Improving of Investment Climate in the Era of

Decentralization and Regional Autonomy

B. Raksaka Mahi,Ph.D

Faculty of Economics, University of Indonesia

July 22,2010

Presentation

Backgrounds

Improving Investment Climate and Ease of Doing Business in Indonesia :

1. Certainty and Clarity of Investment Regulation

2. Ease of Investing

3. Investment facilities

4. Ease of Doing Business

Supervision Mechanism

Conclusions

Backgrounds (1) :

Indonesian Competitiveness

Last year, a survey conducted by the IFC World Bank has released a new report on the ranking of Doing Business internationally.

For the period of 2008-2009 observations, among the 183 economies in the world, Indonesia ranks of 122. This position is an improvement of the last year position of 129 internationally.

There are three major improvements of Indonesia : 1. Starting Business2. Registering property3. Protecting Investors.

This achievement has brought Indonesia to become The region’s top reformer for the East Asia and Pacific.

World Economic Forum Global Competitiveness Index also puts Indonesia on the better rank of 54 out of 133 countries in 2009.This achievement has come from several advantages: a reduction in the favoritism in decision of government officials, a better government efficiency (especially reflected from less wastefulness of government spending, less burden of government regulations). What actions of the government have made Indonesia to achieve such an

improvement in the world rankings?. What are the problems on the implementation of the policies?. What are the role of local governments in improving local competitiveness?.

Those will be discussed in this presentation.

Backgrounds (2):

Local Economy and Decentralization

Since 2001, Decentralization policy has been adopted in Indonesia.

Most of the government functions have been decentralized to the regional governments, including administration and also significance allocation of transfers.

To empower local accountability, a political decentralization has also been taking place by introducing a local election.

With all are in the hand of the local governments, it becomes the strategy of the local governments to optimize all of these authorities for their maximum local economy, and thencontributing to national economy.

Through this Economic Decentralization, an increase of local welfare could be expected.

Strategies of Improving Investment

Climate in Indonesia

Since 2006, the Government of Indonesia has initiated economic policy packages to improve investment climate.

The Focus of the Investment policy are as follows :1. Certainty and Clarity of Investment Regulation

2. Synchronizing Central-Local Regulations

3. Ease of Investing

4. Investment facilities

5. Ease of Doing Business

Investment List Incentives

Criteria Pres Reg 76/2007

List of sectors

Pres Reg.

36/2010

Gov Reg Gov Reg

No.62/2008

Notes Income Tax Incentives

Special Economic Zone

Regulation Law No.39/2009

Notes The role and facilities for SEZ and the criteria to become SEZ

One Stop Service (OSS)

Current Regulation Presidential Regulation No.29/2009

Notes Better investment service in the regions

Investment Law

Law Law No.25/2007

Notes The New Guideline of Investment policy and direction

Central-Regional Investment Functions

Regulation Gov.Reg38/2007 as mandated by Law No.32/2004

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

1. Certainty of Investment Regulations

2. Synchronizing Central-Local Regulations

This is done by abolishing nuisance local tax regulations, which are harmful to business activities. Up to March,2009,cumulatively, as many as 2907 harmful local regulations have already been cancelled by central government since 2001.

Under the new decentralized system, local governments are allowed to create new local taxes to finance their autonomous functions. There are criteria of good local taxes need to follow by them before creating the new tax.

Unfortunately some local governments do not obey the criteria, which results in the production of some nuisance local tax regulations, which are harmful to business activities.

A join team of Ministry of Finance and Ministry of Home Affairs has been established to monitor number of nuisance local regulations.

Sectors which are affected the most by nuisance local regulations are as follows : transportation, industry and trade, agriculture, and forestry.

The new law regulating local taxes and user charges, Law No.28/2009, has stated clearly a closed list requirement which means that the local government could only issue local taxes and user charges which are listed in the law.

Those local taxes and user charges listed in the law has already been evaluated based on criteria which are not harmful for the economy.

