mid-term report - business environment bds - mid-term report, 2003.pdfmid-term report page 6 1....

STRENGTHENING BUSINESS DEVELOPMENT SERVICES ADB KANTOR DEPARTEMEN PERINDUSTRIAN & PERDAGANGAN, TECHNICAL

LANTAI 14, JL JEND. GATOT SUBROTO, KAV, 52-53, JAKARTA 12950 ASSISTANCE

TEL/FAX: (021) 527 2235/36/37 E-MAIL: [email protected] INO-3829

Mid-term Report

ADB TA 3829-INO Strengthening Business Development Services

October 2003

Swisscontact Services AG

Doeltschiweg 39

8000 Zurich, Switzerland

ADB TA 3829 - Strengthening Business Development Services

Mid-term Report

TABLE OF CONTENT

1. OVERALL SUMMARY AND ASSESSMENT OF RESULTS 6

2. COUNTRY BACKGROUND 9

3. PROJECT ADB TA 3829-INO: STRENGTHENING BUSINESS DEVELOPMENT SERVICES 11

3.1 PROJECT RATIONALE 11 3.2 PROJECT APPROACH 13 3.3 PROJECT PHASING 17

4. SUMMARY MID-TERM REVIEW 19

4.1 WORK ON NATIONAL LEVEL 19 4.1.1 Business Environment: Regulatory Review 19 4.1.2 Business Development Services: SME Portal 34 4.1.3 Finance: Credit Reporting System 36 4.2 WORK ON LOCAL LEVEL 42 4.2.1 Summary of results of local assessment 42 4.2.2 Local Action Plans 45 4.2.3 Findings of mid-term review and planning for the 2nd implementation phase 48

5. OUTLINE PLANNING 2ND IMPLEMENTATION PHASE 59

5.1 REMAINING STAFF CAPACITY 59 5.2 FOCUS OF SUPPORT FOR 2ND IMPLEMENTATION PHASE 59 5.2.1 National level 59 5.2.2 Local level 60


Mid-term Report

LIST OF FIGURES AND TABLES

FIGURE 1): SUMMARY MATRIX OF ACHIEVED RESULTS............................................................8

FIGURE 2): OVERVIEW PROJECT INTERVENTIONS..................................................................11

FIGURE 3): BASIC DATA OF PARTICIPATING MUNICIPALITIES ..................................................14

FIGURE 4): SURVEY: BASIC SME DATA.................................................................................15

FIGURE 5): OVERVIEW CAPACITY BUILDING MEASURES.........................................................16

FIGURE 6): PROJECT PHASING .............................................................................................17

FIGURE 7): OVERVIEW PLANNING 1ST IMPLEMENTATION PHASE..............................................18

FIGURE 8): COMPLIANCE COST BUSINESS FORMALIZATION ...................................................20

FIGURE 9): PRESENT BUSINESS FORMALIZATION PROCESS...................................................20

FIGURE 10): COMPLIANCE WITH BUSINESS FORMALIZATION...................................................21

FIGURE 11): PROPOSED BUSINESS FORMALIZATION PROCESS ..............................................22

FIGURE 12): BANK CREDIT COLLATERAL IN TRANSITION ECONOMIES .....................................24

FIGURE 13): SME LENDING PRACTICE IN USA ......................................................................24

FIGURE 14): SME LAW: INSTITUTIONAL SET-UP IN KOREA .....................................................29

FIGURE 15): SME LAW: INSTITUTIONAL SET-UP IN USA.........................................................30

FIGURE 16): OPENING PAGE INFO - UKM ..............................................................................35

FIGURE 17): HIT STATISTICS INFO-UKM.COM........................................................................36

FIGURE 18): INSTRUMENTS FOR ASSESSMENT OF LOCAL BUSINESS ENVIRONMENT................42

FIGURE 19): RELATION BETWEEN INFRASTRACTURE AND PROBLEMS WITH ACCESS TO MARKETS43

FIGURE 20): BUSINESS FORMALIZATION AND ACCESS TO CREDIT ..........................................44

FIGURE 21): WHERE SME GET ADVISE FROM ........................................................................44

FIGURE 23): OSS BENCHMARKS...........................................................................................46

FIGURE 24): SELECTED SERVICES IN SOUTH SULAWESI ........................................................55

FIGURE 25): SELECTED SERVICES IN CENTRAL JAVA .............................................................57

FIGURE 26): REMAINING STAFF CAPACITY .............................................................................59


Mid-term Report

LIST OF ABBREVIATIONS ADB Asian Development Bank BAPPENAS National Development Planning Agency BDS Business Development Services BE Business Environment BI Bank Indonesia BPPT Badan Pengkajian dan Penerapan Teknologi / Agency for

the Assessment and Application of Technology CRS Credit Reporting System DPRD Local Parliament FGD Focus Group Discussion GDP Gross Domestic Product GNP Gross National Product HO Hinder Ordonantie/ Nuisance Ordnance/ Ordonansi

Gangguan ICSMED Industrial Competitiveness and Small Medium Enterprise

Development ICT Information Communication Technology IFC International Finance Corporation ISO International Standard Organization IUI Izin Usaha Industri / Industry License KUK Kredit Usaha Kecil / Small Enterprise Credit LG Local Government MOEA Coordinating Ministry of Economic Affairs MoIT Ministry of Industrial Trade MTAP Medium Term Action Plan MTR Mid Term Review NGO Non Government Organization OECD Organization for Cooperation and Development OSS One Stop Services PDC The Promoting Deregulation and Competition Project PERDA Peraturan Daerah / Local Government Regulation PPAP Loan Loss Reserve PT Perseroan Terbatas / Limited Liability Corporation RIA Regulatory Impact Assessment RUU Rancangan Undang Undang / Draft Law SBA Small Business Administration SBI Sertifikat Bank Indonesia / Bank Indonesia Certificate SBS Small Business Services SEKDA Sekretaris Daerah / Local Govt Secretary


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SITU Surat Izin Tempat Usaha / Business Site License SIUP Surat Izin Usaha Perdagangan / Trade License SME Small Medium Enterprise SMoCSME State Minister of Cooperatives Small Medium and

Enterprise SPMC Service Provider Management Center SUP Surat Utang Pemerintah / Public Debt Note TA Technical Assistance TDI Tanda Daftar Industri / Industry Registration License TDP Tanda Daftar Perusahaan / Business Registration LicenseTF Task Force ToR Terms of Reference TUA Trans Union Advantage UK United Kingdom UKM Usaha Kecil Menengah / Small Medium Enterprise UPT Unit Pelayanan Terpadu / One Stop Services USA United Stated of America WB World Bank WDP Wajib Daftar Perusahaan / Compulsory Firm Registration WG Working Group


Mid-term Report

1. Overall summary and assessment of results In the past, the Asian Development Bank (ADB) has supported the Government of Indone-sia’s (GOI) efforts to enhance competitiveness through an Industrial Competitiveness and SME Development Program Loan (1738-INO) and two Technical Assistances (TA). The TA “ADB SME Development” contributed to the Mid-Term Action Plan for SME Development (MTAP SME), while the TA on Promotion of Deregulation and Competitiveness (TA PDC) has developed an Indonesian Regulatory Review Manual.

