From The Jakarta Post http://www.thejakartapost.com/detailbusiness.asp?fileid=20060220.L01&irec=0

Bureaucracy snag may curb crucial govt spending
Urip Hudiono, The Jakarta Post, Jakarta

With consumer confidence down on high inflation and interest rates, the economy here may still have to rely on government spending to jump start growth this year, but that is impeded by red tape.

But even if consumer confidence rises again it may not be adequate, analysts say, as public sector consumption has its limits in driving the economy, while the implementation of many planned government projects are suffocating under the weight of a bloated, undisciplined bureaucracy.

"State budget spending can compensate for the recent decline in private consumption and investments, but its ability to do so is very limited, even if the government plans to carry over undisbursed funds from last year," economist Sri Adiningsih of the Yogyakarta-based Gadjah Mada University said.

"The carry-over funds only amount to about Rp 12 trillion (US$1.3 billion), which combined with this year's allocation, is dwarfed by an expected Rp 3 quadrillion gross domestic product it has to help push this year."

Meanwhile, Mandiri Sekuritas chief economist Kahlil Rowter said the economic impact of the expenditures would largely depend on implementation, which was not going smoothly due to bureaucratic problems at ministries and agencies.

"With the first quarter nearly over, we might as well expect their effects to just begin in the second quarter, and again see a slow start in growth this year," he said.

Kahlil, however, remained upbeat that government spending -- being less susceptible to inflation and interest rates -- will continue supporting the economy as private consumption and investments slowly increase, boosting it by 0.5 percent to reach a growth of between 5.0 and 5.5 percent this year.

"The main issue is how to improve the bureaucracy and get these projects up and running," he said.

The economy still managed to expand by 5.6 percent to Rp 2.73 quadrillion last year, higher than a revised 5.05 percent in 2004, but has experienced a continuous slowdown from 6.25 percent in the first quarter to 4.9 percent in the fourth.

Rising inflation from two sets of fuel price hikes and the central bank's tight interest rate stance severely affected private consumption and investment.

The government has allocated Rp 647.7 trillion in total spending for this year, including Rp 220.1 trillion for provinces. As much as Rp 571.1 trillion will be used for such economy-driving activities as procurement and development projects, subsidies and welfare programs, with the remaining Rp 76.5 trillion for debt interest payments.

Finance Minister Sri Mulyani Indrawati said the government had also disbursed Rp 12.95 trillion in carry-over funds, following the completion of government project plans earlier this year.

Sri Adiningsih, however, said many of the projects were still hampered by red tape, making it virtually impossible to get them up and running.

"If officials try to work around these procedures to speed up the projects, they are afraid of later being prosecuted for corruption or collusion," she said.

She agreed with Kahlil on the need to streamline the mechanisms for government projects, without sacrificing integrity.

"The projects should also prioritize small and medium-sized enterprises, which have proven to be more resilient to high inflation and interest rates," she said.

Sri Adiningsih mentioned the current interest rate levels could pose problems to the projects, as many were carried out jointly with private companies relying on bank funding.
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