Tue, 23 Nov 2010

From: The Jakarta Post

By Kumba Digdowiseiso, Jakarta
Of all the key factors hampering economic growth in Indonesia, one of the most commonly cited is the low-level of new domestic and foreign investment. Although there are many factors that contribute to investment, all firms are essentially facing difficulty obtaining business permits and licenses.

In the World Bank’s 2011 Doing Business survey of 183 countries, Indonesia’s position decreased from 115th to 121st, making the country’s overall business performance just slightly higher than other ASEAN countries such as Cambodia, Laos, and the Philippines.

Also, of the nine indicators in the Doing Business survey, the variable of starting a business in Indonesia improved significantly. However, we performed poorly in protecting investors, paying taxes, getting credit, registering property, enforcing contracts, closing a business, and trading across borders, with no significant change in construction permits.

I personally believe that those results are not surprising at all as there has been no continuous improvement in terms of regulations as well as bureaucratic reform as far as obtaining licenses goes.

Pertaining to the regulation issue, now that decentralization has come into effect, the regional governments should create a conducive business climate to attract investment into their regions.

However, their privilege of making regional regulations has often hampered investment because they are more concerned with increasing local revenue through levies.

In general, there are four principles for assessing the appropriateness of taxation at the regional level, such as the sufficiency of yield, economic efficiency, equity, the capacity of implementation, and the compatibility of regulation as the regional source of income (Devas et al, 1989).

With respect to the regional governments’ fiscal capacity, their tax revenue could come from various sources, including tax sharing with the central government, tax levied by the regional government themselves and additional taxes levied from the central government taxes.

Ironically, the discretion in taxing has increased their creativity in designing other forms of taxes and various kinds of new retributions in a bid to avoid the limit of the existing taxes.

The Regional Autonomy Watch’s survey (2009) confirmed the existence of levies that have the potential to cause a high-cost economy and uncertainty in the investment climate, including those with improper and different tariff structures, levies that double-up with those at the central and provincial levels, or even those that overlap with other similar levies imposed by other regulations from the same municipal government, are common in some regions.

For example, Ordinance of the Trade Ministry No. 36/2007 on the Issuance of Trading Licenses, states that there is no fee for making a new trading license (SIUP). Similarly, administration fee for a new company registration (TDP) simply does not exist according to Ordinance of the Trade Ministry No. 37/2007 on Company Registration. Yet, no businesspeople in regional areas enjoy new SIUP and TDP free of charge.

On top of regulatory issues, there are also bureaucratic challenges in implementing business licenses. According to The Asia Foundation (2008), the actual implementation of business licenses often suffers from a lack of government capacity and resources, which prevents the government from providing social protection, market control, or information collection.

In principle, the central government through the Home Ministry has developed a One Stop Shop (OSS) licensing service center to improve the quality of bureaucratic reform. This manifests itself in a Single Window Integrated Service (PTSP) at the regional level for the purpose of business licensing.

This idea is similar to those in other ASEAN countries, such as Thailand’s One Start-One Stop Investment Center, Singapore’s Online Business Licensing Service, and Malaysia’s Business Licensing Electronic Support System.

Unlike those countries, the Home Ministry’s PTSP in some areas does not play a big role in licensing activity. Ideally, all permits such as permits for building, trade and industry, would all be processed in this body.

But, most of these permits are not performed there since there is no willingness from the local elites to speed up business licensing activities in PTSP. This, in turn, affects the time and cost that businessmen spend.

Take the example of provincial government of Jakarta that just launched a one-stop investment service.

While this sounds promising for investors, it shows a lack of commitment by the governor to socialize PTSP as this body was actually established in 2007.

Also, he did not commit to force regional government representatives (e.g. regional revenue office and regional trade office) associated with the issuance of the permits to be placed at the PTSP office.

From the two above issues, it is clear that the problem in cost, the precision of time, and procedure in business license is still a major hindrance for many investors. For those who want to expedite the business process or even ensure the approval of a possibly inadequate application, these drive them to pay more. In this case, bribery may not only be initiated by government officials, but also by businessmen who try to find a short-cut in the process.

Now, we are hoping for an improved license system in the PTSP. President Susilo Bambang Yudhoyono launched an ambitious plan of utilizing investment to increase GDP growth for Southeast Asia’s biggest economy from 6.3 percent in 2011 to 7.7 percent in 2014.

Therefore, setting a national standard that has flexibility with regional capacity will aid this process. On regulation, the need to change fiscal incentives to the revenue sharing mechanism is essential for mitigating the practice of using regional regulations to simply increase regional revenues as this can have a positive effect on economic growth.

Last, all of these solutions would not be possible to improve the business licensing regime in Indonesia unless there is an inter-ministerial consensus as well as leadership from the presidential and local elites to realize the benefits.

The writer, an alumnus in Applied Economics at The University of Adelaide, Australia, is a lecturer at National University, Jakarta, and an economic policy researcher at Transparency International Indonesia.