The ADB TA "Strengthening Business Development Services" (ADB TA INO-3829) builds on the achievements of the two former projects by supporting the implementation of spe-cific recommendations of the Mid-Term Action Plan for SME Development (MTAP SME) in the fields of regulatory review on national and local levels, establishing OSS on local levels, facilitation of BDS and improved access to finance by supporting the establishment of a Credit Reporting System in Indonesia.

The TA works in close coordination with the executing agency BAPPENAS, implementing agencies (Ministry of Industry and Trade/MoIT, Ministry for Cooperatives and SME/ SMOCSME and Bank Indonesia) and four local district governments in Central Java and South Sulawesi.

The starting point for ADB TA Strengthening BDS was–as its name makes clear–BDS. In practice, the scope of assigned project objectives and tasks is much wider; focusing on making specific elements of the business environment more conducive for SME, including non-financial (BDS) and financial services.

The TA’s progress achievement in working with various Technical Teams on national and local levels has exhibited strong demarcation. Most discernible progress has been in areas that relate most closely to government’s core functions, areas where specific agencies have the clearest direct authority, influence and interests, such as improving one-stop-

services and introducing regulatory im-pact assessment practices. Similarly, progress at the local level appears to have been generally more tangible than at the national level. The main achieve-ments on national level are:

The TA has successfully facili-tated the process for the future establishment of a Credit Report-ing System: The scoping study has been launched with the com-mitment of 10 participating major banks. A realization of the CRS in 2004 seems realistic;

The SME portal ‘Info-UKM’ is launched and shows promising results in its first month of opera-tion;

A proposal for new business for-malization process in Indonesia has been outlined and discussed, which would reduce compliance cost for businesses considerably (see box).

Revision of Business Formalization: Ex-pected Impact The total effect of the proposed changes in business formalization would reduce the time necessary to register a limited liability company by 54 business days (30 % reduc-tion) and the number of procedures by 6 (30 % reduction). Sole proprietors could be basically registered in 3 procedural steps within 62 business days.

The added value of striving to achieve the higher benchmark levels would increase In-donesia’s business-entry competitiveness according to the World Bank data-base con-siderably: By removing the pre-registration requirements, compliance costs (fees and time) could be reduced from 81% GNP per capita to 59%. Compared to the international sample Indonesia would rank somewhere in the middle field. With 111 business days to complete the registration process Indonesia would still not end up as a top-performer, but would move clearly from the range of the “last five” performers into the lower end.


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Conversely there has been a lack of progress in assisting local government to adopt a fa-cilitating rather than delivery role in BDS. Progress has been constrained by three factors:

lack of political motivation or bureaucratic incentives to relinquish control over direct implementation and delivery activities; in-adequate capacity to identify, select and work flexibly with private BDS providers; and generic government SME promotion programs with little grounding in analysis of SME constraints. A lesson from this experience is that the constraints that led the SME development community to question the ability of government to play a direct role in delivering BDS, appear equally to inhibit government’s ability to facilitate BDS.

Differences in progress achieved in differ-ent districts can be explained to a consid-erable degree by personalities. In some cases, this has been younger, more dy-namic and ambitious individuals in man-agement and leadership positions in spe-cific agencies. In other cases, it has been key political leaders, such as a Bupati, taking a direct interest and lending explicit support to TA-supported initiatives.

An implication is that to be successful in-terventions with government need to iden-

tify influential champions exhibiting characteristics of dynamism, established authority or ownership, a degree of career ambition and possessing the potential to continue to exert influence over a reasonable period of time.

The following table provides an overview of the TA objectives, types and level of interventions as well as the achieved results as per end of October 2003.

Regulatory Impact Assessment in Sragen The result of RIA analysis has triggered the withdrawal of the regulation on ‘ret-ribution on license to cut and transport logs from public woods’ and the ‘retri-bution on plantation yields’. RIA analysis has also contributed to increase the aware-ness of the local government on the impact of business licenses on investment climate. This analysis has resulted in a decree is-sued by the head of the local Government (Bupati), which exempts certain types of new businesses from anti-nuisance (and other similar) permits/licenses. These exempted new businesses are: (i) compa-nies located in an industrial zone, (ii) com-panies whose operation is environmentally friendly, and (iii) companies that potentially contribute to the local economic growth and expansion of employments.


Mid-term Report

Figure 1): Summary Matrix of Achieved Results

Goal Improved competitiveness of SMEs

Purposes Improved regulatory environment Improved access to non –financial services Improved access to financial services National Level

Interventions national level

Regulatory review on business formalization, SME law and Bank Indonesia regulation on collateral

Improved access to SME relevant information through SME Portal

Support the establishment of a credit reporting system in Indonesia

Achieved results

Most progress on business formalization, problem identified, alternative model for registration developed and discussed; Discussion on institutionalization of RIA initiated, draft concept in process of being developed; Input on rationale for SME law provided

SME portal launched, promising number of visitors, high chances for sustainability as linked to existing portal

Commitment from 10 major banks for participation in scoping study; Co-financing of scoping study (IFC and Bank Indonesia); Clarification of Bank Indonesia role; Scoping study ongoing

Provincial Level

Interventions provincial level

No activities planned

Improve availability and quality of business services for SMEs

No activities planned

Achieved results

BDS market assessment conducted. Around 20 potential BDS providers and services identified, market assessment conducted and services in the process of being developed.

Concept for pilot project in linking BDS providers and financial institutions

Local Level

Intervention local level

Introduce Regulatory Impact Assessment, Establish /improve OSS

Support local Governments as facilitator for BDS No activities planned

Achieved results

Action plans developed: Parepare and Sragen good progress, RIA has resulted in abolishing regulations, process of RIA institutionalization started, OSS: range of services and procedures improved. Slow progress in Pati and Bulukumba

Very limited results. Reasons: - Limited willingness, flexibility and incentives for changing policy. LG government budgets are allocated for direct service delivery; limited understanding of BDS concepts; LG support programs too generic

Expected impact

Reduced regulatory burdens for SME in terms of cost and time, on local level already partly realized. Change business formalization alone would reduce compliance cost for registration from 81% GNP per capita to 59%.

BDS provider offer commercial services, higher quality of services results in increased demand and improves business performance of micro and small enterprises. Local Governments make use of private BDS providers.

