26 November 2008

Regional autonomy: Which administrations govern best?

(Source: The Jakarta Post, 23 July, 2008)

by Neil McCulloch

Which local governments govern best? That is the central question addressed by the Local Economic Governance report launched Tuesday by KPPOD (Regional Autonomy Watch) and The Asia Foundation.

The report ranks 243 districts across Indonesia on the quality of their local economic governance based on a survey of over 12,000 businesses in 15 provinces, one of the largest surveys of its kind in the world. It provides the most comprehensive picture yet of the successes, and failures, of regional autonomy.

The good news is that some districts are governed very well. Decentralization has enabled the leaders and governments of some cities and regencies to innovate in a way which would have been impossible prior to decentralization. Perhaps the most obvious example is in the field of business licensing.

Cities like Yogyakarta have used their policy freedom to establish state-of-the-art One Stop Shops (OSS) for licensing providing modern, efficient services, free of corruption. Their efforts were rewarded last December when they received the top prize for city One Stop Shops from the President. And Yogyakarta is not alone -- KPPOD estimates that there are 164 OSS around the country -- in short, good ideas spread.

The bad news is that, even with the much celebrated spread of One Stop Shops, only 7 percent of firms in the survey said that they obtained their licenses through a OSS. And of course business licensing is only one small part of the services which local governments should be providing to the business community.

Access to land, improving local infrastructure, listening to the views of the private sector, and supporting them with business development services also matter, as do ensuring security and effective mechanisms for resolving conflicts and reducing the high transaction costs that businesses face.

And achieving success in each of these areas requires local legislation which supports rather than hinders local development, and competent and clean leadership from the district head and their staff. These are characteristics of the local investment climate that are under the control of all local governments neither wealth nor proximity to Jakarta is needed to do well at these things.

The KPPOD/Asia Foundation survey measures each of these aspects of local economic governance and uses the scores to construct an Economic Governance Index for each district. The results make both sobering and encouraging reading.

Most local governments are irrelevant to most businesses. Not only do only a handful of firms use One Stop Shops -- almost half have no registration license at all. Fewer than a fifth believe that there are business management and other training courses available from the local government, and almost none use formal mechanisms for resolving business disputes. Clearly local governments need to do a lot more to make themselves relevant to the businesses that they serve.

At the same time, local governments often focus on the wrong things. Much has been made of the harmful effect of distortionary local regulations, imposing user charges and restricting trade -- but only 1 percent of firms say that poor regulation is their principle problem.

Indeed most claim not to be overly burdened by user charges, or licensing costs. The principle problems mentioned by firms are bad local infrastructure and difficult access to land. It typically takes a month for a local road to be fixed. Almost two-thirds of large firms have a generator, an indictment of the unreliability of the electricity supply.

Nearly half of firms say that access to land is difficult and in several large cities tenure is insecure. In short, local governments need to focus more on the basics -- ensuring the roads get fixed and that land is administered in a transparent, efficient and fair way.

Some local governments are getting it right. Perhaps the most dramatic finding from the survey is the enormous diversity of outcomes within provinces. In Lombok Tengah, West Nusa Tenggara, it takes less than five weeks to get a land certificate; in Bima regency, in the same province, it takes more than 27 weeks.

In the city of Malang, East Java, over a third of firms say that licensing is difficult -- in the city of Pasuruan only a short distance away in the same province, all of the firms surveyed said that licensing was easy.

The dramatic differences within provinces challenge the idea that poor performance is always because of remoteness or poverty. In fact, the quality of local economic governance can be very different between districts with similar levels of wealth and geographical location.

But this fact is also an opportunity. It suggests that good local economic governance is primarily the result of good political leadership rather than favorable financial or natural endowments. With direct elections at the district level, this means that citizens can use the Economic Governance Index to put pressure on their governments to do at least as well as their neighbors.

It is harder for local politicians to blame poor performance on external factors, when neighboring districts facing exactly the same environment, are already doing better.

Thus, the Index provides one tool through which everyone can judge district performance on the things which local governments are responsible for and which they have the power to improve.

The next challenge will be to calculate the Index for the rest of the country and then to repeat it on a regular basis so that all can see which districts are making progress in improving the quality of local economic governance.

The writer is the Director for Economic Programs at The Asia Foundation in Jakarta


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