Regions make decentralization programs work

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.