Credit Bureau: Improved access to finance for SMEs, reduced transaction cost for banks, less dependency of collaterals, reduced non-performing loans, reduced cost for lending


Mid-term Report

2. Country Background

Indonesia’s recovery from the crisis: Key economic and political challenges

Indonesia's recovery from the 1997-8 financial crises remains fragile. Current real growth rates of 3-4% are insufficient to absorb increases in population and new entrants to the labor market, and thus are unlikely to contribute substantially to poverty reduction. Moreover, the sustainability of this growth is doubtful, given declining investment rates and reliance on domestic, private and public consumption. Even conservative estimates put the rate of unemployment at above 10%. Private sector malaise lies at the heart of this uninspiring economic performance. Private investment has contracted alarmingly; foreign and domestic investment rates have fallen by 42% and 72% respectively between 2001 and 2002, affecting almost all sectors (key exceptions being transport, trading and electricity sectors). Textile exports have fallen by 20% in 2002. In the once-vibrant footwear sector, one hundred large manufacturers have closed in the past three years. There seems to be little dispute amongst observers that Indonesia is no longer regarded as favorable place to do business. Production costs such as fuel, power, water and telephone charges have risen sharply. The labor market has seen significant increases in labor disputes and the introduction of minimum wage legislation. Concern about security and stability— most critically in the integrity of the legal and judicial system—has damaged investor confidence, deterring investment and affecting businesses' ability to compete. Government's handling of its legislative program and the reform process has done little to restore confidence. Commercial activity has been further disrupted by adverse consequences of regional autonomy, including regulatory inconsistency between central and local government (estimates suggest between 70-150 regulations that trade and investment), uncertain legal, contractual and administrative procedures and marked increases in corruption. Discussions of Indonesia's economic performance almost inevitably allude to "decline in competitiveness" and "unconducive business environment" terms, which appear with unerring regularity in media, government and donor agency circles. The fact that the business environment is not encouraging business competitiveness and vibrancy is not in doubt. Neither is the fact that below par private sector performance is constraining growth and delaying progress towards poverty reduction. The challenge is to understand more clearly what terms like competitiveness and conducive business environment actually mean and—more concretely—to understand what government needs to do to improve Indonesia's attractiveness as a place to do business.

Competitiveness understanding & strengthening government's role

The business environment is influenced by a complex range of factors, including natural conditions such as geography and climate, resource endowments and culture and also by exogenous influences such as trends in international trade, technology and the global economy. How-ever, competitiveness is also shaped at home. Government in par-ticular, through its policies and regulations can play an influen-tial—positive or negative—role. A competitive market environment does not mean that there is no role for government. In fact, increasingly it is understood that the reverse is true, that vibrant markets depend on


Mid-term Report

sound supporting institutions. Such institutions laws, regulations, courts, standards regimes, ombudsmen etc determine and enforce many of the 'rules of the game' for private enterprise, without which markets would descend into chaos and illegality. Effective and enlightened government is critical to ensuring that markets work efficiently and equitably. The private sector constraints identified in the previous section suggest that the reality in Indonesia deviates significantly from this general under-standing. Most notably government's inability to perform its core func-tions adequately is seen by businesses as one of the biggest threats to competitiveness. Key weaknesses are:

Lack of a clear rationale defining Governments core functions. As a consequence government has 'sprawled' into areas that would normally be regarded as well beyond its core competence and responsibility (often to the detriment of private sector activity in those markets) whilst at the same time failing to perform its core functions adequately;

Weak overall levels of capacity, particularly in relation to essential government functions, such as the formulation and enforcement of effective regulations, operation of the legal and judicial system and basic public administration;

Inadequate scrutiny of the efficacy of regulatory measures and other interventions.

This general assessment of the obstacles preventing government from playing a more effective role in building competitiveness has important implications for ADB TA 3829. Effective engagement with government will depend on developing a common understanding of what competitiveness means and what government's appropriate roles can be in stimulating competitiveness, assessment of the capacity government requires performing such roles and identification of capacity building measures to strengthen government's ability to play these roles.


Mid-term Report

3. Project ADB TA 3829-INO: Strengthening Business Development Services

3.1 Project Rationale Building on achievements of former ADB support

In the past, ADB support towards Indonesia has addressed the chal-lenge of decreasing competitiveness through an Industrial Competitive-ness and SME Development Program Loan (Loan 1738-INO: ICSMED). The principal objective of the Program Loan is to promote a more diver-sified and efficient industrial structure through deregulation and the adoption of policies that promote competition and provide a level playing field for all enterprises, including SME. The implementation of the pro-gram loan was supported by two Technical Assistances, one on De-regulation and Competitiveness (ADB TA 3416); one on SME Develop-ment (ADB TA 3417). Under the TA Deregulation and Competitiveness, methodologies of Regulatory Impact Assessment (RIA) were introduced to the inter-ministerial Task Force under the Ministry of Industry and Trade and were applied to a number of key regulations. The TA on SME Development has supported the inter-ministerial Task Force under Min-istry of Cooperatives and SME to develop a Mid-Term Action Plan for SME Development, which has been endorsed by ministerial decree in March 2002. ADB TA 3829 builds on the achievements of above men-tioned TAs by

Supporting the implementation of specific recommendations of the MTAP and

Further consolidation of regulatory review on national as well as on local level.

The long-term goal of the project is to strengthen the competitiveness of SME. To achieve this the project focuses on three key elements which influence SME competitiveness:

The creation of a conducive business environment; The facilitation of BDS markets and The facilitation of markets for commercial lending.

Figure 2): Overview Project Interventions

CMake marketswork forBusiness

DevelopmentServices

Make marketswork for

commerciallending

Create a conducive environment for business development

StrengthenSME

competitiveness


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Preparing the ground for in-creased SME competitiveness

Improving the competitiveness of SMEs in Indonesia depends to a large extent on concrete improvements in the market environment within which they operate. This environment currently hinders the ability of businesses to start, grow and change. It restricts SMEs' access to a va-riety of different markets for inputs and outputs. It places heavy burdens on SMEs' routine operations and requirements. It is clear therefore that the myriad SME promotion schemes in existence serve little purpose when the 'building blocks' of the market environment remain adverse to competitiveness. The TA has therefore two overarching foci:

Strengthening government's role in making the business environment more conducive: in particular making practical improvements in the efficacy of government regulation of busi-ness; its preparation and scrutiny of regulation, its provision of information about regulation and its administration and enforce-ment of regulation.

Making markets for specific business requirements work more effectively: in this case working with government to iden-tify how it can facilitate more effective operation of markets for business development services (BDS) and commercial lending.

The TA's assertion is that these two foci are inextricably linked. Making specific markets work more effectively depends on wider improvements in the business environment. Markets for BDS and commercial lend-ing—and the businesses that operate within these markets—are af-fected by government regulation and intervention just like any other market or business. It makes sense to start with the fundamentals.

Steps towards an improved business envi-ronment

The TA focuses on the following practicable steps to remedy some of these constraints:

Strengthening capacity for regulatory review: government's understanding of good regulatory practices and in particular its capacity to undertake routine regulatory review procedures must be strengthened, in order to ensure (a) regulatory consistency, and (b) that regulation does not inhibit SME competitiveness.

Developing local government capacity to play a positive role in the business environment: government's direct interac-tion with SMEs is typically at the local rather than central level, especially post-decentralization. Historically local government capacity is underdeveloped. Steps to improve the business envi-ronment must include a significant focus on local government capacity.

Improving general business operating requirements and procedures: informal businesses’ lack of formal status and ex-clusion from officially recognized information systems prevents them from accessing important public and private services and limits their rights of protection and redress. Moreover, the 'invisi-bility' of a large proportion of the business population in official government data can lead to distortion in government policy, regulation and resource allocation. Making it easier for business to formalize is essential.

Improving government administration: any improvement to regulation and regulatory procedures has to be implemented ef-


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fectively. Much of the 'reality gap' in Indonesia stems not solely from inappropriate regulation or regulation but from ineffective administration. One-stop-services (OSS) are seen as one way in which this administration of business regulation can be expe-dited. The TA supports the establishment of new or improvement of existing OSS in four districts.