Table 1. Nuisance Local Regulations Cancelled(Jumlah PERDA Bermasalah yang dibatalkan)

(by sector, data as of March 31,2009)

The sectors with highest nuisance local regulation cancelled:Transportation (15%)Industry and Trade (13%)Agriculture (12%)Forestry (10%)

Source : DG of Fiscal Balance, Ministry of Finance

Table 2. Nuisance Local Regulations Cancelled(Jumlah PERDA Bermasalah yang dibatalkan)

(by sector, data as of March 31,2009)

Provinces with highestNuisance local regulations cancelled:

East Java (9%)North Sumatra (8%) Central Java (6%) West Java (5%) South Sulawesi (4%)

Source : DG of Fiscal Balance, Ministry of Finance

Province Number of

Nuisance

Regulations

Cancelled

GRDP

Growth

2001-2004

East Java 263 4.78 %

North

Sumatra

246 5.04 %

Central

Java

197 4.55 %

West Java 174 4.51 %

South

Sulawesi

142 4.84%

Table 3. Provinces with Many Nuisance Regulations

Tend to Have a Lower Economic Growth ??

National Average of Economic Growth (2001-2004) = 5,12 %

Model for Estimating Factors Affecting Provincial Investment:

Y = Provincial GDP **)

N = Provincial Population **)

Tax = Percentages of local owned revenue (PAD) to GRDP **)

Inf_Road = Road Infrastructure (Not Significant)

Inf_Elec = Electricity (Not significant)

Nr = Number of nuisance local taxes regulation *)

Notes : Provincial Data of 2006

** = Significance at the level of 5 %

* = Significance at the level of 10 %

3. Ease of Investing

One Stop Service (OSS)

OSS has been implemented in many local governments (more than 250 local OSS)

A National OSS is in the process to be developed. It will act as a hub for investment services.

A technological advancement is currently under development, which expected to become the E-Investment, which could approve investment licensing electronically.

4.Facilities for Investors

Tax Facilities

Government Regulation No.62/2008

Income tax incentives for several sectors in some regions

Establishment of Special Economic Zone

Some regions could propose to have a special economic zone

The final selection is conducted by a team at central government

The draft of government regulation for the technical criteria of a region to become a SEZ is currently being prepared and included in the 100 days program.

Development of Economic Corridors

The design of the economic corridors is currently under formulation with the assistance of the Government of Japan.

The 6 (six) Economic Corridors have been determined.

The first corridor is expected to be realized soon, with some infrastructure projects taking place in the first corridor.

Special Economic Zone and The

Development of Local Growth Center

The Special Economic Zone is developed for a region with high economic competitive to be able to compete at international level.

Facilities for SEZ are provided not only by central government, but also by regional/local governments.

Special economic zone can take place as export processing zone, logistics zone, industrial zone, technological parks, and other type of economic zone (quoted from draft of the SEZ law).

A region with an interest in developing SEZ should show their interests by submitting proposal and also a good commitment; among others pro-investment policy.

The development of SEZ could take place in regions with have already developed a promosing growth center at the local/ regional level.

The establishment of promising regional growth centers has been encouraged, and it is expected to be a local government iniative.

Government Regulation (PP) No. 45/2008 is an example of a support for such a local initiative in establishing a high growth region (“Kawasan Cepat Tumbuh”)

5. Ease of Doing Business

According to the IFC common practices, there are 10 (ten) areas of Doing Business need to be paid attention:1. Starting a business2. Dealing with licenses3. Registering property4. Employing workers5. Getting Credit6. Paying Taxes7. Trading across borders8. Protecting Investors9. Enforcing Contracts10. Closing a business

The Indonesian Government has adopted Policy Strategies to have a better ease of doing business :1. To identify the current practices and problems (number of procedures, time and

cost incurred)2. To establish a Regulatory reform for streamlining the procedures, shortening

time to deliver and reducing costs3. Socializing and implementing the Regulations 4. Monitoring and Evaluating the Implementation5. To obtain Feedbacks for Further Improvements

Table 4.Improvement in Starting a Business

Indicator 2007/08 2008/09 2009/10

# of procedures 12 11 9

Time (days) 105 76 60

Cost (% of

income percapita)

80 77,9 26

Minimum Capital

(% of income

percapita)

38,4 74,2 59,7

Ranks 168

(178 countries)

171

(181 countries)

161

(183 countries)

In the 2009/10, Indonesia is said to have a positive reform in starting

business as number of procedures and days to start business have

reduced significatly. The 100 days program has an effort to reduce the

days of starting business from 60 days to 40 days. Recent policy

commitment even stated to reduce it into 17 days.

