Killing the Goose

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.