Confusing policy signals
It appears rather strange that at a time when Indonesia is poised to become a regional leader in Asia and a global economic player through its membership of the prestigious Group of 20 major economies (G20) the country has been grappling with a mounting wave of nationalistic concern over the stronger foreign dominance of its economy.
So strong has been the nationalistic sentiment that President Susilo Bambang Yudhoyono felt it necessary to assert on Wednesday that the government was now reviewing foreign investment contracts and mining concessions seen as unfair and even harmful to Indonesian national interests.
Yudhoyono said that if any of these contracts were evaluated as completely unfair or having been made in a bad faith to Indonesian interests, there should be room for renegotiation for contractual amendments without breaching the sanctity of contracts.
The remarks, made by the President at the State Palace after receiving the annual audit report on the government’s performance from the Supreme Audit Agency, could convey a confusing policy signal to foreign investors.
We reckon the role of foreign investors in this country has resurfaced as a hot topic of public debate after Indonesia’s largest newspaper, Kompas, in the last week of May headlined for several consecutive days stories on the increasing dominance of foreign investors in the economy, notably in mining, oil palm plantations and banking.
Kompas reported that foreigners controlled more than half of the banking industry in terms of assets, 75 percent of the oil and gas mining industry and around half of the estimated 9.5 million hectares of palm oil estates.
But since the articles neglected to provide thorough background information and circumstantial factors that have accompanied the seemingly astronomical expansion of foreign investment, they could unintentionally whip up inordinately negative sentiment toward foreign investment and trigger a public outcry against the government for being “too liberal” in regard to foreign investors.
To our knowledge, the expanding role of foreign investors in several sectors of our economy has simply followed the opportunities provided by our laws.
Take, for example, the hydrocarbon industry. Since the petroleum sector is highly risky and requires huge investment and sophisticated, high technology, not many national companies are financially and technically capable of operating in this area. Moreover, virtually none of the national banks is willing to lend to such highly risky business.
Look how in the second half of last year the government auctioned through competitive bidding 17 new oil and gas blocks. But only three of them were taken up by oil contractors and all of them were foreign oil companies.
The rapidly expanding role of foreign banks and foreign investors in the banking industry was the result of our banking crisis in 1997-1998 when the government nationalized all major private banks and recapitalized all state banks. But when the government resold the nationalized banks, most of the winners in the competitive bidding were foreign investors or foreign banks.
Likewise, the massive increase in foreign ownership of oil palm estates took place in 2002 when Malaysian companies won, through competitive bids, hundreds of thousands hectares of plantations that the government auctioned as distressed assets taken over from the Salim business group as part of its debt payment to the government.
The government should tread the policy tightrope very carefully in balancing the interests of foreign investors and nationalistic business groups averse to foreigners expanding their role in various industries.
Investment or mining contracts, unless they breach the laws, can be changed only through amendments of the laws, and even these changes should allow for an adequate transition period.
So strong has been the nationalistic sentiment that President Susilo Bambang Yudhoyono felt it necessary to assert on Wednesday that the government was now reviewing foreign investment contracts and mining concessions seen as unfair and even harmful to Indonesian national interests.
Yudhoyono said that if any of these contracts were evaluated as completely unfair or having been made in a bad faith to Indonesian interests, there should be room for renegotiation for contractual amendments without breaching the sanctity of contracts.
The remarks, made by the President at the State Palace after receiving the annual audit report on the government’s performance from the Supreme Audit Agency, could convey a confusing policy signal to foreign investors.
We reckon the role of foreign investors in this country has resurfaced as a hot topic of public debate after Indonesia’s largest newspaper, Kompas, in the last week of May headlined for several consecutive days stories on the increasing dominance of foreign investors in the economy, notably in mining, oil palm plantations and banking.
Kompas reported that foreigners controlled more than half of the banking industry in terms of assets, 75 percent of the oil and gas mining industry and around half of the estimated 9.5 million hectares of palm oil estates.
But since the articles neglected to provide thorough background information and circumstantial factors that have accompanied the seemingly astronomical expansion of foreign investment, they could unintentionally whip up inordinately negative sentiment toward foreign investment and trigger a public outcry against the government for being “too liberal” in regard to foreign investors.
To our knowledge, the expanding role of foreign investors in several sectors of our economy has simply followed the opportunities provided by our laws.
Take, for example, the hydrocarbon industry. Since the petroleum sector is highly risky and requires huge investment and sophisticated, high technology, not many national companies are financially and technically capable of operating in this area. Moreover, virtually none of the national banks is willing to lend to such highly risky business.
Look how in the second half of last year the government auctioned through competitive bidding 17 new oil and gas blocks. But only three of them were taken up by oil contractors and all of them were foreign oil companies.
The rapidly expanding role of foreign banks and foreign investors in the banking industry was the result of our banking crisis in 1997-1998 when the government nationalized all major private banks and recapitalized all state banks. But when the government resold the nationalized banks, most of the winners in the competitive bidding were foreign investors or foreign banks.
Likewise, the massive increase in foreign ownership of oil palm estates took place in 2002 when Malaysian companies won, through competitive bids, hundreds of thousands hectares of plantations that the government auctioned as distressed assets taken over from the Salim business group as part of its debt payment to the government.
The government should tread the policy tightrope very carefully in balancing the interests of foreign investors and nationalistic business groups averse to foreigners expanding their role in various industries.
Investment or mining contracts, unless they breach the laws, can be changed only through amendments of the laws, and even these changes should allow for an adequate transition period.
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