Indonesia has been facing a lot of challenges in its efforts to attract foreign investment.
With clear commitment to democracy and a return to political stability after two years under President Susilo Bambang Yudhoyono, the value of foreign investment is expected to increase for the reason that the president and his team had continuously tried to improve the investment climate and visited many countries to attract investors.
However, the foreign investment in 2006 declined by 47.6 percent compared to 2005. Despite all-out efforts to create a conducive investment climate and improving macro-economic conditions, Indonesia’s important partners such as the US, Kuwait and Singapore are still in doubt of what the future is going to look like. US for example, still often raise the question on human rights issue in Papua, military reforms, existence of radicals and violence. During his recent visit to various quarters, Indonesian ambassador to the US was questioned on how Indonesia handled the question of Papua, an issue which happened to be a stumbling block in the relations between Indonesia and the United States. Papua is also where American mining company PT Freeport operate its big gold and copper mining operations and in which human rights violations have been alleged.
Another big potential investor, Kuwait, backed off its intention to invest in Indonesia, blaming a spate of national disasters hitting Indonesia in the past few years. One of the problems is that many outside Indonesia do not see appreciate how vast and sprawling Indonesia is and hence imagined that if certain disaster happens in a certain province, the whole country has really been affected.
Many people believed that the whole country had been in a state of devastation during the big tsunami that hit Aceh and North Sumatra in 2004, given the information on high death toll. Other man-made and natural disasters such as earthquake, mud-flow volcano, tropical cyclone and landslides have been occurring ever since, creating even more negative impression about the country being fraught with disasters.
Other issues that Indonesia has to rectify include the complex labor issues and a lack of legal assurance. Foreign investors have begun pulling out of Bintan Island inRiau Islands, the closest border to Singapore. Bintan Island has the province’s second biggest industrial park after Batam Island. Two investors, one from Singaporeand the other from Italy, had left the area in the past two months. Of the 30 foreign investors registered as tenants in the Lobam Industrial Area, an economic zone resulting from cooperation between Indonesia, Singapore and Malaysia, which spans 325 hectares and has investments totaling US$1 billion, at least six were set to end operations there this year.
"The government has issued regulations that have often caused difficulties for investors to estimate production costs, which will then have a strong impact on their competitiveness in the international market," said Jamin Hidayat, Managing Director of Bintan’s Lobam Industrial Area. He added that if the government was slow in responding to the matter, the fate of some 15,000 workers in the industrial area would be at stake.
The government is expected to be consistent in implementing regulations. Better coordination between central and local governments is crucial and both have to work hand in hand to improve the investment climate.
US still question Papua issue, investment climate – Envoy (Antara, 2 March 2007)
Decline in foreign investment due to "bad luck": presidential spokesman (Antara, 16 November 2006)
Foreign investors fleeing Bintan (The Jakarta Post, 5 March 2007)
A number of disasters dampen Kuwaiti investors interest in RI (The Jakarta Post, 27 February 2007)