The Regional Investment Forum here last week presented several business-friendly provincial governors and regional officials, who fully realize that conducive policies and bureaucratic and regulatory environments are more effective than natural resources in attracting investment.
These governors, regents and mayors seem to understand that policy variables – institutional capacity, legal certainty, policy consistency and predictability, public services and local regulations – matter more to investors than natural resources, physical infrastructure, labor supply and productivity.
Regional leaders such as these, who come from Sulawesi, Java and Sumatra, could become a catalyst for other regional chiefs to adopt a more pro-business attitude. With governors, regents and mayors now having to compete in direct elections, job creation, which directly benefits residents, is surely the most effective way to win voters. This means employment will be one of the most, if not the most, important yardstick for measuring the performance of a regional chief executive.
Several provincial administrations have taken the initiative by sending missions overseas to woo investors. Others have hired public relations or consulting companies to advise them on how to design promotional programs and to deal with potential investors.
The rationale is that investment creates jobs, which in turn generates purchasing power to spur consumer demand for various goods and services.
Chief economics minister Boediono reemphasized the crucial importance of investment, when he, speaking at the opening of the forum, urged regional administrations to give top priority to pro-business programs for developing local economies.
As the chief of economic reform, Boediono is fully aware the overseas investment promotion missions conducted by the central government, including recent trips by Vice President Jusuf Kalla to the United States and President Susilo Bambang Yudhoyono to China, will be rendered meaningless if regional administrations do not contribute to improving the business climate.
Business-friendly local administrations are pivotal to national economic growth because most of the country's abundant natural resources are at least in part controlled by the provinces and regencies.
But challenges remain because the excesses of regional autonomy, which was launched in 2001, are still hindering businesses in many areas. Bad local regulations are high on the list of grievances by both domestic and foreign investors.
Most local administrations have yet to realize the important role of good institutions and effective bylaws as risk-management tools for investors in the highly complex market economy. Effective bylaws create a structure of expectations that guide businesspeople in calculating risks.
Many regional administrations take a short-term view in their economic policies, often resorting to ad hoc endeavors to generate as much local revenue as possible right now. Recently, for example, the West Nusa Tenggara administration tried to collect taxes from the heavy equipment and motor vehicles operated by PT Newmont Nusa Tenggara, in violation of the terms of the mining work contract between the American company and the central government.
Businesspeople in many provinces have complained about distortional bylaws issued by local administrations in an overly zealous bid to raise as much fiscal income as possible, without realizing that such rent-seeking will sooner or later kill or push good businesses – the main providers of jobs – out of their areas.
Opening the Regional Investment Forum last Thursday, President Yudhoyono said the central government had scrapped more than 506 local regulations, revised almost 150 others and was examining 824 other bylaws that were inimical to investment.
The excesses should be seen as part of the learning process in the implementation of regional autonomy, and not used as justification to reduce local autonomy. Instead of centralizing overall investment licensing at the Investment Coordinating Board (BKPM) in Jakarta, which is after all contrary to the spirit of regional autonomy, the central government should help empower regional investment offices – Provincial Investment Coordinating Offices (BKPMD) – to enable them to better serve businesses and to manage effective promotion programs.
The new investment legislation currently being deliberated at the House of Representatives, which if passed will replace the 1967 Foreign Investment Law and the 1968 Domestic Investment Law, should decentralize investment licensing (outside the oil and gas, and financial services industries) to local administrations.
The central government needs only to set national standards, such as those on environmental requirements, and national directives on the areas of business closed to private investors, whether domestic or foreign.