Indonesia needs to show it is serious about protecting investors and reforming its laws if it wants to turn around declining investment and achieve growth comparable to its neighbours, the World Bank said on Tuesday.
Political uncertainty over this year's parliamentary and presidential polls, bomb blasts and insurgency have been less a factor in frightening off funds than a lack of evidence of a clear path to improving the investment climate, the bank said.
"Personally I believe investment will rise in the coming months (once the elections are over) but unless further actions are taken it still will not rise to a level that is required to get Indonesia growing at the rate it needs to grow," bank country director Andrew Steer said in an interview.
"There are other worrying signs too. The composition of investment seems to be more directed toward real estate and consumption driven investment, and obviously we need to see more investment in productive plants that will generate growth."
Indonesia's foreign direct investment approvals fell to $2.3 billion in the first four months of 2004, from $3.3 billion in the same period last year, according to data on Tuesday from the state investment agency.
And World Bank figures show investment, measured by gross fixed capital formation as a share of GDP, declined to 19.7 percent or 352 trillion rupiah ($39.06 billion) last year, from 20.3 percent in 2002.
"Investment still is stuck. At the time of the (1997/98 Asian economic) crisis, investment fell from 30 percent of GDP to 20 percent and has gone nowhere since," Steer said.
"Indonesia really ought to be thinking of a rate of 30 percent if it's going to reduce poverty and become a competitive nation. Getting to 30 percent requires additional measures."
Comparing Indonesia to Vietnam, where investment is growing much faster, Steer said the government needed to demonstrate that it had mapped out a clear path.
"The truth is it will take 10 years to create a legal system that is truly trustworthy. But it is a mistake to say investment won't respond for 10 years," Steer said.
"You could make the case that Vietnam has a weaker system than Indonesia and certainly no more transparent," he said.
"If you ask the question, 'Are you confident that 10 years from now that Vietnam will have a good legal system?', investors are actually more likely to say yes. If you ask the question here, they say we haven't been given any such assurance yet."
An Indonesian court sparked fresh concern last month by declaring a unit of Prudential Plc bankrupt after a petition from a former consultant.
Britain's second-biggest insurer said the unit was solvent and has appealed the ruling, which revived memories of a similar case in 2002 involving the unit of a major Canadian insurer.
Steer said the Prudential case demonstrated the need for a clear bankruptcy law.
"It argues for a modern bankruptcy law. There are amendments in parliament. It's a great pity that parliament hasn't made decisions and we would urge that be done immediately as a sign there is a seriousness here," Steer said.
The easiest way to get the private sector to invest large sums of money in Indonesia would be through infrastructure, he said.
As the world's fourth most populous country, Indonesia has huge infrastructure needs and Steer said the private sector would be willing to bring money in but areas such as road tolls and utility tariffs needed to be set by the market, not the authorities.