Indeed, there is much appeal, for this moderate Islamic country has done many things right. It has made the transition to a thriving democracy, battled for many years -- most successfully -- against extremists among its ranks, and created a friendly foreign investment climate. It has even led the way among developing countries in creating a best practice-based guarantee facility for investors -- the Indonesia Investment Guarantee Fund -- which was co-founded in conjunction with the World Bank. So Indonesia has made impressive progress in transforming itself from a dictatorship to a democracy, over little more than a decade, and has laid down a well worn 'welcome' mat for foreign investors.
Given this, it is easy for foreign investors to get carried away with Indonesia's many appeals. On one hand, the country has tremendous promise to become a truly significant player in regional affairs, and it is already one of Asia's most important economic forces. Yet if investors dig beneath the surface, there remain a variety of significant structural challenges that ought to give them pause. Indonesia ranks just 128th out of 185 countries in the World Bank's Doing Business rankings, ranking among the lowest in terms of starting a business (166th), resolving insolvencies (148th), getting electricity (147th), and enforcing contracts (144th). It also ranks poorly in terms of access to credit and paying taxes.
Why is this? Among the challenges associated with investing in Indonesia, corruption, a lack of transparency, and an inability to enforce contracts are the biggest concern to many. Transparency International ranks Indonesia 100th in its annual survey of 183 countries -- so not the worst -- but anyone familiar with the country knows it is a big problem, which plagues large and small foreign investors alike. President Yudhoyono has made fighting corruption one of the centerpieces of his two-term presidency, having created the Corruption Eradication Commission -- an honest attempt at tackling the problem. But even the president has had to deny corruption allegations, and corruption in the judiciary has been the subject of some legendary stories of blatant graft. The absence of regulatory transparency, and the strength of cronyism and nepotism, continue to be areas of great concern, the most recent high-profile example being that of Churchill Mining's difficulties with a coal project in Borneo.
A survey completed last year by Canada's Fraser Institute, which included 800 mining-related companies, ranked Indonesia in the top ten in terms of mineral potential, but in the bottom 10 in terms of its 'policy potential index', which measures the effect of government policies on exploration. The rich and powerful are preventing the government from successfully implementing policies that would enable it to more effectively liberalize the mining sector. Nationalism is also a contributing factor. The mining sector, in particular, has been the subject of increasingly nationalistic rhetoric among politicians. Indonesia has imposed greater restrictions on foreign ownership of mines, and has forcibly renegotiated royalty rates with foreign investors.
Beyond this, the threat of terrorism is once again rearing its head. The arrest over the past week of nearly a dozen men who intended to attack the U.S. Embassy in Jakarta, the U.S. consulate in Surabaya, and an office of Freeport-McMoRan point to lingering concern about the potential impact extremists can have on foreign interests in the country. al Qaeda's franchise in Southeast Asia, Jemaah Islamiyah, was thought to have been eradicated, but now appears to be alive and well, given these individuals' links with JI. Other attempts at terrorism in Indonesia have been discovered this year, so the terrorist threat has been resurrected. The government deserves credit for having stopped these attacks before they could be carried out, but the impression that is left is that terrorism will remain an influence in the Indonesian landscape for some time to come.
So what does all this mean for foreign investors? It simply means that Indonesia has made good progress, but has a considerable way to go before it can truly be considered a preferred investment destination. Dust off those rose colored glasses and take a good hard look at Indonesia before you invest there. Many long-time foreign investors will tell you it takes a good amount of patience, fortitude and perseverance to be successful investing in Indonesia. In fairness, this can be said of many other emerging markets -- and even of the BRIC countries. My concern is that in the rush to grab a piece of the pie, foreign investors who are new to Indonesia will not appreciate the plethora of challenges -- which make it unique -- nor what is truly required to be successful there.
Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk management consultancy, and author of "Managing Country Risk." This report was written while on assignment in Vietnam