World Bank urges Indonesia to reduce policy risks

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.