Making markets work for Busi-ness Develop-ment Services and commercial lending

It is widely acknowledged that SMEs' access to markets for certain fi-nancial and business service markets is constrained. Rather than ad-dressing some of the fundamental constraints impinging on these mar-kets, government's response has typically been either to provide certain services directly or to legislate for compulsory allocation of services to SMEs (e.g. directed credit). Such direct intervention or edict amounts to little more than a 'sticking plaster approach' which is unlikely to resolve more deep-seated problems including:

Information deficiencies which undermine service providers' and service consumers' ability to assess risks and make decisions

Lack of appropriate legal, regulatory and oversight frameworks to enforce contracts, promote quality and other standards and protect consumers and property

Unwieldy business formalization procedures which inhibit the ability of businesses—service providers or service consumers—to use official legal recognition as a form of implicit guarantee or 'reputation collateral', which is particularly important in busi-nesses dealing in intangible products, like services

Government is better placed to address these kinds of institutional con-straints than it is to engage directly in the market place. It is these kinds of market 'facilitation' roles that the TA would seek to strengthen, based on a view of government as an enabler of markets rather than as a con-troller of markets. Specifically the TA seeks (a) to establish a credit in-formation bureau at the national level, to improve banks' ability to as-sess SME lending risks accurately and expeditiously, and (b) to identify and improve facilitation roles that government might play to strengthen BDS. Such roles focus on improving information on BDS markets through, coordination between BDS providers and other institutions and activities to raise the general awareness of businesses about BDS.

3.2 Project Approach Focus on na-tional and local levels

The project activities focus partly on the national level and partly on the local level. Work on the national level includes support for introduction of regulatory review methodologies, a credit information system and an SME portal. However, a strong focus is given on work with local Gov-ernments, especially in the field of Business Environment (regulatory review, OSS) and BDS. The focus on work with local Governments is of strategic importance, as the local autonomy and decentralization law delegates a wide range of authorities with regard to local economic de-velopment to the local Governments, including the shaping of a condu-cive business environment. The four local Governments have been pre-selected by the Executing Agency (Bappenas) and include two districts in Central Java (Pati and Sragen) and two in South Sulawesi (Bulukumba and Pare-Pare). The following tables provide an overview on the characteristics of the geo-graphic area and the surveyed SMEs in each district:


Mid-term Report

Figure 3): Basic Data of participating Districts

Local economic indicators Sragen Pati Parepare BulukumbaPopulation per km2 902 1,028 1,090 306Land area 942 1,149 99 1,154GDP per capita (IDR) 827,752 824,002 1,629,952 1,011,020GDP growh (2000-2001) 2.85% 3% 5.17% 2.24%Main economic sector Agri (38%) Agri (44%) Trade (31%) Agri (56%)Gross domestic saving rate 37% 76% 283% 50%Total Government revenue per capita (IDR) 331,000 266,000 801,000 387,000Contribution local income to total income 6.59% 7.43% 9.15% 4.98%Increase local income (2000-2001) 74.68% 74.96% 90.15% 1.13%No of Government officials /1000 capita 14 10 10 18Change in routine expense (2000-2001) 189% 165% 194% 30%Change in development expense (2000-2001) 196% 206% -24% +25%Change of PERDA post decentralization 56% 70% 28% 200% The two data tables reveal different characteristics among the four sur-

veyed districts: Districts in South Sulawesi

Bulukumba represents a typical rural district with low population den-sity and agriculture as main economic sector. However GDP per capita is higher than the two other agriculture-based districts in Central Java, Pati and Sragen. Economic dynamics is lowest of the four districts with regional GDP growth markedly below national growth rates at just 2.24 %. Contribution of locally generated income to total income is low-est of the four districts. The majority of businesses are micro-businesses with less than five fixed employees and turnover of less than IDR 50m per year. Business formalization rate are low, despite the fact that the majority of enterprises have been in business for more than three years. One other notable feature of this location is a high level of legislative activity by the local parliament, with by far the highest in-crease of new local regulations after decentralization.

Parepare represents a semi-urban economy with trading as the main economic sector. The district shows by far the highest GDP per capita, twice that of districts in Java and, at 5.14%, regional GDP growth also far above average. Parepare leads in benchmarks too, such as gross domestic savings rate, Government income per capita and contribution of local income to total Government income. Rather surprising is a re-duction of development expenditure, in contrast to other districts. Most businesses in Parepare are micro-enterprises but have a considerably higher monthly turnover than in Bulukumba. Business formalization is very high; only 7% of businesses lack any legal status. Market orienta-tion is similar for both districts in South Sulawesi with the majority of businesses focusing on local markets.


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SME basic data Sragen Pati Parepare BulukumbaLegal status of businessNo legal status at all 33% 10% 7% 34%Sole proprietaire (of those with legal status) 99% 81% 96% 97%CV 0% 14% 3% 3%Limited company 1% 2% 1% 0%Cooperatives 0% 3% 0% 0%Business operationalLess than 3 years 8% 5% 16% 17%3 to 10 years 50% 24% 39% 54%More than 10 years 42% 71% 45% 29%Business sizeLess than 5 fixed employees 55% 46% 81% 91%More than 5 fixed employees 45% 54% 19% 9%Turnover less than IDR 50 Mio/year 23% 25% 55% 86%Turnover between IDR 50 and 100 Mio/year 38% 9% 20% 10%Turnover more than IDR 100 Mio/year 39% 66% 25% 4%Market orientation% of sales to end user 21% 32% 57% 58%% of sales to intermediaries 79% 68% 43% 42%Local markets 37% 56% 68% 70%Market within Province 25% 32% 16% 20%Market outside Province 38% 12% 16% 10%

Figure 4): Survey: Basic SME Data

Districts in Cen-tral Java

Pati and Sragen represent rural, predominantly agrarian areas in Java and are similar in many respects: population density, regional GDP per capita and GDP growth rates. Government income per capita is consid-erably higher in Sragen than in Pati. Typical business size in the two districts are larger than in South Sulawesi, but even so approximately 50% of the business population comprises micro-businesses with less than five fixed employees. However, average business turnover is con-siderably higher than in South Sulawesi. The number of businesses op-erating for less than three years is low (in Pati 71% of businesses have been operating for more than ten years) suggesting low levels of new business formation and hence rather static economic development. Business networks in Central Java are much more oriented towards provincial and cross-provincial markets compared to those in South Su-lawesi.

Focus on capac-ity building

Recently government's influence on the business environment has been brought into sharp focus by two events: the 1997-8 financial crisis and Indonesia's dramatic process of decentralization. Both events have highlighted deficiencies in government's capacity to formulate, adminis-ter, enforce and monitor policy and regulation and the adverse effects these deficiencies have had on the business environment in Indonesia. Working with government to develop appropriate capacity is therefore a key focus of the TA's activities.

