Mon, 11 Sep 2006

Regulations the biggest barrier to new investment

Vincent Lingga, The Jakarta Post, Jakarta

Indonesia may find some consolation in the praise of the World Bank and its private-sector arm, the International Finance Corporation, over the improvements made in its business climate but this commendation means virtually nothing in the way of wooing investments because most other countries performed much better.

Indonesia predictably remains among the most difficult places in terms of the ease of doing business, ranked 135th of 175 countries surveyed for the 2007 Doing Business report, compared to 131st among 155 countries in the 2006 report, which tracks indicators of the time and cost of meeting government requirements in business startup, operation, trade, taxation and closure.

The fourth annual Doing Business survey measures quantitative indicators on business regulations and compares their enforcement across 175 economies based on data available as of last January.

The report, therefore, does not cover developments after the launch of the investment policy reform last March, which calls for expediting the time of business startup to 30 days.

But do not expect too much from the government's regulatory reform. Indonesia has been notorious as a laggard in reforms. Even President Susilo Bambang Yudhoyono, who came to office with a strong political mandate, failed to get the message from the Doing Business survey "take advantage of your new mandate and push through significant reforms at the start of your term."

The government did succeed in cutting down the time and cost of starting up business from 151 to 97 days and from the equivalent of $1,300, or 101.70 percent of the country's gross per capita income, to $1,111 last year, but scored poorly on most other key indicators.

The country would have scored much lower still if the ranking included such variables as macroeconomic stability, the quality of infrastructure, currency volatility, investor perception and law and order.

The comparative data in the report should give the government, notably chief economics minister Boediono, the ability to measure the government's regulatory performance compared to that of other countries, taking good lessons from global best practices to prioritize reforms.

It is disappointing to note that even among the ASEAN countries, Indonesia only scored better than Laos.

It took about 224 days in Indonesia to comply with all licensing and permit requirements, compared to the average of 147.4 days in the Asian region. The enforcement of commercial contracts took about 126.5 days, as against the Asian average of 52.7 days. Employment regulations were also among the most rigid.

Once incorporated, a company may want to buy land upon which to build a plant but the cost of registering property in Indonesia has reached as high as 10.5 percent of the property value, compared to the average of four percent in the region.

Overall, businesses in Indonesia often shoulder administrative costs that are twice as high and have to struggle through twice as many bureaucratic procedures as their counterparts in other Asian countries.

The March investment policy reform was designed to address all these business woes by expediting the procedures for business startup, speeding up customs, licensing, and court procedures, and made labor regulation more flexible.

As businesspeople here can easily testify, pointless regulations foster graft as the more irksome the rules, the greater the incentive to bribe officials not to enforce them. Because it is so difficult to obey all the rules, businesses tend to remain informal -- outside the law and the tax net. They cannot raise credit from the formal banking system.

However, it is not reasonable to expect a much faster pace of regulatory reform in the country. At best, improvements will be incremental, as found by the latest World Bank report.

The central government may be able to push harder with reforming and streamlining the first two sets of procedures for starting up business: First, by obtaining approval from the Investment Coordinating Board and second, through establishing a limited liability corporation through the Justice and Human Rights Ministry, which requires at least 10 different procedures involving notaries, banks and the tax department.

But the third set of procedures -- obtaining numerous licenses and registrations from ministries and local governments -- could be the hardest part because local administrations often follow their own rules, setting their own standards and criteria.

The government, therefore, took a shortcut by introducing last June the concept of a special-economic zone, which is being implemented on Batam, Bintan and Karimun islands in cooperation with the Singaporean government.

The regulatory environment and physical infrastructure in these SEZs will be developed to the standard of at least the world's 30 top performers in terms of the ease of doing business.

The government seems determined to turn the three SEZs into islands of competence, growth poles and catalysts for investment promotion in other parts of the country.