Who Benefits from Foreign Investments?

After our founding fathers succeeded in achieving Indonesian independence, the determination was to build the Indonesian economy.

Sukarno (Bung Karno) and his generation set up the nation-state within 25 years, after undergoing various upheavals and struggles such as the Dutch insistence on reoccupying West Irian, the rebellions waged by the Indonesian Communist Party, the groups of the South Moluccan Republic (RMS), the Revolutionary Government of the Indonesian Republic (PRRI Permesta) and other uprisings. With all its limitations, by the end of its rule, the government of Bung Karno, referred to as the Old Order, succeeded in establishing the Unitary State of the Republic of Indonesia, in which we have lived up to the present.

It was the call of history and the constitution that led Soeharto (Pak Harto) and his generation to focus their attention on economic development. However, it is most regrettable that those enjoying their development policies for 32 years were not the Indonesian people according to justice as mandated by the Constitution of 1945.

Also read:

> New Phase in National Electric Car Industry

> Indonesia Ready to Become Player in Electric Vehicle Supply Chain

Economic development requires investments and investments need capital, which the Indonesian nation is still lacking. So, foreign investors and Indonesian private investors are invited to participate with various facilities.

One of the first foreign investors entering Indonesia was a very large foreign bank with branches all over the world.

But the bank was not allowed to operate before its operational license was issued.

This bank came from the United States and brought with it its big name. When it intended to open a branch in Indonesia, it was required to pay equity capital along with its application, which was deposited in state-owned banks with an interest rate of around 24 percent per year. But the bank was not allowed to operate before its operational license was issued.

Owing to the weak bureaucracy, the operational license finally issued two years later. Consequently, while awaiting the license, the bank had already enjoyed 48 percent interest.

As we can see, the debt-to-equity (D/E) ratio for the bank was very high. The high D/E ratio was inherent in the bank because the capital operated by the bank was the money that Indonesian people had deposited in it.

A foreign bank with a big name won more trust than the domestic banks. The bank therefore, received transfers, savings and deposits from the Indonesian public with interest as compensation. The money of the Indonesian people accumulating in the foreign bank was lent at a higher credit rate and the difference led to a gross profit for the bank, called “a spread”.

What happened at that time was the greatest portion of credits went to foreign companies rather than local firms. What does all this mean? The foreign bank was set up with equity capital, 50 percent of which was provided by the government in the form of an annual interest of 24 percent pending the granting of the operational license, which took two years to process.

KOMPAS/AGUS SUSANTO

Aerial photo of the Jakarta-Bandung High Speed Train (KCJB) project at the Cikunir Interchange, Bekasi City, West Java, Sunday (11/14/2021). The maker of the Jakarta-Bandung high-speed train PT Kereta Cepat Indonesia China has opened negotiations with the China Development Bank (CDB) in an effort to obtain additional loans.

When it began operating, the very famous foreign bank, most trusted by the Indonesian public, was flooded with deposits. If the D/E ratio was 90 percent, the foreign bank’s owner only paid 5 percent of the whole capital needed. Later the bank was overwhelmed by Indonesian transfers, savings and deposits, the largest portion of which were given to foreign companies operating in Indonesia.

I once experienced this when I was engaged in business as a sole agent of Graetz and ITT color televisions. I got credit from a European bank with a branch in Indonesia. All payments and reports were smooth, yet unexpectedly, the bank ceased the credit facilities for me with the reason that its funds were needed to grant credits to German companies operating in Jakarta.

Also read:

> The Burden of National Debts

> The Pandemic and the Debt Burden

Such a situation more or less still prevails in Indonesia today. So, if we invite foreign investments, we need to realize this situation and the government needs to employ key financial analysts. Foreign investments in other areas are also persuaded to enter Indonesia with various enticements and facilities, mostly working with credits from banks in Indonesia derived from the deposits of Indonesian people in different forms.

Indulged in euphoria

So what benefits are enjoyed by the Indonesian nation? These have always been touted are employment, taxes and technology transfer.

