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Outward Bound

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The reality of business in Indonesia has always been one of change for the foreign investor. The Government of Indonesia, especially during the New Order era, has had a tendency to introduce wide-ranging changes in law and policy at fairly regular intervals. Especially since the landmark deregulation packages of the late 1980's, it has been possible to wake up in the morning to face a slew of new laws and regulations that the government issued overnight, usually after strenuously denying that any changes would take place.

The Reformation Government will probably have fewer surprises in store, mostly because of the increasing power of the DPR and the uncertain reaction of the people to perceived arbitrary acts.

One area that will definitely be changing though is the relationship between the central government and the various provinces of Indonesia. However it is termed -Decentralization, Regional Autonomy, or Provincial Empowerment-the rights of the people of the provinces to have a say in their future and a share in the wealth is a genie that is already out of the bottle. How the central government will address the autonomy issue is far from certain, however.

This does not necessarily mean an increase in separatist movements of the kind seen in Aceh and Papua, though this danger exists. It does mean that most foreign companies will need to develop a wider view of Indonesia than the one centered on Jakarta.

That will be a change indeed. For most of the last 50 years, foreign firms had to have a significant presence in Jakarta regardless of where their actual operations were located. Jakarta ruled. Decisions on licensing and contracts of work were made in the capital, and if a company had any hope of influencing these decisions, it was in Jakarta.

In the future, for all but a limited number of international companies with specialized activities, many important decisions will be made and opportunities found outside Jakarta, mostly in the provincial capitals but also at the lower, Bupati, or regency levels.

Contracts of work, licenses for construction, exploration, production, and almost all other new investment will need the approval of the local government. Optimists might say that this could simplify things for the companies involved. Optimists are often less than well informed.

The government of Indonesia also seems to want foreign companies to do more than be involved with the provincial governments. There have been several statements lately of desire for a new role for foreign companies in the development of Indonesia. Personages such as Laksamana Sukardi and Freddy Numberi have voiced their views of future foreign investment.

Laksamana Sukardi, State Minister of Investment and State Enterprises Development, recently said that foreign investors will also be required to bear social responsibility: to protect the environment in their operations, to respect human and labor rights, and to uphold good corporate governance in their operations.

Freddy Numberi, Governor of Irian Jaya Province (now Papua) and State Minister for Administrative Reforms, also has described the role of foreign investors in the provinces. He said that there must be a change from the New Order ways and that the foreign investors' obligation was to be a partner with the local community, stressing equality and technical transfer, of course, but also encouraging the People's Participation. He emphasized that the human touch will be more important in the future, including promotion for the indigenous people working in a company and also the education and increasing welfare of the local people. A foreign company's obligation in the provinces would be to provide a better life to people inside and outside of their companies.

This is paraphrasing the ministers, but the sense is one of a desire for a further commitment on the part of business to do more for the people in the specific locality where they operate.

Investing in social welfare programs has always been good advice and many companies already have programs in place to help local populations. However, in the future, this may probably change from being good advice to being an intrinsic part of your company's ability to do business in Indonesia.

No one, including the Indonesian government, understands how the shift to regional autonomy is going to work. There are a few assumptions that can be made, however.

1) The Indonesian bureaucrat in a provincial government or regency office in charge of granting licenses is probably not as well educated, experienced, or sophisticated as his or her counterpart in Jakarta.

2) The ingrained non-budgetary income mentality of provincial officials will not change because of any planned increase in government salaries.

3) Ethnocentrism, racism, and xenophobia are more deeply entrenched in rural areas than in urban centers.

4) Local populations generally believe that they have a prior and perhaps inalienable claim to the land and its resources regardless of Indonesian law. These populations will have to be convinced that a foreign company is an active member of the community with them in the development of the land or resources.

Without accommodating the realities of operating outside Jakarta, foreign investment will encounter a host of problems that they do not want. Companies are already enduring forced labor strikes where the local authorities are unable or unwilling to intervene. There are numerous instances of local peoples attempting to reacquire or reoccupy lands they feel were unjustly taken. Blockades of factory or hotel access, intimidation of employees, requests for money or other compensation based on a company's proximity, violent reaction to perceived environmental damage, forceful requests for mass employment opportunities are all experienced regularly by companies already operating in the outer provinces.

Although the central government was very strong under the New Order and made many praise-worthy achievements in bettering the lives of the people nation-wide, most rural areas still require substantial upgrading in basic infrastructure. It seems clear that many government officials in Jakarta would like to see business in the provinces assume some or all of the that normal function of government.

Any foreign company now operating or planning to operate outside Jakarta will be well advised to have a plan for establishing a local relations office. This is especially true if operations are outside of the urban centers. A fund should be set up to provide for the on-going betterment of the people around your operation. Regardless of whether yours is a major mining company, a resort hotel, or a small representative office, a visible contribution is required.

Small offices may only contribute rice or goods to the local mosque. Larger operations may have a local hiring and training program. Major operations may set up health, education, and welfare institutes.

The effect of the regional autonomy is problematic. What you can be sure of is that the landscape of business in Indonesia is in change again and foreign investors need to be seen as actively contributing to and being a part of the local communities in which they operate.

This article was generously contributed by George B. Whitfield, III when he was a Technical Advisor with Executive Orientation Services.

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