Capacity is an overused term in development projects but it’s meaning is simple: it is the ability to perform specific roles or tasks. Effective ca-pacity building is not possible without a clear understanding of the spe-cific objectives and functions of an individual or organization and the capacity required to perform those functions. Similarly capacity building has to be appropriate to context, to technical competencies and re-


Mid-term Report

Defining the roleof Government

Assessing theexisting situation

BusinessEnvironment

Defining strategiesfor change

Implementation

Monitoring

Capacity Building

Awareness Building, Best Practices, Training, Media Work, Stakeholder Seminars, Assessment tools,Monitoring instruments, Guidelines, Benchmarks, on-the job training

FGDSME

FGDBDS

Provider

AssessmentOSS SME

Survey

ActionPlans

Benchmarks

BestPractice Markets for BDSBasic

Data

sources that are available to that individual or organization. Finally, ca-pacity is dynamic rather than static: circumstances change, so roles and tasks must adapt too. This means that sustainability is central to capac-ity building—individuals or organizations must be able to continue to de-velop their capacity over time using local resources.

At the local level, the TA has introduced a broad range of capacity build-ing measures, such as awareness raising workshops, media orientation, training and direct support, to assist local government officials and other stakeholders in how to assess the business environment and identify fields where local government can influence environment.

Figure 5): Overview Capacity Building Measures


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3.3 Project Phasing Overall phasing The total project duration of 24 month is divided into three phases:

Inception phase (August 5, 2002 until October 18, 2002),

1st implementation phase (starting from October 19, 2002 until September 30, 2003);

2nd implementation phase (starting from October 1st 2003 until July 31, 2004).

Figure 6): Project Phasing

Inception Phase Key issues of the inception phase were installation of the project in-frastructure, team building and the development of a common under-standing of the approach within the team and among the counterpart groups on national and local level.

1st implementa-tion phase

The 1st implementation phase was divided in two sub-phases: the fo-cus of the first sub-phase (October 2002 until February 2003) was di-rected towards an in-depth understanding of the project environment, especially at the local level. Therefore, a comprehensive survey of the business environment and BDS markets was developed and conducted in all four target districts. The information gained from this analysis pro-vided the basis for the development of specific concepts and local ac-tion plans, implementation of which started in April 2003. A mid-term re-view at the end of the first implementation phase was conducted in or-der to evaluate the concepts and results achieved. The following chart provides an overview of the approach for the first implementation phase based on planning developed during the incep-tion phase. It is important to recognize that the two components of Busi-ness Environment and BDS are closely interlinked.

Inception Phase Implementation Phase 1 Implementation Phase 2Inception Phase Implementation Phase 1 Implementation Phase 2

Aug – Oct 2002 October 02–September 03 Oct 2003 – July 2004Aug – Oct 2002 October 02–September 03 Oct 2003 – July 2004

.PlanningApproach

Set-up

Ana-lysis Implementation

Implementation

TeambuildingDevelop common understanding

PlanningInst. Set-up

Understanding the environmentFact-finding

Develop specific concepts

Apply and implement conceptsSupport/monitor implementation

Evaluate and consolidate resultsAdjust concepts

Formulate lessons learnedDevelop models for replication

MTR

ConsolidationLessons Learned


Mid-term Report

Mid –term re-view and mid-term report

Project progress was documented continuously in an inception report and three quarterly progress reports. This mid-term report provides a summary of the achievements as per the end of the 1st implementation phase, the findings of the internal mid-term review, which was con-ducted in early October 2003 as well as the planning for the second im-plementation phase. Findings of the mid-term review and the planning for the 2nd implemen-tation phase have been discussed in mid-term review workshops in Makassar and Semarang for the local level and Bogor for the national level.

Figure 7): Overview Planning 1st Implementation Phase

Preparation RIA Training RIAInitial RIA

Training RIAInitial RIA

Implementation/Reorganization OSS Implementation/Reorganization OSS

Portal: Need Assessment

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Nov - Dec 02 January – March 03 April – June 03 July - Sept 03 Nov - Dec 02 January – March 03 April – June 03 July - Sept 03 Analysis Implementing

BDS Supply AssessmentBDS Supply Assessment

Design Interventions Plan Design Interventions Plan BDS Demand AssessmentBDS Demand Assessment

CB Business Environment

Design AP BEWith regard to:

OSSRegulationsOther fields

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Rec. Full RIA in 3 fields:B. Formalization, Collateral, Law 9/95 Rec. Full RIA in 3 fields:B. Formalization, Collateral, Law 9/95

Module RIA


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4. Summary mid-term review

4.1 Work on National Level Overview According to the TA terms of reference, work on the national level com-

prises:

Business Environment: Regulatory review and impact assess-ment on three topics;

Business Development Services: supporting the development of an SME portal;

Finance: supporting the development of a credit reporting sys-tem in Indonesia.

4.1.1 Business Environment: Regulatory Review Overview Regulations for review have been selected in a three-step process.

First, TA consultants prepared a “long list” of laws and regulations with significant impact on SMEs. Second, each law and regulation was evaluated using the following criteria: a) increase of transaction cost; b) restriction of competition; c) negative impact on SMEs; and d) prospects for advocating change. Third, based on these criteria, and in consulta-tion with the Technical Team, the following three sets of regulations have been selected:

General Business licenses under Ministry of Trade and Industry, including Business Registration (Business Formalization);

Bank Indonesia Regulation on Collateral Valuation (BI Director Decree Art. 4 & 6 No. 31/148/Kep/Dir/1998 on Loan Loss Re-serve – PPAP);

Law 9/1995 concerning Small Enterprises.

4.1.1.1 Business Formalization

Background Flexible business entry and exit is essential for a competitive business environment. Government shapes entry and exit through its business formalization policy, the regulatory framework for a business to obtain and maintain a legal status throughout its lifecycle. In Indonesia, the scale of the formalization process is excessive. A multitude of general business, sectoral, and operational licenses have to be obtained, which are often duplicative. Compliance requirements such as supporting documents and supplementary licenses are often overlapping and nu-merous. The World Bank Data Base (1999-2002) reveals that Indone-sia’s formalization parameters for business entry are among the highest in the world, ranking 110 out of 111 in terms of time necessary to com-plete the formalization process for a limited company and 76 out of 85 in terms of cost and time. The WB database does not yet reflect the fact that the districts now charge for the issuance of SIUP and IUT/ TDI (both were free of charge before decentralization) and are raising fees for TDP, further increasing the cost of business formalization.


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The ADB Business environment survey in four districts: While the World Bank methodology is based on the formalization process of a lim-ited company (including formation requirements according to Civil Law) the ADB TA survey focused on the core formalization process, which is relevant for most companies in Indonesia (HO/SITU, TDI/SIUP/ TDP). The survey results clearly reveal the main weakness of the present sys-tem for business formalization: low compliance rates and high burdens for businesses (depending on the district) in terms of cost and time.

Figure 8): Compliance Cost Business Formalization

Shortcoming of the present sys-tem

The Indonesian business registration system is characterized by a high number of pre-registration requirements, amongst the highest in the world. This is due to the fact that the present system requires busi-nesses to obtain all technical licenses and general business licenses prior to registration, as illustrated in the chart below:

Figure 9): Present Business Formalization Process

An analysis of the present system reveals the following shortcomings:

Ineffectiveness: The business registration system only achieves public objectives for the collection and provision of up-to-date company data to an extremely modest extent. Only 15 % of all businesses are registered (1.5m out of estimated 9.7m tar-geted enterprises) forcing 85% of all business to operate ille-gally. Despite draconian sanctions (up to three months in prison), business registration is not enforced. Even if registration is enforced on local level, information is seldom provided to cen-tral level institutions as decentralization has interrupted the in-formation flow between national and local government.

