The government efforts of issuing a dozen policy packages and improving the licensing system have not been able to attract foreign investors to invest in Indonesia. The realisation of foreign investment and ease of doing business actually showed a decline. Differences are emerging within the government over the best ways to address the main influential factors.
Based on the Investment Coordinating Board (BKPM) data, foreign investment (PMA) was only Rp 89.1 trillion in the third quarter of 2018, declining 20.2 percent from Rp 111.7 trillion last year. In contrast, domestic investment (PMDN) actually soared 30.5 percent to Rp 84.7 trillion.
On the other hand, out of 190 countries, the World Bank downgraded Indonesia’s ease of doing business (EoDB) ranking to 72 from 73. It is now below Peru, Vietnam, Kyrgyzstan, Ukraine, and Greece.
BKPM Head Thomas Lembong said external and internal factors are causing unfavourable investment performance. He admits the internal factors in question include the lack of efforts made by the government. Basically, the proportion of foreign investment in the world is indeed falling. Therefore, the government needs to focus on improving investor confidence in investing their funds in Indonesia.
The current investment realisation is the result of last year’s efforts. If the implementation of pro-investment policies this year is still unable to bring in investment, the next year's realisation may continue to decline. “I personally still put the responsibility on the internal side. In my opinion, the execution and implementation of pro-investment policies have not been optimal,” Thomas said in his office, Jakarta, Tuesday (10/30).
Thomas considers the investment policies issued by the government are still less attractive, which lead to a slowdown in investment. Tax holiday is deemed less successful in stimulating the interest of investors as it only covers three percent of the economic subsector. The hope is that the implementation of the tax holiday can be further expanded.
He is aware that the government had lost momentum in improving the EoDB in the past year. This also affected the interest of investors. In the past three years, the EoDB ranking has been obtained not in the proper way: fundamental improvement in the government’s work system. “We are almost like using hacker methods by tampering with procedures,” he said during the EoDB Press Conference at the Economic Coordinator Office in Jakarta, Thursday (11/1).
He also mentioned the reduction of administrative procedures to three days from three weeks and administrative costs to Rp 300,000 from Rp 3 million. According to him, this method will not make significant improvements from previous improvements that have been carried out.
To pursue the top 40 target set by President Joko Widodo (Jokowi), improvements must be made from the root of the problem. Thomas said the root is the whole government system, including patterns of performance, assessment, and achievement that focus on procedures and fulfilment of requirements as well as evidence of regulatory compliance. Fundamental changes to the system are needed not only for bureaucrats, but also law enforcements.
The president has actually mandated a shift in the focus of the bureaucracy from the rules to the results to be achieved. However, the fact is that the government is currently focusing on the rules. The business licensing process still takes time for administration with various terms and documents.
Another challenge is that the improvement of EoDB from the regional government (Pemda) and the central government is still similar, which is stuck in a pattern of unproductive activities. Government officials sometimes still practice mutual hostage and extortion. Online Single Submission (OSS) is one of the efforts from the government to accelerate EoDB. However, this new system – launched in June – will only be fully operational by the end of December.
The National Development Planning Board (Bappenas) Head Bambang Brodjonegoro admits the licensing problem was the cause of the low interest in foreign investment. However, the political period is also a factor. Investors usually postpone their investment plans ahead of the General Election. They want to wait and see the policies that will be issued by the next government.
“Some investments may be structural, more so on the issue of ease of permit. Some are more because of the upcoming election,” Bambang said in the Parliament Building, Jakarta, Wednesday (10/30).
Nevertheless, the Economic Coordinating Minister Darmin Nasution and the Presidential Chief of Staff (KSP) Moeldoko seemed reluctant to admit the government’s failure to increase investment. Darmin said the decline in the realisation of investment was not because of a lack of pro-active policies from the government, but it was caused more by instability in the world economy. “The global economy is in turmoil. Who would think of investing if the situation is like this?” he said at Borobudur Hotel, Jakarta, Wednesday (10/31).
The results of the EoDB survey conducted by the World Bank have a gap (difference) with the implementation in the field. According to Darmin, the Customs and Excise Directorate did not charge any fees, but the survey results showed that there was a fee for cross-border trade.
According to Moeldoko, there have been many pro-active policies from the government to safeguard investments, including the OSS system. Other efforts were also made in safeguarding the security of investors by creating stability in the field of politics and security. “Then efficiency. This is so that economic costs do not increase. We fix the infrastructure. We provide access to electricity,” he said.
Meanwhile, Moeldoko said global economic conditions greatly affect the realisation of investment. Many countries have provided investment convenience. As a consequence, investors will go to other countries if the investment climate is more promising there.
The Economist from University of Indonesia Faisal Basri said the interest of foreign investors in investing is low due to the lack of attractiveness of domestic investment. He also mentioned about the government’s stance that was inconsistent with foreign investment. On the one hand, the government is trying to attract foreign investors through a number of incentives. On the other hand, the government narrowed the foreign movement by changing the regulation of foreign ownership as in the insurance industry to only 80 percent.
Indonesia needs to promote foreign direct investment (FDI) to strengthen the economy. The FDI, which is a type of long-term investment, can safeguard the stability of the rupiah exchange rate against the US dollar. FDI needs to be prompted, especially in export-oriented businesses, so that it can help improve the current account deficit, in this case the trade balance of cross-country goods and services.
So far, foreign investment has taken the form of portfolio investments in stocks and bonds, which are easy-to-enter investments (short-term). Indonesia's dependence on this type of investment is to cover the shortfall in foreign exchange (forex) from the current account deficit, which makes the rupiah exchange rate prone to weakening.
He dismissed the statements that the Indonesian economy is controlled by foreign party. According to him, the portion of foreign investment in Indonesia’s Gross Domestic Product (GDP) is also the lowest among Southeast Asian countries. “Foreign roles are increasing, but the level is still below the average Southeast Asian FDI of 66 percent of GDP,” he said.
The Minister of Finance Sri Mulyani Indrawati also highlighted the investment issues. She promised to encourage all relevant ministries at the central and regional levels to attract investors to invest in Indonesia.
Investment can create employment opportunities and improve people’s welfare. These economic growth component also encourage the increase in the competitiveness of Indonesian goods and services. “After all, investment is a very important source for various things,” she said.
The Finance Ministry will continue to improve tax services with the information technology (IT) system, to make it easier for investors to take care of taxes. “We use IT system for e-filling and paying tax. So, no one goes to the tax office, making the processing time short,” she said. In addition, there will be improvements to support export and import activities by cutting down the processing times and costs.
BKPM is committed to boost foreign investment, which is targeted to grow 10.5-11 percent next year. “To pursue it, significant reforms must become the focus and special attention of the government. This has not been a focus so far,” Thomas said.