Yet in the case of employment, the fact is that companies in the future will be leading toward using information technology, artificial intelligence, robots and the like to replace manpower.

In terms of taxes, the policy adopted by the government also continues to relieve the tax burden imposed on foreign investors as bait to prompt them to enter the market. This is done by lowering various tax rates, canceling the sales tax on luxury goods (PPnBM) and offering many other facilities.

As a broad illustration, the sales of the relevant corporation are divided into components of the cost price.

In order to ascertain who receives how much percentage, we can examine the balance sheet and profit and loss statements with strict analysis. As a broad illustration, the sales of the relevant corporation are divided into components of the cost price.

The results show that the percentage that falls into the hands of Indonesian workers, the percentage that covers taxes and so forth to reach the net profit, is low, benefitting the business owner in the form dividends or retained earnings.

Also read:

> Deficit Widens, Debt Increases

> Investment and Regulatory Certainty

As an example, let me give a broad analysis of a company, PT Unilever Indonesia (all figures are multiplied by Rp 1 million). In 2020, its sales totaled Rp 42.972 trillion (US$3.01 billion). Of the sales, the benefits for Indonesia comprised the manpower cost worth Rp 2.086 trillion totaling 5 percent, taxes worth Rp 2.043 trillion totaling 5 percent, while the net profit was Rp 71.635 trillion totaling 17 percent.

KOMPAS/RADITYA HELABUMI

An officer shows US dollar bills at Bank Mandiri, Jakarta, Thursday (19/8/2021). Since trading earlier this week, the exchange rate of the US dollar against the rupiah has continued to strengthen.

What does it mean? The investment by Unilever Indonesia brought only 5 percent of its total sales to benefit to its workers from sales. Tax receipts were also only 5 percent, whereas the net profit enjoyed by its owners or shareholders was 17 percent.

Other advantage

As already described above, foreign companies generally operate with bank credits and bank funds provided through credits or loan capital coming from Indonesians’ transfers, savings and deposits. Yet in the case of Unilever Indonesia, Indonesian workers and the state treasury respectively only received 5 percent from their sales.

PT Unilever Indonesia only serves as an illustration of what can happen with foreign investments in Indonesia, and this example applies more or less to foreign investments in general. Does it mean that we should ban foreign investors from making investments in Indonesia?

Of course not! This article is intended to make us smarter in calculating and negotiating with foreign investors so the sharing of benefits between them and the Indonesian nation is fair. To this end, a team of experts which is truly competent in corporate economics is needed, especially with proficiency in analyzing the balance sheet and profit and loss statements of major foreign and private companies.

Public goods and services

The government has the duty of supplying public goods and services used by the people for free. This is the reason why we once recognized statutory bodies called state companies (perum) and state-owned limited liability company (persero).

In the Reform Era, perum were abolished, incorporated with state-owned enterprises with profit-making orientation.

Perum could incur losses as they aimed to provide basic goods and services for the people as taxpayers. Persero are companies with 100 percent shares owned by the government, with the permission to run for profit. In the Reform Era, perum were abolished, incorporated with state-owned enterprises with profit-making orientation.

As a picture, let us take the thoroughfare—which in many countries we know as “capitalist nations” are called the freeway, highway, Autobahn, snelweg and so on. There is no “toll” because such roads are used without payments.

In Indonesia, freeway investments are left to the private sector with the motive of profit making. Toll roads constitute a natural monopoly because the space provided for the roads is monopolistic in nature.

KOMPAS/RADITYA HELABUMI

The atmosphere of traffic was quiet on Jalan Sudirman, Jakarta, during the implementation of restrictions on emergency community activities which had entered the second week, Monday (12/7/2021).

Such matters deserve our deeper reflection to bring our economy closer to the soul and spirit of the Pancasila state philosophy.

Kwik Kian Gie, Coordinating Economic minister 1999-2000 and National Development Planning minister/Head of the National Development Planning Agency 2001-2004

(This article was translated by Aris Prawira).