Developing Institutional Framework for Regulatory Reform: Indonesian Experience

B. Raksaka MahiSpecial Advisor to the Coordinating Minister of Economic Affairs and

Vice Secretary of National Team for Export Development and Investment Development (PEPI)

APEC Seminar for Sharing Experience in APEC Economies on Relations Between Competition Authority and Regulatory Bodies, June 11-13,2008,Bali,Indonesia

2

Economic Growth of 6,6%-6,9% in 2008.Reducing Open Unemployment to 8,0%-9,0% in 2008.Reducing Poverty Incidence from 17,75% in 2007 to15,0%-16,8% in 2008

Government Targets

Backgrounds

It is important to push the real sector and to empower small andmedium enterprises to help accelerating economic growth and reducing open unemployment and poverty incidence.

To improve the business environment in order to increase investment for growth, employment and poverty reduction.Strategies :

To give a holistic picture of the government policies and reforms To make a better coordination of reforms among sectoral ministries and regional governments. To increase public transparency by involving all stakeholders in designing the reforms through survey, workshop and dialogue. An external monitoring team is also set up for feedbacks.

Objectives of the Reforms

Direction of The Reforms

• Eliminating unnecessary, burdensome and redundant regulations;

• Streamlining required regulations;

• Strengthening and improving vital regulations to safeguard the public interest

• Developing a better environment for competition

Reform Agenda 2005 - 2009

Structural and Institutional Reforms

Increase Competition

Lower Risk

Efficiency

Better Environment

Better Return

Low Cost

Investment

Better Quality of Public Spending

Growth

Increase Employment

Reducing Poverty

Reforms Development: 2005-2009

INPRES 3/2006

INPRES 6/2007

INPRES 5/2008

Focus : Investment Climate

85 actions

Focus: Real Sector and Small-Medium Business

165 actions

4 groups of Issue: Investment climate, Financial, Infrastructure, Small Business

Notes : INPRES = Presidential Instruction

Focus : 2008-2009 Reforms

Infrastructure

Financial

193 actions

Covering issues of investment climate, financial, infrastructure, small business, environment,energy,labor, ASEAN commitment.

Established without INPRES

7

NO The Groups of the Policies Number of Actions

1 Improving Investment Climate 502 Financial Sector Reform 403 Accelerating Infrastructure Development 414 Empowering Small Business 34

INPRES 6/2007 Reforms and the Components

The first three policies above are the continuation of similar policies that have been conducted since 2006 through INPRES 3/2006, while the package on Small Business Empowerment serves as an expansion of similar programs that were accommodated in the Investment Climate Improvement Policy (INPRES 3/2006). The President of Republic ofIndonesia has assigned the Coordinating Minister for Economic affairs to monitor the implementation of the Inpres.

Reforms Directions on Improving Investment Climate

• Establishment of Investment Law and Its Supported Regulations :1. Negative list of Investment 2. Incentives3. Special Economic zone4. One Stop Service for Investment5. E-Investment

• Central-Regional Regulation Synchronization

• “Doing Business” reforms : (Notes : Indonesia Rank 123 of 178 countries on Doing Business, according to IFC Report – 2008. The position is improved from previously rank 133)1. Starting A business2. Dealing with Licenses3. Paying Taxes4. Registering Property5. Employment6. Getting Credit7. Trading across border8. Protecting Investors9. Enforcing contracts10. Closing Business

Progress on Investment Climate Reforms: Some Milestones

Reforms on Starting a Business

Further Reforms on

“Doing Business”

Streamlining Sectoral (Ministrial)

Licenses

Streamlining Regional Licenses

Completed by

Sept 07

9

Completed by

March 07

Investment Law

(Law No.25/2007)

In Progress

INPRES 3/2006 INPRES 6/2007 INPRES 5/2008

Negative List Incentives

Criteria Pres Reg76/2007

The list Pres Reg111/2007

Gov Reg Gov RegNo.1/2007

Notes Under Revision

Special Economic Zone

Regulation Draft of the Law is completed

Notes To be submitted to parliament

One Stop Service (OSS)

Current Regulation Min of Home Affairs 24/2006

Notes Pres Regulation is prepared to have a better quality of OSS

E-Investment

Current Process The system is currently undergoing

Notes The pilot project will be December 2008, the national wide will be the end of 2009

Regulations Related to the Investment Law

Central-Regional Investment Functions

Regulation Gov.Reg38/2007

Notes Clarify division of authority between Central and Regional Government on Investment

