News Analysis: Local governments: From rent-seekers to business partners

Vincent Lingga , The Jakarta Post , Jakarta Mon, 05/26/2008 10:13 AM Headlines

Provincial, regency and municipal administrations are competing with each other to offer multibillion dollar development projects to domestic and foreign investors at the Regional Investment Forum opening here today.

They are promoting a wide variety of projects in agribusiness, mining, infrastructure, property and tourism worth between about US$145,000 and $780 million.

They include a railway project in Riau, tree-crop plantations in various provinces, a toll road and an international seaport in Banten province, industrial estates and integrated farming in Central Java. What an encouraging development.

This is strikingly different from the mind-set of regional administrations during the first two years of regional autonomy from 2001 when regional chiefs and legislators, excited by their newly acquired authority, rushed to enact bylaws aimed mostly at collecting additional rents from businesses.

Many regional administrations, euphoric about their newly gained power, flexed their muscles to grab a larger share of the wealth from natural resources. They resorted to the easy, unsustainable ways of raising revenue by squeezing companies with additional taxes and levies.

They did not realize that this rent-seeking attitude would sooner or later kill the goose that laid the golden eggs.

The Home and Finance Ministries were forced to revoke almost 1,000 regional bylaws contravening national laws.

Nevertheless, the mind-set of most regional administrations has changed over the past three to four years, especially after the introduction of direct elections for regional chiefs.

As provincial governors, regents and mayors compete in direct elections, economic performance directly benefiting the people becomes the most effective means of gaining voter support.

Thus, job creation has become an important performance measure of a regional chief executive.
Hence, regional chiefs must be friendly to the business community, but not corrupt, and establish sound business partnerships.

This new paradigm requires regional chiefs to put pro-business policies at the top of their economic agendas because it is investors who generate jobs. This in turn fuels purchasing power and spurs consumer demand for various goods and services from which local administrations can raise levies.

The virtuous circle generated by investment goes on and on, raising the value of property and consequently increasing property tax receipts, of which 90 percent goes directly to regional administrations.

Within the national context, business-friendly local administrations can contribute greatly to economic growth because most of the country's abundant natural resources, such as forests, agriculture, fisheries, mining and tourist attractions, are located in the provinces and regencies.

Certainly, the enthusiasm and aggressiveness with which regional administrations woo investment are not the same. Several provincial administrations, for example, send teams on investment missions in nearby countries such as Singapore, where most global investors set up their regional offices.

Several regencies have hired professional consultants to help them plan, design and implement investment promotion programs. Many others woo investment by expediting business licenses.
Others have not been as aggressively implementing pro-business policies due to inadequate institutional capacities and a lack of financial and natural resources.

However, provinces or regencies with poor natural endowments should not be put off as investors often see policy variables as the main factors influencing their decisions to set up business in a particular area.

Policy variables -- including legal certainty, policy consistency and predictability, public services and local regulations -- often weigh heavier for investors than physical infrastructure, labor supply and productivity.

The second regional investment forum is a good opportunity for regional administrations to learn how to promote investment projects, what investors really want and how to attract more businesses to their areas.

The success of this forum should not be calculated by the value of investment deals closed but, more importantly, seen through the ongoing attitudinal changes of regional administrations toward the private sector, not only as taxpayers, but also as the driver of economic growth.
Furthermore, business-friendly local administrations will be greatly conducive to the development of small enterprises and cooperatives in rural areas across the country.

Read full post »

Small fuel price hike will trigger new uncertainty

Vincent Lingga , The Jakarta Post , Jakarta Fri, 05/23/2008 10:53 AM Headlines

President Susilo Bambang Yudhoyono eased market concerns about the government's fiscal sustainability when, after several months of indecision, he made up his mind earlier this month about the urgent need to raise fuel prices.

The financial market was buoyed by this, even though questions on the amount of the rise and the date it would take effect were left unanswered.

The government on Wednesday removed an element of uncertainty within the fuel reform plan by fixing the size of the upcoming price increase at 28.70 percent but, in keeping with Yudhoyono's characteristic indecisiveness, still did not address the question of "when".

Yet more worrisome is the size of the price hike seems so small that, even on the basis of the prevailing international prices (which will likely continue to increase), there will still be a disparity of 40 percent or more with market prices.

This is still quite a lucrative margin for smugglers to take advantage of. Such a big difference leaves great temptation for misuse by industrial users.

Since international oil prices will likely continue their upward trend and the domestic-to-world price ratio will increase steadily, this otherwise bold measure will be made less credible. It will instead cause a new element of uncertainty as the market perceives the measure as merely temporary.

Despite government assurances there will not be any further price increases this year, the market is still asking when the next one will occur, because the proposed 28.70 percent rise would not even bring domestic prices close to 70 percent of international levels like the October 2005 fuel price rise did.

The market would likely reject the price adjustment as inadequate in making a big positive impact on the government's fiscal position. The new fuel prices will neither remove the incentives for smuggling overseas, nor provide the right market signal for fuel conservation, efficiency and investment in alternative, renewable energy sources.

We find it hard to understand why the government did not follow up on its bold move in 2005 when it increased fuel prices by 30 percent in March and again by 125 percent in October.

The economy underwent a virtuous circle within one week following the fuel reform in October 2005: the stock market rose, the rupiah strengthened and consequently reduced inflationary pressures. The market even shrugged off the impact of another terrorist bomb attack in Bali which took place almost on the same day the government more than doubled fuel prices.

Any move to raise fuel prices, irrespective of the amount, will always trigger street demonstrations. Anyway, almost any issue will give rise to protests under our present democratic system. Any measure to increase energy prices will always fuel inflationary pressures.

But with good coordination between fiscal and monetary authorities, and well managed cash transfers and other poverty programs for the poor the inflationary impact can be contained, the panic reaction minimized and poor families protected from an adverse impact.

But raising fuel prices in little increments would only prolong the pains of the reform, planting a "new time bomb" which would likely explode six months or one year from now.

Thus the fuel price policy the government will announce within the next few days should be supplemented with an additional fixed schedule for a gradual phasing out of fuel subsidies for private cars until the prices are automatically floated on Mid Oil Platts Singapore (MOPS) quotations and the rupiah's exchange rate, such as those already imposed on industrial users.

Such flotation will allow for an automatic monthly price adjustment, thereby providing policy predictability for the general public, protecting the economy from shocking inflationary pressures and sparing the government the wasteful political bickering with the parliament that occurs each time international oil prices fluctuate wildly.

It's a technical matter how such a fuel price flotation should be implemented to prevent shocking inflationary pressures. After all, we have been on that road once before in 2002.

We don't foresee any major problems in managing fuel distribution under the two-tier price scheme because state-owned oil company Pertamina, the monopoly of subsidized fuels, has built up enough expertise to minimize misuse.

What is most important is floating domestic fuel prices on international levels will free the government from enslavement to the wildly volatile international oil market, remove the fuel subsidy "time bomb" from its fiscal management and forces fuel efficiency and conservation and encourages investment in alternative renewable energy.

Read full post »