Excesses of regional autonomy hinder business

P. Agung Pambudhi, Jakarta

The recommendations of the Indonesian Chamber of Commerce and Industry (Kadin) to the new government on industrial and investment revitalization have strongly indicated that implementing regional autonomy is causing major obstacles to Indonesia's economic development.

The business community has so far argued that regional autonomy has negatively affected the investment climate. They say regional regulations have imposed costly levies on businesses and some regulations oblige the recruitment of local personnel and not qualified professionals. They have also pointed to weakened inter-regional cooperation, which they say has reduced economies of scale, and a lack of a single licensing authority, which has created business uncertainty.

Vice President Jusuf Kalla said effectively the same thing when he presented the 2004 Regional Autonomy Watch (KPPOD) Awards to the regions with the best record of attracting investment. Kalla warned the administrations against adopting policies to serve short-term interests by seeking maximum local revenue from businesses through levies.

A recent KPPOD study of 1,025 regional regulations found that 30 percent of these bylaws would lead to high-cost economies. This finding was validated by a business survey where 24 percent of 5,184 respondents in 214 regencies and cities complained about business distortions caused by the regulations.

The survey also revealed that businesses had to bear the burden of illegal fees from security forces, the courts, social organizations and mobsters, that were worth about 6.81 percent of total production costs. These extra costs were estimated to be even higher in another study undertaken by Transparency International.

Despite this gloomy picture, it should be acknowledged that some regions have made attempts to improve their investment climates. A one-stop service concept for business licensing has spread throughout different regions. While the quality of these services still varies, it is a development worth mentioning.

A number of regions can now reduce the time and costs needed to process business permits. In 15 regions the time taken for business licensing has been cut by 60 percent and costs by 30 percent on average.

While still limited, some regions have enhanced transparency in their institutions by publicizing balance sheets; something that has not yet been done by central government.

Several regions have also made breakthroughs in the provision of education and health services, giving free education and low- cost medical treatment to the poor.

It is quite apparent, however, that the negative impact of regional autonomy outweighs the positives. The question is, why has regional autonomy become such a negative?

Much of the blame should be laid on the regional administrations, which are regarded as weak in skilled human resources, who work to serve narrow, venal interests.

It is just as easy, however, to point the finger at the poor performance of central government, which is no better than that of the regions in dealing with regional issues. In legislation, the private sector has long lists of laws and government regulations that are not in synergy with each other, thus causing distortion to the investment climate.

Meanwhile, the rivalry between regions to impose questionable levies on businesses, is as much about the coordinating function of provincial administrations as extensions of the central government.

It may seem trite to bring up the well-worn phrase about the need for cooperation between government -- central and regional -- the private sector, and civil society to create a favorable investment climate. But while it is often said, it is also just as true now as it was before; nothing will be achieved without tripartite cooperation. More important is how each part of society should take part in this change.

Unsurprisingly, each of the economics ministers of the United Indonesia Cabinet have all on different occasions voiced the importance of this tripartite cooperation.

To achieve any synergies between these three elements, the key but most difficult stage is determining the common interests and areas of authority of the three groups.

The central government should not see itself as the only authority capable of handling regional affairs -- much of these authorities should be delegated to regional governments.

However, regional administrations with their new powers should not only be oriented to regional development in the narrow confines of their bureaucracies, but also in the context of the nation's territorial integrity.

For the private sector, it may be appropriate for it to support the broader role of regional administrations in investment because it is these groups that are more knowledgeable about the local conditions and the interests of local communities.

Assuming that the three parties accept Law No.32/2004, which revised Law No.22/1999 on regional administrations, it is imperative for the central government to initiate or revise business-related laws like the investment, trade and mining regulations.

However, the central government's most important function is to act as a good leader, by working to accommodate the different interests of the three groups -- something that will be no easy task.

The writer is executive director of the Regional Autonomy Watch group.