Five years after rolling out local autonomy in a bid to pave the way for better governance, regencies and municipalities should have had sufficient time by now to improve their business climates.
Unfortunately, however, the country continues to be ranked as one of the most difficult countries in Asia in which to start up a business.
A seminar on investment in the regions organized by the International Finance Corporation's Program for Eastern Indonesian Small and Medium Enterprise Assistance (IFC-PENSA), the Asia Foundation, and Germany's economic cooperation agency Gesellschaft fur Technische Zusammenarbcit (GTZ) on Thursday, identified six principal problems that were holding back economic development at the local level.
Asia Foundation economics program director Liesbet Steer said that the six problems were a lack of commitment to reform, innovation and flexibility, change of mindset, public participation, coordination among government agencies, and capacity building.
She said that the seminar, which was attended by officials from the central government, local administrations, private sector firms, and foreign experts, was aimed at facilitating the sharing of experiences among the participants and then finding solutions to the problems being faced.
Investors have long been complaining about complicated regulations and local licensing procedures for starting up businesses as being of particular concern when doing business in the regions.
Over the last five years, instead of streamlining the investment licensing procedures, the newly autonomous regencies and municipalities had produced thousands of new regulations and ordinances as part of their efforts to raise money. But this, in turn, had raised the cost of doing business and put a damper on the investment climate.
As imposing higher taxes on local residents would be likely to be rejected by the public, local administrations had instead turned to putting the squeeze on companies through the imposition of additional taxes and charges.
The proliferation of burdensome regulations also revealed a lack of coordination between the central government and local administrations.
Trade Minister Mari Elka Pangestu said in her statement, read out at the opening of the seminar by the Trade Ministry's secretary-general, Hatanto Reksodipoetro, that there was some confusion over the powers of the central government and the local administrations in the investment field.
The confusion could be seen, for example, in the power to grant land use titles. Investors frequently complained that this kind of uncertainty had further complicated investment licensing procedures at the local level.
Although many regencies and municipalities were poor and they badly needed investment to expand their economies, they seemed not to realize that cumbersome regulations were detrimental to their efforts to attract investors.
Business enabling environment program manager with IFC-PENSA, Hans Shrader, reminded the participants that additional private investment was necessary to sustain economic growth and increase the employment.
"For that, the quality of the business climate created by the local government will affect the amount of investment coming in," he said.
"In this regard, coordination between the local government and central government is crucial as neither will be able to reap the full benefit of a robust investment climate without supporting each other," he noted.
Liesbet Steer said that the seminar also addressed the need to develop and manage one-stop licensing centers and deregulate local economies.
"A one-stop shop and regulatory impact assessment enhance the ability of local governments to help businesses develop and expand, while earning the confidence of new investors," she said.
Alfred Hannig, director of GTZ's sustainable economic development program noted the need for the central government to provide a clear and favorable regulatory framework to provide guidelines for the regions in their efforts to encourage new investment.
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