Table 5. Procedures to Start a Business

No. Prosedur Jumlah Hari Biaya Departemen/Instansi

1 Pengisian formulir ke Notaris dan memperoleh persetujuan nama PT ke Depkumham

7 hari Rp 385.000 Direktorat JenderalAdministrasi Hukum Umum, DEPKUMHAM

2 Pengurusan dokumen oleh Notaris 7 hari Rp 2.526.816

3 Pembayaran PNBP di Bank 1 hari Rp 200.000 Ditjen Pajak, DEPKEU

4 Memperoleh persetujuan akta pendirian PT oleh Depkumham

14 hari Rp 1.000.000 untuk persetujuan akta dan Rp 500.000 untuk penerbitan di lembaran negara

Direktorat JenderalAdministrasi Hukum Umum, DEPKUMHAM

5 Pendaftaran TDP dan memperoleh sertifikat TDP

15 hari Rp 500.000 Pemerintah Daerah/DEPDAGRI

6 Memperoleh NPWP dan Identifikasi PPN (NPPKP)

1-2 hari Tidak ada biaya Ditjen Pajak, DEPKEU

7 Memperoleh SIUP 5 hari Rp 250.000 Pemerintah Daerah/DEPDAGRI

8 Pendaftaran Tenaga kerja ke Depnaker

14 hari *) Tidak ada biaya DEPNAKER

9 Pendaftaran Jamsostek 7 hari *) Tidak ada biaya DEPNAKER

Jumlah hari 60 hari 26% dari PDB Per Kapita

Source Doing Business IFC 2010, september 2009.

Table 6. Improvement in Registering Property

Indicators 2007/08 2008/09 2009/10

#of procedures 7 6 6

Time (days) 42 39 22

Cost (as % of

property value)

10,5 10,7 10,7

Ranks 121

(178 countries)

107

(181 countries)

95

(183 countries)

The Chairman of National Land Agency has made a significant policy, by

introducing the time limit for checking the status of the land title to become one

day, and also land title transfer to become 5 days. This is considered as a

Positive Reform. Recently, the land agency has started to implement a mobile

registration of land and property, make it easier for people and business when

registering their property.

Table 7. Improvement in Dealing with Construction Permits

Indicators 2007/08 2008/09 2009/10

#of procedures 19 18 14

Time (days) 196 176 160

Cost (% of

income per

capita)

286,8 221,1 194,68

Rank 99

(178 countries)

80

(181 countries)

61

(183 countries)

The major player in this area is the local governments, since all of the licenses for

construction permits are mainly issued by local governments.The implementation of One

stop shop has helped to improve the procedures of issuing technical licenses.Some local

governments have already had a very good local OSS (Such as Sragen, Yogyakarta,

Cimahi),

Supervision Mechanism:

Reward and Sanctions System

The Government has already enacted significant policies to increase national and local competitivness.It requires a high commitment for both central and local government to implement the policies. Good supervision are needed to ensure the implementation of the policy.

Good local governance are not yet practiced by all of the local governments, some are still issuing bad local regulations.

To ensure such good practices are implemented at the local level, the government has already enacted a reward system. The reward system is based on the achievement of local government in managing their local finance which results in unqualified financial report. Also macroeconomic indicators; such as economic growth and human development index achievements are considered.

If the reward system has been implemented, it is not the case for the sanction system, although the new law No.28/2009 on local tax and user charges has indicated that such a sanction could be enforced to the local governments which issuing nuisance local regulations.

The reward and sanctions mechanism are also are not yet implemented to the central authorities which are not implementing good governance. However, the new law on public services have indicated that such reward and punishment could be implemented for both national and local government agencies.

Challenges

Regulatory Reforms have been formulated, but the reforms need a timely process for the implementation at the regions.

Streamlining regulations require a strong support from the local governments. Some of them are not keen to help implementing the revised regulations. Most of them are still implementing the un-reformedregulations for investment.

Some local governments have adopted an OSS for serving the investors, unfortunately some of the local OSS still have a quality which is under the expectation.

Reward and sanctions are not yet fully implemented at national and local level.

Conclusions

The policy to improve investment climate has already in the right direction, and it has shown some good results, such as a better position of Indonesia on ease of doing business.

Also reforms have shown some good outcomes, as measured by improvement on macro indicators.

There are reforms required in the future : Building infrastructure (road, electricity,etc.) A support from local governments to comply with the

national reform agenda. Implementing sanctions for local governments which

producing bad local regulations for the economy. Establishing and implementing a clear and transparent

reward and sanction mechanism for the central government agencies.