The recently issued government regulation on franchising will hurt the industry with its difficult and sometimes unreasonable requirements, forcing some business players to look for "legal loopholes", an association says.
"The new regulation is too tight, particularly for small and medium-size franchising businesses, which constitute about 80 percent of the 560 brands currently available in the market," Indonesian Franchising and Licensing Association chairman Amir Karamoy told The Jakarta Post on Thursday.
Amir said at present a franchising firm could base its business operations on one of two regulations; the franchising regulation just issued by the Trade Ministry, or a regulation from the Justice and Human Rights Ministry, as the business falls under the domain of intellectual property rights.
With the recently introduced franchise regulation, Amir said already dozens of franchising companies were planning to migrate to the Justice and Human Rights Ministry regulation, which does not use the term "franchising", instead referring to a "licensing scheme".
The licensing scheme, Amir said, is seen as giving businesses more room to maneuver without bumping up against various rules and regulations.
"We will see a massive exodus of players moving to the licensing scheme. In practice, it is almost impossible to tell the difference between the two schemes. Plus, both are still within the domain of intellectual property rights."
Earlier this week the government -- through the Trade Ministry -- introduced a new franchising regulation that imposes tighter controls over the industry by demanding, among other things, that all franchisers provide a business prospectus that consist of at least two years of financial reports.
Failing to meet the requirement risks a penalty of up to Rp 100 million (some US$10,900).
The regulation demands franchisers report all deals made with franchisees to the government, and conduct assistance programs continuously for the franchisees in the form of training and counseling.
The regulation also demands both franchiser and franchisee prioritize the use of locally produced goods and resources as long as there is no issue of quality standards.
"In the meantime, we will benefit from the fact that the licensing regulation (from the Justice and Human Rights Ministry) is still being regulated. Moreover, we heard that it will not be as restrictive as the franchising regulation," Amir said.
He said the main problem with the franchising regulation from the Trade Ministry was that it did not consider the difficulties of SMEs.
"Personally, I don't have a problem with the idea of having transparency in conducting business. However, the demanded practices are just too high for smaller businesses," he said.
Thomas Lie, chairman of the Indonesia Franchising Association -- another business grouping that represents the industry -- said the government has failed to provide necessary incentives to support the growth of SMEs in the franchising industry.
Lie said regulations were not enough to answer challenges in the sector, especially when compared to neighboring countries such as Malaysia, which provides soft loans for the development of the industry.