Regions make decentralization programs work

William Frej, Indonesia Mission Director, United States Agency for International Development (USAID), Jakarta

This article was condensed from a speech made by the writer at the annual ceremony awarding the most attractive regencies and municipalities to investors in Jakarta last week.

The award is based on the results of the annual survey conducted by the Regional Autonomy Watch (KPPOD) which last year ranked 200 regencies and cities in terms of their investment climate. The 2003 survey ranked the Batam and Purwakarta regencies as the most attractive destinations for investment.

Through its partnership with the Asia Foundation, USAID has supported the annual survey by KPPOD since 2001 as an important initiative to review the performance of local autonomy from the perspective of the private sector (investors).

Following the fall of Soeharto and the financial crisis of 1997, Indonesia entered a new era in the country's development. As an important component of the reform and reconstruction process, Indonesia embarked on what is arguably the most expansive and rapid decentralization process that the world has ever witnessed. Decentralization has created both significant challenges as well as opportunities, and KKPOD's annual ranking exercise is a valuable contribution to ensuring that in both the short and long-term, decentralization will be a positive development to Indonesia's economic growth.

While Indonesia's economy has stabilized since the financial crisis in 1997, the recovery has not been accompanied by economic growth rates and job creation rates, necessary to lift over 140 million Indonesians who live on less than $2 a day out of poverty. Perceptions of red tape, corruption, and security issues continue to keep investors and their capital away from Indonesia, making it even harder for Indonesia to fully recover.

The decentralization process itself has added to the confusion, as many of the laws and regulations are incomplete or conflicting, creating a totally new operating environment for the business community. To support regional autonomy, local governments have been given greater authority to establish local taxes and charges in order to generate local revenues -- this too has created both a perceived and real burden on the private sector.

This is not to say that the situation is all bad, as I noted before -- decentralization has created both challenges and opportunities.

Regional autonomy begun in 2001 has empowered local governments with new responsibilities for service provision and new rights to create regulations. It brings government closer to the people and allows Indonesia's citizens to experience democracy in a tangible way. Regional autonomy also creates opportunities for forward-thinking local governments to develop a business environment marked by streamlined regulation, appropriate infrastructure, and efficient government services. We are here today to applaud the efforts of the many local governments moving in this direction.

At the same time, these rankings sound a cautionary note. If local governments abuse their new powers and are not accountable or transparent in their operations, then the result will be a worsening of the business environment. As an example, short- sighted local governments could institute distortionary policies inhibiting domestic trade which in turn, increases the cost of doing business, making it harder rather than easier to invest. This innovative KPPOD survey highlights the good, the bad, and the ugly; and puts the "kota" (municipality) and "kabupaten" (regency) in a competitive situation which is the reality of our globalized economy -- those that are ranked poorly should not dismiss the results but should be pay close attention to enhance their competitiveness in future years.

It is simply not feasible for local governments to rely solely on the budget and their own source revenues to make the necessary investments in infrastructure, human resources, and social welfare programs that are needed to fully realize local potential. It is imperative that local governments support and work with the private sector and develop sound policies and practices that will facilitate and encourage private sector investment.

There are already numerous examples where local governments have taken the initiative to improve the business environment, particularly for small and medium enterprises which are a main source of employment throughout Indonesia. Four local governments, with support from The Asia Foundation, streamlined the licensing and registration process for small businesses.

By eliminating redundancy in the licensing process, gains in efficiency were made that reduced processing time by 40 percent and reduced costs by 30 percent. This not only benefits the local businesses but also the local government and the community at large.

The KPPOD survey and subsequent rankings provide a practical tool to investors searching for opportunities for their capital in identifying investment-friendly local governments. For local governments, it points them in new directions regarding regulations and government services, labor and productivity, physical infrastructure and regional economic dynamism to ensure a better future for their citizens. I encourage the local governments present here today to take the findings seriously and use this to identify needed improvements in your local policies and/or management practices.