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Indonesia is not the easiest place in the world in
which to do business, as confirmed by the country’s ranking of 155th out of
183 countries in the World Bank’s Doing Business 2012 report.
One starting point from which the government could start to make things a
little easier would be by reforming business licensing — a key to improving
the investment climate. It seems that complex business licensing procedures
discourage firms from becoming registered, giving rise to difficulties
later in their accessing finance from formal financial institutions and
constraining productivity.
Across sectors, this can suppress the establishment of new firms and
therefore the creation of new jobs, dragging down overall economic growth.
While simplifying business licensing does not necessarily raise the total
value of investment, a recent study by the World Bank suggests that
simplifying business licensing in Indonesia may increase the number of
small and medium enterprises (SMEs) being set up. This is consistent with
the finding that there is a correlation between the number of SMEs per
thousand inhabitants and the costs of starting a business.
The logic is that easier licensing procedures could encourage firms to
become registered and thereby help firms to access finance from formal
financial institutions, supporting expansion particularly for SMEs. Getting
access to finance should help to raise firms’ productivity, allow expansion
and generate economies of scale, thus providing a boost to job creation and
economic growth.
When comparing plant size distribution between Indonesia and a number of
other emerging countries, we find a striking feature of very few
medium-size firms in Indonesia, the so-called “missing middle”. For
example, the percentage of small firms is larger in Indonesia, a huge 93
percent, versus 37 percent in Brazil.
Small firms in Vietnam and the Philippines constitute
about 60 percent of total firms. Meanwhile, medium-size firms constitute
only 5 percent of all manufacturing firms in Indonesia, compared with 47,
27 and 28 percent in Brazil, Vietnam and the Philippines, respectively. In
addition, in Indonesia more than 30 percent of the sample firms are
unregistered.
There seems to be several reasons why some firms prefer to remain small,
one of which is related to the desire to evade taxation and inspections,
while another is that the costs of being registered outweigh the benefits.
Some experts argue that excessive regulation and licensing is a factor in
keeping firms small and informal.
In Indonesia, licenses such as company registrations (TDP) and/or trade
licenses (SIUP) are used as one of the requirements to obtain financing
from financial institutions. Therefore, it is surprising that so many firms
prefer to remain unregistered.
The burdens relating to poor licensing policy appear to be a major issue
for businesses across Indonesia, forcing them to remain informal or deal
with the costs of compliance.
Although some licenses are processed at the national level, most are
processed at the local level, especially those related to physical permits,
sectoral licenses and business registrations. Among licenses and permits,
construction permits (IMB) and nuisance permits (UUG) are perceived as the
most onerous to obtain by firms. There are two main reasons for the
complexity in business licensing in Indonesia.
First, a plethora of regulations referring to buildings, nuisance and the
environment creates overlapping rules and confusion in implementation.
Second, limited technical standards for building construction or design
safety often leads to “negotiations” with officials over standards. The
situation can be even more complicated where provincial and
municipal/district governments have the capacity — whether de jure or de
facto — to introduce new regulations.
While Indonesia has made some progress in reforms helping business
start-ups, it is still far behind its peers like Malaysia and Thailand.
Indonesia ranking of 155th out of 183 countries in starting a business,
compares with Malaysia and Thailand which ranked 50th and 78th,
respectively. Starting a new business in Indonesia is relatively more
difficult compared with its regional peers.
It takes about 45 days with eight procedures to start up a new business in
Indonesia, while it takes an average of only 38 days with seven procedures
in the Asia Pacific region.
In Malaysia, starting a business only takes six days and four procedures
and costs 16 percent of average income per capita, while in Thailand it
takes 29 days and five procedures and costs 6.2 percent of income per
capita. Meanwhile, Indonesia trails well behind costing 18 percent of
income per capita.
The government should continue its efforts to simplify business licensing.
Simplification is about limiting licenses to those that are justifiable.
Also, many firms complain that in order to obtain licenses they are
pressured to join business associations. So, one quick-fix would be to
issue an official announcement explicitly stating that joining a business
association is an option but not a requirement for starting up a new
business.
In addition, efforts in the medium term should focus on improving
coordination between government agencies and clarifying the roles of
central and local regulations both horizontally and vertically.
Simplifying business licensing is no silver bullet for increasing economic
growth in Indonesia. However, relatively cheaper and faster business
licensing seems to have a positive effect on the number of SMEs being
established and therefore on job creation.
However, more work is necessary to better understand the precise impact of
regulatory reforms on SMEs — Indonesia’s main job creators — as urgent as
the need to simplify is. In view of this, simplifying business licensing in
Indonesia should be considered a first step toward unleashing the potential
for more business start-ups and act as a key to unlocking broader
investment climate reform. ●
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