Conflicting objectives: The main objective of the business reg-istry is information. In order to achieve comprehensive informa-tion from the business community, the burden imposed by busi-ness registration should be as low as possible The pre-

0

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registration requirement of obtaining all necessary technical business licenses in advance represents a control mechanism, resulting in low compliance for business registration, which con-tradicts the main objective of information collection.

Figure 10): Compliance with Business Formalization

Inefficient implementation: Only 42,000 files are accessible electronically. IT infrastructure is at a rudimentary level and inter-agency co-ordination and information exchange barely occurs (e.g. no online data exchange between ministries) resulting in duplication of databases. For example, MoIT alone maintains three databases using information from SIUP, IUI, and TDP, while other databases exists within the Ministry Of Justice (for Limited Companies), and the Ministry of Cooperative and SME.

No exclusion for micro or small enterprises: The present reg-istration law excludes subsistence businesses employing family members from registration, which means that around 60% of all businesses in Indonesia are subject to registration. International comparisons among other countries (Pakistan, Thailand, Ger-many, UK) show that no other country has defined coverage for business registration so broadly, ranging from 19 % (Germany) to 50% (Pakistan) of the business population.

RIA stakeholder meetings: rec-ommendations for a new busi-ness registra-tion policy

To facilitate the formulation of a new business registration policy, two RIA Workshops were held on September 2-3 and 16-17, 2003. Options of a new business registration policy were discussed, developed, and assessed according to the following questions:

• Should business registration be implemented centrally, locally or jointly?

• Should business registration focus on information or control?

• Should all businesses be required to register or only specific types?

On the basis of problem analysis, assessment of various options and stakeholder feedback, the following recommendations regarding policy options arise:

0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%

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Compliance with Business Formualization

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• Policy Responsibility: it is recommended that co-administration of business registration between central and local government be strengthened, rather than to centralizing (as proposed in the draft new business registration law) or decentralizing administration. To support joint administration it is deemed necessary to develop an incentive sys-tem, funded by national government, to stimulate local government staff capacity development (by training), infrastructure upgrading and to in-crease operational funds. • Policy Focus: it is recommended that business registration should be a mere notification for all business. This means that basically are business should be required to register and that the registration process should be streamlined to reduce the scale and complexity of in-formation requirements. At this stage, there are no clear preferences or agreements on the type of businesses that might be excluded or ex-empted from business registration.

• Policy Function: it is recommended to transfer existing pre-registration requirements to the post-registration stage in order to shift the objectives of business registration policy from control to information collection. Although these ex-ante controls pose a significant burden to business, they are designed to protect consumers, investors, and credi-tors, so in order to compensate for any loss of government control at the pre-registration stage, it is necessary to improve information manage-ment and strengthen co-ordination among government agencies. It is also recommended to revise the legal requirements needed to operate a business. General business licenses (SIUP/ IUI) are duplicative to busi-ness registration, are therefore unnecessary and should be repealed. Government control at the post-registration stage should be achieved through specific technical licenses. It is further recommended that small business exemptions from disturbance license (HO) legislation should be considered.

Figure 11): Proposed Business Formalization Process

Expected impact of the proposed policy

The effect of the proposed changes would be to reduce the minimum time needed to register a standard enterprise by 54 working days (30% reduction) and the number of procedures by 6 (30% reduction). Sole proprietors could be registered in 3 procedural steps within 62 working days (10 procedures/ 111 working for a PT). Achieving these higher benchmark levels would increase Indonesia’s business-entry competitiveness (WB data-base) considerably. With 10 procedures to formalize a standard firm, Indonesia would be compara-ble to the Philippines, Vietnam, and France. Reducing the number of

BusinessFormation

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procedural steps by 6 would have a significant effect on the time and costs related to business entry. If the pre-registration stage were re-moved, compliance costs would reduce from 81% to 59% of GNP per capita, placing Indonesia in the median of the international sample. With 111 working days to complete the process, Indonesia would certainly improve from its current position in the “last five” performers, although it would remain considerably below international best practice standards.

4.1.1.2 Bank Indonesia Regulation on Collateral Valuation

Background The financial crisis has lead BI to fostering regulations for collateral rec-ognition in calculating loan loss reserves. Some of these new regula-tions have a negative impact on SMEs' access to commercial loans. For example, banks have to re-assess the collateral value of land semi-annually, a relatively expensive procedure if it concerns small loans. In contrast to procedures in other countries, insured moveable assets, as well as certain financial assets such as the repurchasing value of life in-surance or pension fund contributions, are not recognized as collateral. The same applies to credit insurance or credit guarantees, irrespective of the financial solidity of the insurer or guarantor. This virtually cuts off micro enterprises and SMEs without land ownership from access to commercial finance. The MTAP proposes to review respective BI regu-lations. Considering the relatively small share of small enterprise credit (KUK) in overall credit volumes, and the low rate of non-performing loans small enterprise relative to non-performing corporate loans, cer-tain relaxations may greatly improve SMEs' access to finance without unduly endangering stabilization and recovery of Indonesia's financial system.

Bank Indonesia Regulation

According to a Decree by BI Directors Regarding Loan-Loss Re-serve (PPAP), banks have to apply the following regulations for valida-tion of collaterals: • Types of collateral that can counted as 100% reduction for PPAP,

are: (1) current, deposit and savings accounts, deposited guarantee denominated in IDR or foreign currency, and (2) SBI and SUP;

• Types of collateral that can counted up to a maximum reduction of 50% are currently traded shares/securities on capital markets;

• Other types of collateral such as: land, buildings, residences, air-craft, and ships above 20m3, up to a maximum value of 70%, de-pending on valuation term used.

The fact that the BI regulations do not mention movable assets as col-lateral means that banks, even if they accept movable assets as colla-tors, are not allowed validating such assets as collaterals for loan loss reserve calculation.

Comparison study

A comparison study with transition countries indicates that movable as-sets are nearly as important as fixed assets in terms of collateral, as shown in the chart below. The fact that Bank Indonesia does not recog-nize movable assets as collateral represents a major constraint to SME lending, as many SME cannot provide land or buildings as collateral.


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Figure 12): Bank Credit Collateral in Transition Economies

Collaterals for SME lending in transition coun-tries

Lending practice in USA

The following table provides an overview on lending practice in the United States of America, which underlines the importance of movable assets for SME lending:

Figure 13): SME Lending Practice in USA

Key findings for Indonesia

1. Movable assets are one of the main types of collateral–other than fixed assets–used by SME to raise credit.

2. Conditions regarding valuation and type of assets accepted depend on capacity of bank staff to make assessments and legal certainty.

3. Ownership status of assets is the factor most carefully assessed by banks when considering specific asset types as collateral.

4. Non-registration of moveable assets is a constraint to their use as collateral for SME lending.

5. The existence of a registry office for fixed and moveable assets is a key factor.

6. Legal certainty permitting banks to possess moveable assets expe-diently in the event of credit at risk/bad credit is also a factor in de-termining banks acceptance of moveable assets as collateral.