CentralCentral--Regional Regulation Synchronization:Regional Regulation Synchronization:Number of Nuisance Local Regulations Cancelled, Number of Nuisance Local Regulations Cancelled,

as of April 2008 (Cumulative from 2001)as of April 2008 (Cumulative from 2001)

Provinces which have the most nuisance local regulations:

North SumatraEast JavaWest JavaCentral JavaSouth Sulawesi

A joint Team of Ministry of Finance and Ministry of Home Affairs has been established to evaluate all local regulations suspected to distort investment

Future Regulatory Reforms Direction:Closed-List of Local Taxes Category

Starting Business Improvement: Completed Sept 2007Notary survey LPEM Target Action Progress(2007)

1

Obtain clearance for the company name from the Ministry of Law (MoL); obtain the standard form of the company deed from MoL 2 7 2 1 doneFounders draw up the deed of establishment (articles of association) and sign it in front of a notary. 1 doneObtain a certificate of domicile from the local municipality 0 Eliminated Obtain a taxpayer registration number (NPWP)

and taxable entrepreneur identification number (NPPKP) 0 paralel

5**Open a bank account and deposit the initial issued capital in the name of the proposed company 4 4 2 1 No need tt, just Directors Statement

6

Pay to the State Treasury the non-tax state revenue (PNBP) fees for legal services pursuant to the Decree of the Minister of Law No. M.OI-UM.01.06/1993 1 1 1 1 done

7

Arrange for the notary to apply for the publication of the articles of association of the company in the supplement to the State Gazette from the State Printing Press, get payment receipt 1 2 1 1 done

8 Submit physical documents to the Ministry of Law 1 4 1 centralization ; done9 Delegation of Authorization to Kanwil NA 13 0 centralization; done

10Issuance of the SK approving the deed of establishment by the Minister of Law 14 10 7 done

11

Register with the Company Register at the Local Trade Office and obtain the Company Registration Certificate (TDP) 9 15 10 4**) done

12Apply for the business trading license (Surat Izin Usaha Perdagangan or SIUP) 11 14 11 3 done

13 Register with Ministry of Manpower 1 1 N/A 1 done14 Apply for workers social security (Jamsostek ) program 1 1 N/A 1 done

Total Time in Working Days 53 97*) 62 22*) Calender Days ; **) Including Tax Identification number

22

4** 6 14

2

3

3** 4 10 3

2 2 7

No Activities

Notary Survey

LPEM (2005)

Law Firms Interview (IFC 2005)

Other Regulatory Reforms Related to Investment Climate

• Better Paying Taxes through Modern Tax Offices

• Establishing National Single Window (NSW) for Speeding up the Export-Import Process

The need and Sources of Investment onInfrastructure 2005 - 2009

Needs* Sources

Sources of Potential Fundings

Domestic

multilateral dan bilateraDonorsl

Private Sectors

Govt Budget

Rp. 225 Trillions( 38%)

Financing Gap

Rp. 360 Trillions

(62%)

Rp. 585 Trillions

RpTrilln

%

126 22%

90 15%

144 25%

Source : IRSDP RRP – ADB & BAPPENAS, October 2006

Regulatory Reforms

Increase ofInfrastructure

Investment

The Forum And Capacity

Building

1

2

3

*) The needs are estimated as requirement of Infrastructure of 5-6% of GDP

Accelerating Infrastructure Development: Backgrounds

Regulatory Reforms

Institutions

Infrastructure Management

Finishing all regulations related to infrastructure development

Increasing ability of Contracting Agency in preparing KPS policy

INPRES 6/2007: Reforms on Infrastructures

Clear description on Central-Regional functions

Clarity of the role of Regional Govt Enterprises on Infrast Development

Non-banking institutions for Infrastructure

Institutional Development

Land for Public Needs

Operational Guidelines for private

Accelerating housing development

Road Maintance

Revkew public obligatory (PSO)

