Sara Webb, Sekayu – When Indonesia shifted power from the capital, Jakarta, to the regions, investors had to start dealing with a confusing constellation of districts, some business-friendly, others downright unwelcoming.
Pick the right province or region – and South Sumatra, with its rubber and palm oil plantations, plus oil, gas and coal deposits, is considered one such area – and there are huge rewards to be reaped in Southeast Asia's biggest economy.
But make the wrong choice, and investors can find that their projects stall or founder, thanks to corruption, red tape, conflicting national and local legislation, erratic power supplies, and other poor infrastructure.
"Investors want good roads, they want to be near the port, and have good infrastructure. But it's also important to be in a place where the local leader understands about good economic governance," said Erman Rahman, director for economic programs at the Asia Foundation in Jakarta.
The Asia Foundation, in conjunction with a local research agency, recently assessed and ranked 243 Indonesian districts and cities according to their business-friendliness, providing a sort of Michelin Guide for investors, domestic and foreign.
With direct elections at the district level, Indonesians can put pressure on those local governments that perform poorly, or reelect those that deliver results.
Identifying the provinces, districts, or cities with good governance is crucial for investors in a country like Indonesia, where rampant corruption and befuddling bureaucracy have long held economic growth in check.
Already, a handful of local leaders, for example in Java's Sragen district, Bali's Jembrana, and South Sumatra's Musi Banyu Asin, have acquired a reputation for improving governance, by introducing one-stop licensing systems that cut down the opportunities for graft, and by investing in infrastructure.
Thanks to the efforts of some local leaders, as well as to the anti-graft agency known by its local acronym KPK, Indonesia is beginning to make some headway in dealing with corruption, a problem that permeates almost every level of society.
Free healthcare, education
As regent of Musi Banyu Asin, Alex Noerdin used royalties from local commodities producers to fund much-needed facilities.
The district capital, Sekayu, now has a new hospital, and uses an insurance scheme to provide free health care and treatment for local residents, whose complaints typically range from malaria to traffic or workplace accidents.
There's also a new school, providing free education, plus new sports facilities. Noerdin even brought in a British football coach and Russian water polo coach to encourage children and teenagers to take up sports, and built roads, bridges, and other crucial infrastructure.
"People didn't believe I could do it, but I proved I could," Noerdin said in a recent interview.
This part of Sumatra has attracted big names such as US oil giant Conoco Phillips, Indonesian explorer PT Medco Energi, state coal miner PT Tambang Batubara Bukit Asam, and plantations group PT London Sumatra.
Some investors have welcomed Noerdin's pro-business approach. Noerdin was "very supportive and we have heard a lot of other positive things from investors in the area," said Bret Mattes, chief executive of oil and gas firm Star Energy, which has started exploration at the Sekayu block in Musi Banyu Asin.
"Our key drivers for securing Sekayu were technical, but it certainly makes any investment decision easier when the regency and the province are supportive of investment and investors, and have a vision for growth and improvement."
Power struggle
Overall, Musi Banyu Asin ranked fourth out of 243 places for economic governance in the Asia Foundation survey.
When the post of governor for South Sumatra came up earlier this year, Noerdin stood for election and won on promises to extend his free healthcare and education to the whole province.
He said he is considering offering tax breaks and other incentives to attract investors to South Sumatra, and that he wants to tackle the region's power shortages by bringing in Chinese power plant firms. "The most important thing that investors need is consistency of regulations," Noerdin said.
Decentralization, ushered in during 2001 as part of Indonesia's political and economic reforms, has, however, also paved the way for legal uncertainty due to conflicts and discrepancies between central government and local government, particularly over the mining, forestry, and environmental laws.
Archipelago Resources, a U.K.-based gold miner, is one investor that has run into trouble at the regional level.
Its Indonesian unit, PT Meares Soputan Mining, got approval from Jakarta to start commercial production at its Toka Tindung gold mine in North Sulawesi. But it still hasn't been given permission by the provincial government due to environmental concerns, effectively freezing investment of nearly $200 million.
"While central government remains a key part of the overall story, local governments now have a major role in allocating public spending and establishing the regulatory environment," the Asia Foundation said in the governance report.
"Some local governments have used this new freedom to create dynamic business environments, others have struggled with financial management, legal uncertainty, and poor strategic planning," it said, warning that in some cases, the power shift has helped turn mayors and local leaders into "little kings."
[Additional reporting by Telly Nathalia in Jakarta; Editing by Bill Tarrant.]