Bank credit collatoral in transition economies

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4.1.1.3 SME Law

Background In discussions with the Technical Team on regulatory review it was agreed that the input of the project with regard to the ongoing work on the revision of the Indonesian Small Business Act (law 9/95) should not focus on an assessment of the existing draft for a new SME law but rather on providing inputs in terms of a) a more academic input on the rationale for an SME law, and b) a summary of international experience based on case studies on SME basic laws and policies in six bench-marking countries: Japan; Taiwan; Korea; Thailand; US; and UK.

a) Rationale for SME law

Context Introduction of an SME Law needs to be grounded within the overall ra-tionale for supporting SME. This overarching rationale stresses ensuring a competitive business climate and “level playing field” for all firms, large, medium and small; a focus on SME derives from the fact that SME comprise a large proportion of the business population in all coun-tries (rather from any unique benefits of them being small per se).1 Furthermore, introduction of an SME Law should be based on an un-derstanding of:

The appropriate role of government in supporting private sector development;

The existing structure and capacity of government; The efficacy of government interventions to support business

development. Influenced by the wider business context, unique governance and legal structures and history of SME policy and support, there can be no blue print for an SME Law: internationally, it appears that the objectives and nature of specific SME Laws vary considerably.

General Ration-ale for an SME Law

Given the absence of a blue print for an SME Law, a clear rationale for its introduction is vital. These might include:

Political motivation to redress neglect of SME in the past, usually in form of pronounced policy and support biases towards large-scale and public sector enterprises;

Strategic direction to ensure consistency and coherence of SME promotion activities with a wider policy and support framework for developing a competitive private sector (this would include an oversight role);

Administrative concerns, relating to: establishing an institutional mechanism for SME promotion (and providing a uniform defini-tion of SMEs for allocation and procurement purposes within the public sector); coordinating a diverse range of SME promotion activities by multiple agencies; and achieving efficiency gains from better coordination.

Reforming and streamlining existing policy direction, implemen-tation and institutional set up.

1 The Impact of SME on Growth, Development & Poverty: Cross Country Evidence; (2003) World Bank


Mid-term Report

In principle, therefore an SME Law may bring a number of benefits. However, at the country-specific level, further examination of how a specific SME Law can address identified constraints is required.

Specific ration-ale for an SME Law

It is useful to consider the expected value-addition or distinctive benefits of an SME Law within a specific country situation. Put simply, a number of countries that demonstrate vibrant SME performance don’t have a specific SME Law, so the obvious question is whether an SME Law is really needed?2 Two points need to be borne in mind when considering this question:

A significant proportion of the most serious problems faced by SME are not actually SME-specific, but relate to broader busi-ness constraints or specific sectoral or technical factors: in what ways will an SME Law help resolve these issues?

Typically many SME-related policies, regulations and institutions already exist: what will be distinctive about a specific SME law in relation to the status quo?

The distinctive contribution an SME Law could make will relate to sev-eral possible functions or institutional mechanisms:

Policy shaping and setting Coordination and oversight Implementation or delivery activities

Policy shaping and setting and coordination and oversight roles could be referred to as “horizontal” or strategic functions; they influence, shape or direct, but do not necessarily involve direct engagement with the beneficiaries or targets of the law. Conversely program implementa-tion or delivery functions could be termed “vertical”, because they en-gage directly with ultimate beneficiaries and entail some form of service delivery and as a consequence are typically more detailed or targeted. It is worth noting that it is often counterproductive to house horizontal and vertical functions within a single institution, e.g. implementation and oversight functions. Given that in almost all countries vertical SME support functions are common and well established there appears to be little rationale for an SME Law simply to legitimize that support; it exists already. The stronger rationale appears to be in terms of horizontal or strategic func-tions, where typically SME-related policy and support has been diffused, uncoordinated and often isolated from wider private sector and eco-nomic development trends or policy. Therefore the distinctive rationale for an SME Law could be claimed to be developing greater strategic fo-cus and coherence, implementation efficiency and impact in a country’s SME promotion agenda. If it is the case that these horizontal functions are the greatest priority, they may be established or strengthened in two ways, by:

Introducing a specific SME Law;

Enhancing consideration of SME within the overall legal, policy, regulatory and public service framework.

2 Regulatory Review on SME Law; (2003) ADB TA


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Risks and is-sues arising from introduc-tion of an SME Law.

Wider experience suggests that introduction of an SME Law has often lacked a clear rationale resulting in a generic SME development focus in the SME Law. Typical consequences of this include:

Establishment of a broad-focus SME agency. Development of a new SME support structure in parallel to exist-

ing ones. An emphasis on direct SME support rather than more strategic

roles. Creation of a SME-specific policy and structure, which can actu-

ally isolate rather than include SME in the economic main-stream.

A particular problem appears to be a failure to separate horizontal and vertical functions resulting in:

Inter-agency competition or duplication of roles. Conflicts of interest between implementation and oversight. Establishment of coordination and oversight functions at inap-

propriate levels in the institutional hierarchy, resulting in lack of authority over other agencies with SME-related activities.

As a consequence the distinctive purpose of an SME Law – to ensure greater strategic coherence, coordination, quality control and program efficiency – can be undermined.3

Possible alterna-tives to an SME Law

If establishing these distinctive strategic, horizontal roles–with the objec-tive of enhancing SME consideration within existing set up–is seen as a key priority for government, do different (and more effective) means ex-ist? It appears that some countries have achieved more coherence in their overall private sector development and SME promotion policy and pro-gramming through a number of means:

Establishing a coherent, overarching private sector strategy and policy direction (usually under one lead ministry e.g. Finance, Economy, Trade and Industry), which outlines overall objectives, defines priority areas of government intervention (and often types of activity government won’t undertake), roles of specific agencies and other actors, key performance considerations and so on.

Ensuring that effective consultative mechanisms for policy and regulatory formulation operate across government in order to in-corporate relevant stakeholder inputs, including inputs from the private sector (and SME), e.g. via Business Membership Or-ganizations, Small Business Councils, Federation of Small Busi-nesses, etc.

Addressing hierarchy and authority, coordination and oversight issues through powerful horizontal functions at higher or inde-pendent levels and ensuring that they incorporate consideration of SME-related concerns, e.g.,

3 A further problem, often at the heart of an SME Law is establishing a uniform definition. It remains a subject of debate as to the feasibility of establishing a legal definition of SME, when different stakeholders in government use different criteria according to their differing practical requirements, diversity of SME and change over time.


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o Institutionalized Regulatory Impact Assessment functions which ensure SME-appropriate policy across all parts of government (Think Small First concept)

o Strong government audit functions which look at program effectiveness and efficiency, across all levels of govern-ment (such as value-for-money benchmarking of gov-ernment services, program impact assessments)

The key lesson is that these horizontal functions are generally part of better governance practice as a whole rather than SME-specific. A key priority is therefore to ensure that such governance mechanisms appropriately address SME-related issues rather than to establish a special (usually subordinate) SME agency to act as the sole “flag car-rier” for SMEs across all levels of government.

b) Key findings from international comparison study

The international comparison study of SME laws and policies in six countries identified the following best practices.