Blue Print on Master Plan of Infrastructure

Transportation rate policy

A

B

C

D

E

A

B

C

D

E

F

G

Policies PROGRAM # of Actions

1

1

1

2

3

1

1

4

4

5

2

2

TOTAL 41

14

Road & Toll Road Water & Sanitation

New Road Law Law No. 38/2004

GR on toll road Gov RegNo.15/2005

Law on Water Resources

Law No.7/2004

GR on Supply Gov RegNo.16/2005

Telecommunication

Interconnection regulation

Ministrial Decree No. 8/2006

Regulation on Retain Revenue

Gov Reg No. 28/2005

Energy & Power

GR on electricity procurement & utilization

Law No. 3/2005

Establishment New Electricity Law

Submitted to parliament

New Energy Law Law no 30/2007

Transportation

New Rail Transport Law

Law no 23/2007

Draft new laws on sea, air, and land transport

Submitted to parliament

Land & Government Investment

New Land Acquisition Law

Presidential Instruction No.36/2005 & No.65/2006, Per Ka BPN 3/2007

New Government Investment Regulation

Gov Reg No. 8/2007

Regulatory Reforms on Infrastructure

Small-Medium Business Empowerment

• Access for Credit Financing– Credit Collateral (Land Certification for collateral)– Revitalizing Investment Credit for Small-Medium Enterprises

• Entrepreneurship Development– Launching Degree for Bachelor on entrepreneurship

• Market Access– Government Regulation on Traditional-Modern Market– Integrated market development

• Regulatory Reforms– Fiscal Incentives for Small-medium enterprises– Developing Law on Micro, Small and Medium enterprises

Financial Reforms• Financial Sector Stability

– Law on Financial Safety Net– Operating Forum of Financial Sector Stability

• Banking Reforms– Improving Performance of State Banks– Establishing Law on Syariah Banking

• Non Banking Reforms– Amendment of Laws on Insurance, Pension Fund, Export Financing – SOP for financing sector

• Capital Market– Fiscal Facility for Openness of the company– Merging BEJ and BES

• State-owned enterprises reforms

Results:Indonesian Economy Keeps Growing After The Crisis

-13%

Investment Realization Improved in 2007

Economic Growth of Indonesia is among the highest in South East Asia

Employment is Growing and Unemployment Rate is reduced

Period Labor Works Unemployment Rate (%)Open Underemployment Total Force Open Total

2002 (Agt) 9.1 12.0 21.1 100.8 91.7 9.1 21.02003 (Agt) 9.9 13.2 23.1 102.8 92.8 9.7 22.52004 (Agt) 10.3 13.4 23.7 104.0 93.7 9.9 22.72005 (Nov) 11.9 15.0 26.9 105.9 94.0 11.2 25.42006 (Agt) 10.9 13.8 24.7 106.4 95.5 10.2 23.22007 (Agt) 10.0 14.9 24.9 109.9 99.9 9.1 22.7

Unemployment (Millions persons)

Poverty Reduction ExistingPoverty Based on Some Measurement

1996 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007CBSNumber of Poor People 34.01 49.5 47.97 38.7 37.9 38.4 37.3 36.1 35.1 39.3 37.2% 17.5 24.2 19.1 18.4 18.2 17.4 17.4 16.7 16.0 17.8 16.6

Poverty line USD PPP 1 per capita/dayNumber 15.4 na 24.9 20.9 19.7 15.5 14.5 16.5 13.6 19.5 15.5% 7.8 na 12.0 9.9 9.2 7.2 6.6 7.4 6.0 8.5 6.7

Poverty line USD PPP 2 per capita/dayNumber 99.6 na 135 125.3 125.2 115.6 110 109.1 102.1 113.8 105.3% 50.5 na 65.1 59.5 58.7 53.5 50.1 49 45.2 49.6 45.2

*) ProjectionSources : Wrold Bank and Central Bureau of Statistics (CBS)

Challenges

• Regulatory Reforms need a timely process, especially within the parliament, when related to passing a new (reformed) law.

• Coordination among stakeholders to pursue the actions is the key for the success of completion of actions, which sometimes it is hard to get a strong commitment of stakeholders.

• Implementation of new (revised) regulations at regional level requires an extra effort of resources. Some regions are not keen to help implementing the revised regulations.

• Infrastructure: Despite significant regulatory reform, not much has happened.

• Streamlining regulations at national and regional level requires a strong support of the units or regions.

• Public Expectations are high for reforms, but the yield of reforms take sometimes to take effect.

• Public communication related to the reforms results is not yet effective.

Conclusions• Reforms have already had a direction and a

framework, at least for the last three years.• Reforms have shown good outcomes • Reforms have existed in all agenda, but not all

have yet given significant outcomes (e.g.: Infrastructure)

• Gradual Reforms are more sustainable than a sudden change.

• Public Communication of the Reforms need to be improved in the future.

Thank you

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