[Kabar-indonesia] Why RI's Regional Govts Are Unfriendly to Business [By co-author of ADB report]

[JoyoNews at aol.com]

also: JP: Project heads must be qualified: Bappenas 

The Jakarta Post
Thursday, June 22, 2006

Op-Ed

Why regional governments are unfriendly to business 

Owen Podger, Surabaya

The regional autonomy watchdog KPPOD has come out with its valuable annual 
assessment of the investment climate in regions, praising some reform, but 
decrying obstacles to investment everywhere. Why are there so many obstacles? Are 
the regional governments solely to blame?

Why do regional governments want to raise local taxes and charges (known as 
PAD)? On average PAD is only about 10 percent of total revenue, and a typical 
local government has to double its revenues just to add 10 percent to its 
budget. Wouldn't it be easier to cut costs? No, because there is almost no 
incentive! 

Most of the budget is spent on salaries, so why not just sack the 10 percent 
of public servants who do least work? Alas, salaries come with the general 
allocation grant (DAU). Reduce the staff and you lose money next year! Increase 
staff, such as teachers, and you may get special additional funds from the 
central ministry that do not show up in your accounts. 

Two government regulations affecting PAD have been voided by the 
constitutional court, but their legacy remains. These fixed the budget for operational 
expenses of the Bupatis, Mayors and local councils. Operational budgets in one 
third of regions were required to be exactly Rp 150 million (US$15,950), 
regardless of population size or geography. Thus the mayor of Sabang in 2003 was 
supposed to have a budget of Rp 53,000 per capita, and the mayor of Bandar Lampung 
a mere Rp 110. What determined this amount? The size of PAD. In order to 
raise their operational expenses-read flashy lifestyle-politicians had to raise 
PAD to the next level. 

When the regional government laws required "performance budgets", why would 
the operational budgets of the leaders not be based on some standard of 
performance? Clearly because the central government did not believe they could be 
trusted. So they devised a system whereby they could not be trusted. The 
constitutional court threw out the regulations, but it did nothing to build 
trustworthiness. 

Regional autonomy continues to be defined as local taxing and charging. A 
recent study in Aceh defined two indicators of fiscal capacity of regional 
governments, the ratio of PAD to gross regional product, and the ratio to total 
government revenues. Thus the higher the PAD the better the government. It 
concluded that Sabang had the worst fiscal capacity in Aceh, although it records the 
highest PAD per capita in the whole country! Its PAD is relatively low because 
it is the richest region with the highest budget per capita. It has a highly 
subsidized port and tourism. 

The fixed component in DAU gives Sabang eight and a half times the average 
per capita. Its extra boost from revenue sharing of oil through Aceh's special 
autonomy is more per capita than Nias's whole budget. Why would it bother with 
any local taxes and charges when it has more that it can spend? 

Many regions have found far more profitable way of raising their revenues 
than increasing PAD. The incentive of the large fixed component in the DAU 
formula is to divide. Since Nias was divided into two districts, its DAU has risen 
by almost 50 percent relative to others. To get the same increase it would have 
to raise its PAD five-fold. 

Is local government culture so foreign to business culture? Let us look at 
local economies, and the role of government in them. There is only a handful of 
regions with a substantial economic base, where the local budget is a small 
proportion of it. 

Surabaya is the most extreme case, where the local budget is around 2 percent 
of the Gross Regional Product (GRP). Not surprisingly, most business gets on 
with the job of serving markets. Only a small part of the business community 
attaches itself like a fungus to the government, such as the outdoor 
advertising industry. Most of the large-population rural regions of Java, the typical 
local government budget may be about 20 percent or more of the total economy. 
Traditional and new businesses still manage to survive, and even grow when they 
can tap into export markets. 

But the "fungal economy" is more substantial. More businesses prefer 
government contracts to production. And the economic multiplier of that 20 percent of 
the economy is substantially bigger and more accessible than export markets. 
Service providers find their customers are nearly all public servants, well 
paid by comparison with most of the population on the edge of the monetary 
economy. 

As the ratio of budget to economy goes up, the more business orients itself 
to the budget. And the more the young people aspire to be civil servants. The 
whole economy becomes fungal. There are regions where most of the PAD comes 
from the bus-fares of public servants going to work, from taxing restaurants 
where public servants having lunch, and from mining tax on the sand used to build 
their nice new homes. High PAD as a proportion of the total economy becomes an 
indication of the lack of a real economic base, not fiscal capacity at all. 
How could the economy of such regions be developed? 

A better educated community should be better prepared for work. Most poor 
regions inherited few technical high schools with decentralization of education 
in 2001. They have general high schools designed to produce office workers and 
tertiary student. They have few offices or universities, so they are trained 
to become civil servants. Regions with a high ratio of technical high schools 
are generally those already well developed, with highest rates of university 
education. 

The constitution requires each local government to allocate at least 20 
percent of its budget to education. The law in Aceh calls for 30 percent. Sabang is 
required by law to allocate at least 50 percent more than South Nias. But 
South Nias has ten times more pupils. How is it to get ahead? They seek support 
from the national government, of course. They have just employed several 
hundred new teachers in a nationally-sponsored program-and nearly all have no 
qualification in teaching. Why? Because that is how the system works. Does Sabang 
also seek national support? Of course. Fairness in the system gives to rich and 
poor alike. 

We could also comment on span of control in local government, which is so 
broad that local governments cannot be managed effectively. Or we could comment 
on the personnel management system and personal reward system which works 
against professional development. What is clear is that local governments and local 
civil servants, just like the business community, are working according to 
the incentives built into the system. The system is so distorted that few local 
governments or local businesses have any clue as to how build new incentives 
for the growth of a healthy economy. 

The writer is a free-lance consultant on governance reform, and co-author of 
ADB's Country Governance Assessment Report of the Republic of Indonesia. He 
can be contacted at micah68 at centrin.net.id 

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The Jakarta Post
Thursday, June 22, 2006

Project heads must be qualified: Bappenas 

The Jakarta Post, Jakarta

The director of the National Development Planning Board (Bappenas) has 
stressed the need for the leaders of government-funded projects to possess 
procurement and project leadership certificates.

In a speech to a provincial development planning forum in Banten on 
Wednesday, Bappenas director Paskah Suzetta stressed the importance of certification to 
prevent incompetent officials being assigned to lead government projects. 

He was quoted by Antara as saying that the certification process, which 
commenced in 2005, was intended to ensure the competence of project leaders, which, 
in turn, would help accelerate project execution and improve compliance with 
the law. 

Meanwhile, the Bappenas director of regional affairs, A. Rudiyanto, expressed 
concern about the poor performance of officials charged with heading up 
government projects. For example, he said, out of 100,000 regency and municipal 
officials from throughout the country, only 12 percent, or 12,000, had passed the 
recent procurement and project leadership examinations. 

However, he added, those who failed could retake the examinations after 
receiving additional training. 

"We need more than 7,040 project leaders for the country's 440 regencies and 
municipalities," he said. 

He added that the test papers had been set by a Bappenas team in 
collaboration with a number of universities. 

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Joyo Indonesia News Service
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