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ndra Darmawan, a director at the Investment Coordinating Board (BKPM), seemed to be quite bullish about the impact of tax incentive programs that were expanded late last month to almost 130 other business sectors, expecting over US$31 billion in new domestic and foreign direct investment approvals this year.

The additional incentive consists of a tax allowance that allows companies to reduce their taxable income up to 30 percent of their total investment, carried over six years, to accelerate depreciation and amortization and carry forward losses over five to 10 years.

This facility is much smaller and limited than the previous incentive package of a tax holiday between five to 10 years and a tax allowance launched last August especially for large projects in base metals, oil refining, petrochemicals, machine tools and renewable energy with a minimum investment of about US$117 million.

Though only in the form of tax allowance, the impact of this additional tax incentive, notably on job creation, would still be quite positive because of the broad range of industrial sectors it covers, mostly in downstream operations.

The government though should see to it that the joint team of the BKPM and the ministries of finance and industry in charge of assessing proposals for the tax incentives will not become bogged down in bureaucratic quagmire. The evaluation process should be entirely transparent and should be completed within a clearly set schedule.

 However, in so far as direct investment is concerned, the government, especially the BKPM, which is responsible for promoting investment, is well advised to realize that tax incentives never top the list of factors considered by investors in selecting the sites of their businesses. After all, companies pay income tax only when they make profits.

In addition to political and macroeconomic stability, good governance in the public sector (meaning legal certainty, efficient tax administration, customs services, licensing bureaucracy, policy certainty and consistency and adequate infrastructure) is even more important for investors than tax incentives.

The impact of tax holidays and tax allowances would be negligible if the qualities of the main components of good governance in the public sector do not reach the minimum condition seen by investors as a prerequisite for business operations.

Unfortunately we perform quite poorly compared to other ASEAN countries. In the sector of good governance, we gained 121st position among the 183 countries rated last year by the World Bank for the quality of their business climates.

We do even worse in the sector of basic infrastructure. The acute lack of basic infrastructure and the crumbling condition of existing infrastructure have become the biggest barrier now to new investment.

The government has made many improvements to woo investments in infrastructure, strengthening the legal framework, setting up financial institutions to meet the specific needs of infrastructure investors and setting up institutional arrangements for the sharing of investment risks between the government and the private sector.

Last month the parliament approved the long-awaited law on land acquisition for infrastructure development. It will nevertheless take a few more months to complete all the implementing regulations as directives for the enforcement of the law.

But all this is simply the first, albeit very good, step of the many concerted efforts needed to make our investment climate highly competitive with others in the region.