Keeping regional anti-investment regulations in check

The recent law on regional taxes and user charges should be seen as a serious counteraction from the central government against the dramatic increase in problematic regional regulations (Perda).

Under the new law, local governments can only collect 11 taxes and 30 user charges. This closed list system will then shift the regime of regional regulations from a preventive system to a repressive one.

Previously, Law No. 34/2000 allowed regional regulations to be put into effect without approval from the central government (Finance Ministry, 2009), prompting the booming of problematic regional regulations.

It is important to understand the reasons behind the existence of problematic regional regulations. The intention to increase local revenue (PAD) – as a symbol of independence from the central government – has been pinpointed as the main explanation for mushrooming anti-investment regulations.

If this persists, local administrations can still impose anti-investment regional regulations, disguised somehow as pro-investment titles.

Thus, from the outside they seem to be in line with the new law, while the contents are in fact far from that.

Also, the regional regulations might not explicitly stipulate any anti-investment tariff but the lower bylaws – for instance, decrees from the mayor – do. In both cases, the closed list only helps prevent the creation of problematic regional regulations, but does not solve the problems.

So, the review process remains crucial even if the closed list is imposed. However, there are two problems with this.

First, how can the central government get access to copies of regional regulations? The collection process relies on the willingness of local governments to send copies to the Directorate General of Fiscal Relations (DGFR).

But the number of regional regulations that arrives at the DGFR is certainly different from what is practically enforced at local levels.

Second, does the DGFR have the capacity to scrutinize each regional regulation, taking into account the presence of 491 local administrations? Aside from the review process, the termination process is also time-consuming.

The DGFR submits the list of problematic regional regulations to the Home Ministry (MoHA) to issue the termination letter.

In the context of Indonesian bureaucracy, this process can take a long time. Worse, even if the
problematic regional regulations are canceled on paper, there is no guarantee they are truly annulled in the field.

One should not forget that anti-investment regional regulations are not only those related to tariff barriers, such as taxes and user charges that are covered by the new law. In fact, non-tariff barriers, for example quota and discriminative attitudes against non-local people, exist in many local administrations.

These regional regulations principally violate the basic concept of Indonesia as a unified state in which trade between and among administrations should be free. These regional regulations are one of the important sources of high-cost economy. They also trigger illegal fees at the ground level (SMERU, 2007).

Some cases showed that problematic regional regulations are rooted in the quality of human resources; be it government staff or parliament members.

A serious lack of capacity among these people explains why most regional regulations do not comply in terms of juridical, substantial, and principle aspects.

SMERU (2009, forthcoming) demonstrated that some regional regulations are simply copied from other districts and have nothing to do with the district in question. This problem is deeply pervasive, particularly because nearly 200 newly established local governments do not have sufficient human resources to deal with policy making and legal drafting.

Therefore, intervention of the central government in terms of training and education would certainly support the new law, in both the formulation and enforcement processes.

Furthermore, all public documents, including regional regulations, should be made accessible to stakeholders. Establishment of local government websites, where all regional regulations are stored, offers a possible solution (particularly as the new government has promised to connect all villages with internet access by 2010). This will certainly help DGFR in collecting and reviewing regional regulations.

Regulatory Impact Assessments (RIA) must be introduced extensively as a tool in policy making at local levels. Conducting such an assessment requires the participation of all stakeholders.

The involvement of business and local communities, by channeling their interests, leads to empowerment.

Meanwhile local governments also gain from wider participation since policy enforcement would be easier. Finally, if the RIA process takes place properly, it will reduce the workload of the central government in reviewing regional regulations.


The writer, a SMERU researcher, is currently working on an Australia-Nusa Tenggara for Regional Autonomy (ANTARA) AusAID funded study of Business Enabling Environments. These are her personal opinions.

Palmira P. Bachtiar, Jakarta | Wed, 09/02/2009 10:18 AM | Opinion
http://www.thejakartapost.com/news/2009/09/02/keeping-regional-antiinvestment-regulations-check.html