Bold new investment law

Bold new investment law

The new investment law that was approved by the House of Representatives on Thursday goes a long way toward addressing complaints often raised by foreign investors. But it does not sell the nation's resources to foreigners, as some civil society organizations here have alleged.

The law, in a bold way, gives equal legal status and equal treatment to both domestic and foreign investors, but that doesn't mean foreign and domestic investors are given the same business opportunities.

The legislation, which will replace the 1967 Foreign Investment Law and 1968 Domestic Investment Law, includes special provisions which require the government to reserve particular business fields exclusively for micro, small and medium-scale enterprises and cooperatives.

Other outstanding measures in the law that will most likely please both domestic and foreign investors are the stronger property rights granted to investors in specified areas: land cultivation titles of up to 95 years (now 35 years), building right to 80 years (now 30) and land-use title to 75 years (now 25).

These land titles do not constitute blank checks for domestic or foreign investors to exploit our resources because the rights are granted based on the fulfillment of strict requirements: The investment has a long gestation period, greatly contributes to strengthening economic competitiveness, does not need a large acreage of land and does not insult the public's perception of justice.

The new legislation also explicitly offers easier immigration procedures for obtaining residence permits and multiple entry visas. For example, investors are automatically entitled to a two-year residence permit, and this can be upgraded into a permanent residence permit after four consecutive years of stay in Indonesia.

The law grants tax incentives in the form of a reduction in the amount of taxable income, exemption or reduction of import duties and value added tax on capital goods, inputs and intermediate materials, accelerated depreciation and reduction in property tax burdens.

Similar to the 1967 Foreign Investment Law, the new legislation specifically protects investors from expropriation and guarantees them free repatriation of foreign investment capital and returns or dividends and salaries and wages of expatriate personnel.

The law promises a one-stop licensing and service center for investors. But if the government is really serious about expediting investment licensing, it must first review the cumbersome procedures and reassess the real purpose or merit of the dozens of permits an entrepreneur is required to obtain before starting up an investment venture.

Experience has shown that many of the permits imposed on investors have nothing to do with ensuring compliance with laws or government regulations. The government should be clear-cut about which of the existing permits can simply abolished, which can be delegated to private institutions with fiduciary responsibility, which must be issued by ministries in Jakarta and which are under the jurisdiction of local administrations.

Foreign investors will be especially pleased to know that, unlike the 1967 Foreign Investment Law, the new law does not require foreign investors to divest the majority of their shareholding after a specified period of time.

Like most other laws in the country, the effectiveness of the new investment law will still depend on implementation regulations, which will stipulate technical details of the law's provisions. This law requires at least four presidential regulations and dozens of ministerial decrees (rulings) to enforce its provisions.

But again, a good, strong investment law is only one of the prerequisites needed to woo investment. Investors will not change their negative sentiments towards Indonesia solely on the back of the new law as they will still judge how well the law is implemented. It is the interaction between policies and governance practices that investors assess before making the decision to plow their capital into the country.

Put another way, domestic and foreign investors are willing to stake their capital only when the general business climate meets the minimum degree of physical, legal and institutional infrastructure that allows for reasonable risk calculation.

Hence, the hardest part of the challenge to woo investment remains the same: strengthening law enforcement to minimize government policy-related costs and risks in taxation, customs, labor, mining, local autonomy and basic infrastructure.