financial crisis.

Perusahaan Pengelola Aset, the state asset management company, has Indonesian assets with a value of more than $US780 million.

The sale of the bank stakes could be one of the first big deals in the Asian countries hit by last month's tsunami, the paper said, and might ease fears the tragedy would hamper economic and financial activity in the region.

The divestments would let the government capitalise on a rise of about 40 per cent in banks' share prices in the past 12 months.

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