Killing the Goose
Regencies and cities, which lack resources -- or the capacity to capitalize on them -- should not despair when it comes to attracting private investment, because investors consider policy variables to be very important factors that influence their decisions to set up business in a regency or town.
Policy variables, which include institutional capacity (legal certainty, policy consistency and predictability, government services and local regulations) and socio-political factors, carry more weight than physical infrastructure, labor supply, worker productivity and the structure and potential of the local economy, as factors considered by investors in choosing the location for their businesses.
That is one of the main findings of a comprehensive survey of more than 5,000 businesspeople in 214 regencies and towns across 29 provinces conducted by the Regional Autonomy Watch (PPOD) last year as a means to determining attractiveness of regions to investors.
The survey, funded and inspired by the Asia Foundation and United States Agency for International Development, confirmed the conclusions of similar business-perception studies conducted by foreign chambers of commerce and several business consulting agencies in Indonesia.
The survey, the fourth annual by the PPOD, could eventually be developed into a rating of investment risks in the regencies and municipalities to pressure local administrations to improve the general business climate in their areas.
Such a rating is quite important for local administrations intending to raise funds by floating municipal bonds. In fact, after the implementation of local autonomy in 2001, it is no longer sufficient for investors, notably foreign ones, to assess the country (Indonesia) risks, but also province and regency risks when deciding on a site for their businesses.
Indeed, strong law enforcement to minimize government policy- related costs and risks like those regarding regulations on taxation, customs and autonomy have always been high on the list of grievances that both domestic and foreign investors have had about the investment climate in the country.
The survey, for example, rated Indramayu regency in West Java the best in terms of institutional capacity, because the local administration has expedited investment/business licensing under a one-stop service center at the sub-district level.
The central government has tried to establish a one-stop service center for investment licensing, since the 1980s, at the Investment Coordinating Board, but it has failed -- apparently due to bureaucratic jealousy.
Interministerial coordination has long been the weakest point of the government, not only because bureaucrats from different agencies refuse to give up control. Within the perspective of the public administration, which has been perceived to be one of the most corrupt in the world, licensing authority means "lots of cash" for officials.
Businesspeople have praised the pro-business attitude of the Indramayu administration and its consistent policy of encouraging the public's participation in the formulation of local regulations (bylaws).
Pro-business policies should indeed top the economic programs of local administration because it is investors (businesspeople) who create jobs, which in turn generate purchasing power to spur consumer demand for various goods and services.
Vice President Jusuf Kalla, who is an experienced businessman in his own right, commented on the survey's conclusions. He said that local administrations should be long-term oriented in their economic policies must quit such short-term endeavors, like manufactured taxes and fees for businesspeople, to raise as much cash as possible.
Many businesspeople have complained about absurd and disturbing regulations issued by local administrations in an overly zealous bid to raise as much local revenues as possible without realizing that this rent-seeking attitude will sooner or later kill the goose that lays the golden eggs. The central government has revoked many regional bylaws, which contravened national laws but narrow-minded administrations in several regencies or municipalities still prefer to squeeze businesspeople to fulfill their fiscal needs and wants.
The business survey also reiterated the need for the central government to further expedite investment licensing by decentralizing the licensing authority from the Investment Coordinating Board in Jakarta to provincial and regency administrations.
The central government only needs to set national standards such as those on environmental requirements and national directives on the business areas closed to private investors, whether domestic or foreign.