World Bank urges Indonesia to reduce policy risks

Rendi A. Witular and Sari P. Setiogi, Jakarta

One of the main tasks the next president, highly likely to be Susilo Bambang Yudhoyono, must fulfill to gain the confidence of the international business community is to improve the implementation of government policies.

A report from the World Bank released on Tuesday cited the unpredictable interpretation of regulations in the country a major concern for businesses here.

According to the World Bank's World Development Report 2005, uncertainty about the content and implementation of government policies topped the list of concerns faced by developing countries.

The report, entitled A Better Investment Climate for Everyone, drew the conclusion from surveys of over 30,000 firms in 53 developing countries; in Indonesia, the World Bank surveyed 713 firms this year.

From the surveys, the World Bank concluded that Indonesia was among those developing countries which are poor at implementing and drawing up policies.

Some 56 percent of the surveyed firms reported the unpredictable interpretation of regulations was the main problem that caused policy uncertainty. The figure is higher than those surveyed in the Philippines, China and Cambodia.

"A vibrant private sector creates jobs, provides the goods and services needed to improve living standards and contributes to the taxes necessary for public investment in health, education and other services," Francois Bourguignon, World Bank senior vice president and chief economist, said in a statement.

"But too often, governments stunt the size of those contributions by creating unjustified risks, costs and barriers to competition," he said.

Because of the risks, companies will demand higher returns, adopt shorter planning horizons, or not invest at all. Firms operating in high-risk countries usually require more than twice the rate of return they would require in lower-risk countries to compensate for the extra risks.

Policy-related costs shouldered by firms can also be substantial, and make many potential investment opportunities unprofitable.

According to the report, improving policy predictability alone could increase the likelihood of new investment by more than 30 percent.

It also highlighted that the unreliable electricity supply and other infrastructure, crime and corruption could impose costs more than double those of regulations. Together with weak contract enforcement and onerous regulations, these costs can amount to over 25 percent of sales.

A related survey showed 50.9 percent of respondents in Indonesia said bribes were paid for to conduct business activities here. The figure, however, is lower than those reported in China, Cambodia and Russia.

While many investment climate improvements require changes to laws and policies, the report highlights several challenges that the government of developing countries needed to address to improve their investment climates.

The utmost challenge is restraining corruption and other forms of rent-seeking. The majority of firms in developing countries report having to pay bribes when dealing with officials, and many rate corruption as their most pressing obstacle.

The report also suggests the need to build the credibility of government policies. Passing new laws has little impact if firms do not believe they will be enforced or sustained.

Fostering public support for policy improvements is also needed to be taken into account, as failure to build public support for creating a more productive society will slow reform and jeopardize business sustainability.