Investment licensing realigned

Stripping the Investment Coordinating Board (BKPM) of its licensing authority will do little to speed up the process of business start-ups in the country unless the government acts firmly to realign cumbersome procedures and expedite the issuing of permits by government agencies.

Inter-ministerial coordination has always been the weakest link in successive governments, despite the creation of the Coordinating Minister for the Economy position, which has been part of cabinets since the early 1980s. Even the authoritarian, centralized administration of Soeharto took more than 10 years to overcome resistance from its ministries to make the BKPM a truly one-stop service center for domestic and investment licenses.

However, the entire system broke down after Soeharto's ouster in May 1998, and investment licensing has become far more arduous and complex, especially after the institution of local autonomy in 2001.

Then president Megawati Soekarnoputri tried early last year to restore the BKPM as a one-stop center for investments but to no avail due to the failure of her political leadership. In terms of this country's public administration, which is perceived correctly to be the most corrupt in East Asia, licensing authority means the power to collect rents.

No details were immediately available as to how the government would go about expediting licensing after downgrading the office's function into that of a promotion and company registry office.

Coordinating Minister for Economy Aburizal Bakrie and Minister of Trade Mari Elka Pangestu, who last week disclosed the government's plan to facilitate smoother approvals, only said that notaries public would play a central role in helping businesses obtain permits. It would be notaries public, not investors, who would traipse between the different ministries to obtain all the necessary permits.

On the face of it, this new system would do virtually nothing to speed up investment licensing. The BKPM is not the main impediment in the country's series of bureaucratic licensing procedures. Nor is the BKPM the only agency in charge of licensing. Investments in financial services are still handled directly by the Ministry of Finance and Bank Indonesia, while those in the oil and gas sectors are administered by BP Migas.

The latest survey by the World Bank, as compiled in its Doing Business in 2005 report, shows that it takes an average of about five months to start up a business in Indonesia.

If the government is really serious about expediting investment licensing, it must first review the cumbersome procedures and reassess the real purpose or merit of the dozens of permits an entrepreneur is required to obtain when starting a business.

Experience shows that many of the permits imposed on businesses have nothing to do with ensuring compliance with government regulations. Take, for example, permits for plantation investments. The more than two dozens permits an investor has to obtain from local administrations and ministries in Jakarta are supposed to secure sustainable forest management. However, massive deforestation in the country continues unabated. Likewise, the cumbersome procedures for customs clearance are designed to minimize smuggling or under-invoicing -- in theory only -- rampant goods smuggling has severely damaged the manufacturing industry.

The government should decide which of the existing permits can be simply abolished; which can be delegated to private institutions with fiduciary responsibility; which can be issued by ministries in Jakarta and which should be under the jurisdiction of local administrations.

Whatever mechanism is introduced to replace the BKPM as the center of investment licensing, it should be designed with two objectives: To develop a one-stop administration center for all permits under the jurisdiction of the central government and to further empower local administrations to better serve businesses and woo new investors.

This means that Jakarta should eventually delegate most of its business licensing authorities to local administrations to encourage them to compete for investment.

However, expediting investment and business licensing is only one part of the great challenge to reinvigorate the investment here. The other more demanding task is to further improve the general business climate. Businesspeople decide to apply for investment licenses only when they see the situation is conducive.