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Indonesia’s attempts to attract foreign investment took a major leap forward in December when the House of Representatives passed long-awaited land reform legislation. Disputes over land ownership have long been one of the major impediments for improving Indonesia’s grossly inadequate infrastructure — a reality that threatens the country’s future growth.

The sentiment for years, from the World Bank and others, has been that the country’s weak infrastructure is impeding flows within key energy and transport arteries crucial to the health of the nation’s economy.

How did it come to this? How is it that the potential of a 240 million-strong population blessed with abundant natural resources might fall short? While the answer is multifaceted, the bulk of culpability can be attributed to the maturing state of Indonesia’s governance culture and identity.

Since the fall of Suharto’s decades-long dictatorship in 1998, political stability in the so-called Reformasi period has greatly improved, the nation’s institutions have witnessed modernization (albeit with varying degrees of success) and the middle class has slowly gained better opportunities to grow and prosper. Encouragingly, Indonesia has been on a steady path of economic and political development characteristic of newly democratized nations.

The numbers speak for themselves. Indonesia’s economy has grown by an average of 5 percent to 6 percent annually in the past decade and is projected to maintain that growth in 2012. Exports have more than doubled since 2005, fueled largely by the global commodities boom, while industrial production has averaged 2.55 percent since the late 1990s, expanding to 10.1 percent in 2011.

For Jim O’Neill, the chairman of Goldman Sachs Asset Management and the person most associated with identifying the BRICs (Brazil, Russia, India and China) as crucial actors in the global political economy, a growth economy is a country with rising productivity backed up by favorable demographics. This combination will allow a country to grow enough to outpace average global economic growth.

This constitutes an economy that accounts for at least 1 percent of current global GDP and therefore includes the BRICs, Indonesia, Mexico, South Korea, and Turkey. In addition to attracting status as a growth economy, the upgrading of Indonesia’s sovereign debt to investment grade in December was also a welcome development that is expected to improve investor sentiment and boost capital flows.

However, macro-level developments generally reveal little of the internal problems that have the potential to cripple essential investment projects by years and ultimately stall growth. Despite the policy efforts of the World Bank, the International Monetary Fund and the Asian Development Bank to minimize perceived risks to capital, in the immediate years following the Asian financial crisis of 1997-98, bureaucratic inertia in Indonesia was prevalent. The multilateral push for institutional reform following the crisis was admirable if also a little shortsighted.

There are two distinct reasons why one-size-fits-all policy frameworks often fail in transitioning and emerging (“growth”) economies, especially in newly democratized countries such as Indonesia.

First, the institutional apparatus, capacities and functional requirements to successfully implement and operate efficient regulatory and policy models are often lacking. The transformation from an elite-based, centralized power structure to a pluralist and more diffuse administrative system requires more than just copycatting a successful policy model from OECD countries.

Second, and equally important, countries with both a colonial and a long-running dictatorial past often have antiquated laws and rules that constitute an impediment for essential structural reforms.

The recently passed land reform legislation addresses the latter by altering land ownership rights in Indonesia. Since the 1960 land reform, landowners have been protected by laws that prevent the government from forcing land sales on public good grounds for infrastructure projects. The new law changes that. In doing so it forces a speedier land acquisition process and guarantees a fairer sale price for landowners, thus facilitating the roll-out of highway construction and other crucial land-dependent infrastructure projects. At the heart of the legislation, and a key measure that enabled the passing of the bill, is the establishment of a special committee to determine the land prices on a case-by-case basis.

The bill also allows landowners to seek judicial review in court should they disagree with the committee valuation of their land. This remains the Achilles’ heel of the new legislation. If the bill doesn’t set certain determinate powers for the special committee to settle the pricing, land disputes have the potential to drag on for years given Indonesia’s notoriously inefficient legal system. More worryingly, the setting up of a committee for land prices echoes the usual veneer of democratic governance and “public accountability” theatrics in Indonesia, that are just that – theater – as real accountability is loudly absent.

Indeed, the pertinent question marks in the bill are the accountability and decision-making mechanisms attached to it. On what grounds will the committee members be chosen and to whom will the committee be accountable? The success of the committee in setting fair prices for landowners and of the legislation itself is much dependent on these questions, no doubt given the level of corruption and poor judicial review in Indonesia. Let’s not forget that Indonesia ranks 100th on Transparency International’s Corruption Perceptions Index for 2011.

Implementation of the legislation is equally troublesome. The Indonesian government has a track record of designing grandly, yet falling short on delivery. For foreign investors then, the maturing institutional structure with imprecise and sometimes opaque accountability mechanisms constitutes a high degree of risk irrespective of the industrial sector. In essence, the stability of the policy environment is low while the probability of frequent regulatory changes remains high.

By and large, the typology of Indonesia’s incipient regulatory culture inhibits a lower-risk investment environment despite the recent legislative progress. The government needs to strengthen formal institutions by significantly improving their resources and technical, administrative and analytical capacities, while increasing their independence.

Improved procedural clarity combined with judicial efficiency can also help Indonesia gain investor confidence and facilitate infrastructure development further. Without these crucial reform measures, the road to the BRICs club may be just a bit rockier.

Mika Purra is the founder and managing director of StraitsGlobal, a Singapore-based risk management and research consultancy.