5 - Regional Autonomy, Regulatory Reform, and the Business Climate

Summary

During the Conference organized by USAID-PEG and the Ministry of Industry and Commerce (Departemen Perindustrian dan Perdagangan) convened at Hotel Borobudur in Jakarta on 13 August 2003, a lot of complaints were heard, supported by surveys of credible research institutions, as regards new taxes, user charges (retribusi) and other levies that had been extracted by provinces, districts and municipalities (kabupaten & kota) in the past two years in which the laws on regional autonomy had been implemented. Many of those charges were levied on trade or on the movement of commodities in, or passing through, a certain territory. Such levies were depicted as having a distorting effect on the economy, as they would hamper the free flow of goods within national borders, an important economic policy principle to be upheld. The central government had tried to roll back such levies in 1997 by Law No. 18, but after the implementation of the laws on regional autonomy in 2001, especially Law No. 34/2000, they have come back. The legal status of some of them is, however, more than questionable.

Apart from charges on transportation of goods, there are also reports of exactions on enterprises by local governments, ostensibly as user charges, such as contributions for street lightings, even when the electricity is produced by the companies themselves. The practice of demanding “third party contributions” by local governments is also a new cost-increasing phenomenon making the affected enterprises less competitive or less profitable. According to a survey in fifty-five districts (kabupaten) by the research institute of the economics faculty of the Universitas Indonesia (LPEM) in Jakarta, such charges have sometimes amounted to up to 10 per cent of the costs since 2001, and impose a relatively heavier burden on smaller establishments. Other surveys presented in this anthology, however, concluded that the impositions have weighed more heavily on larger enterprises. Hence it is still not easy to form a firm conclusion. Perception surveys have also indicated that most companies do not report a larger change in impositions as compared to the situation before the year 2001. There are even respondents who perceive a slight improvement of the business climate after the implementation of regional autonomy. Whatever the direction, lighter or greater burdens, the changes are marginal (below 0.5 on a scale of 2).