Coherent Private Sector Devel-opment Strategy

Most countries in this study have been striving for consistent and coher-ent SME policies within a wider policy framework of competition, econ-omy, trade and industry. OECD’s cross-country comparative study also confirms that high productivity is best explained by the strength of com-petition,4 evidenced most clearly by the consistent integration of com-petitive policy into SME policy in the US. Article 2 of the US Small Busi-ness Act pronounces that the objective of the Act is to preserve free competitive enterprises. It would not be an overstatement that the US does not have a SME policy but only a competition policy. Indeed, com-petition policy principles are embedded in regulatory mandates in many policy areas, including economy, trade and industry.

On the contrary, in the past in some Asian countries, particularly Japan and Korea, SMEs were regarded as the object of protection; govern-ments directly provided various finance, marketing or technology assis-tance. Such direct government intervention has led to SMEs’ depend-ence on protection. In the aftermath of the Asian Crisis, having recog-nized the importance of more competition-based and market-oriented policies, some Asian governments have been trying to integrate princi-ple of market competition into important policy regimes outside the field of competitive policy, in particular in finance, trade and industry. How-ever, the policy environment in many Asian countries still mixes inter-vention with competition. As a result, sometimes SME policy becomes fragmented and inconsistent with competition policy.

Japan has shifted from traditional protection-oriented SME policy to pol-icy to enhance innovation by encouraging competition through deregula-tion and assistance of high potential business start-ups. This policy change is reflected in the new SME Basic Law enacted in 1999. In Korea, competition principles are at the heart of new economic, trade and industry policy emerging after the Asian Crisis. In general, Korea’s responses to the Crisis show increasing willingness to rely on competi-tion and open market policies. Indeed, government has focused on con-trolling the power of conglomerates by regulating internal transactions,

4 The OECD Report on Regulatory Reform, 1997, Paris.


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debt guarantees and cross shareholdings. However, it still exempts SMEs from the application of general competition law by preserving cer-tain business lines and quotas for government procurements. One lesson from international experience is that introduction of a SME basic law needs to be grounded within an overall policy rationale for en-suring a competitive business environment where all firms–large, me-dium or small–can maximize their potential business capacities and be competitive in the market place and where the prime role of government is to enhance this business environment. As SMEs comprise the major-ity of the business population in any country (and they are key benefici-aries of a better business environment), overall SME policy should not be based on a perception of SMEs’ uniqueness or weakness vis-à-vis large companies. Policy should ensure that SMEs are treated fairly but preferentially: providing special privileges for SMEs will not increase their competitiveness on a sustainable basis but carries the risk of de-pendence on such protection.

Institutional Set Up for Effective Policy Coordina-tion

Since the essence of SME policy can be regarded as private sector de-velopment policy and is therefore closely related to other policies in the field of competition, economy, trade and industry, there is clear re-quirement for coordination between institutions responsible for SME and private sector policies and regulations. The comparative study gives some indications of possible institutional mechanisms for effective policy coordination, although there does not appear to be a single, ideal model. In some countries powerful horizontal coordination bodies are estab-lished at the center of the government and do not belong to any particu-lar line ministry, they have independent resources and technical capaci-ties to conduct policy reviews and authority to enforce new policy meas-ures. Experiences in countries like Taiwan, Korea and Thailand show that the policy coordination function can be enhanced by the establish-ment of hierarchically higher institution directly attached to the head of administration or parliament. In most cases, the policy coordination insti-tution comprises heads of relevant government agencies and represen-tatives from the private sector, NGOs and academia.

Figure 14): SME Law: Institutional Set-up in Korea

Institutional set-up in Korea

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The US has another approach to set up Small Business Administration (SBA), a powerful and independent agency that has a mandate to advo-cate the interests of SMEs within the federal government as well as to formulate and implement SME policy measures. New policy measures or regulations that may have significant impact on SMEs can only be in-troduced after consultation with the SBA. Figure 15 illustrates the SBA is a matrix organization that has both vertical (implementation of its pol-icy measures) and horizontal (overseeing the SME related regulations and strategy making) functions.

Figure 15): SME Law: Institutional Set-up in USA

Institutional set up USA

Reduction of the regulatory and administrative burden on SMEs has been one of the top priority issues in SME policies in many countries since SMEs are disproportionately affected by administrative and regu-latory burdens. Since the early 1980s the US has been a pioneer and world leader in implementing this policy. The Regulatory Flexibility Act of 1980 and the Small Business Regulatory Enforcement Fairness Act of 1996 increased SBA powers in the federal regulatory process. The 1980 Act requires federal agencies to conduct Regulatory Impact Assessment (RIA) on proposed regulations that affect SMEs. In addition, the 1996 Act re-quires federal agencies to publish compliance guides for all rules with a significant SMEs impact. Furthermore, the 1996 Act also establishes a complaint process whereby any SME can complain about enforcement actions to the SBA Ombudsman or 20 Small Business Regulatory En-forcement Fairness Boards established across the country.

The UK has also placed special emphasis on reducing regulatory and administrative burden on SMEs. The establishment of a Regulatory Im-pact Unit to oversee RIA in the Cabinet Office and Better Regulation Task Force to promote and monitor reduction of regulatory burdens on businesses reflect this priority. In 2000 the Small Business Service (SBS) was established to fulfill an advocacy function for SMEs within

Other agenciesSBA

SME policy coordination, implementation and advocacy

within the government

SMEs

Overseeing SME related regulations

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government in order to ensure that regulatory approaches minimize burdens on businesses. As part of every RIA, government agencies are obliged to conduct small businesses impact analysis–a so-called “Small Business Litmus Test”–and consult with SBS on the results.

Compared with the US and UK, the Asian countries of this study do not seem to have placed a priority on regulatory burdens, with the exception of Korea. In 1997, as the result of the worst economic crises in the post World War II period, the Korean government implemented drastic pro-grams of regulatory, financial, and structural reforms. Under the 1997 Basic Act on Administrative Regulations, the government established the Regulatory Reform Committee under the authority of the President. Having received a strong support and commitment from the President to eliminate unnecessary rules and anti-competitive regulations, the Com-mittee reviewed 11,000 regulations in 1998-1999, reducing the number of regulations by 50%. This rapid, decisive reform has brought substan-tial benefits to SMEs by ensuring a more pro-SME policy environment and lowering the entry barrier in many industries. The Small and Me-dium Business Administration also targets its policies at improving the structure and international competitiveness of SMEs and reducing regu-lations with adverse impact on competition.

4.1.1.4 Conclusion and outlook Regulatory Review

SME law As noted previously, at the behest of its government counterparts, the ADB TA was not required to review and comment upon the proposed SME Law, but to confine its inputs to the general rationale for an SME Law and a review of international experience. However during subse-quent discussions between the TA and the national working group on regulatory review, stronger TA guidance and inputs have been re-quested. This request has come at a late stage in the drafting of the Law. Therefore the extent to which ADB TA inputs can be accommo-dated is questionable.

Moreover, as the observations below make clear, the ABD TA has pro-nounced doubts as to the overall nature of the Law as currently pro-posed and its likely impact on SMEs. In the event that such concerns are borne out and the SME Law comes to be revisited on a ‘back to the drawing board’ basis the TA’s inputs may have greater utility.

Observations on existing draft. Given the extensive nature of the TA’s concerns with the Law it is not possible to provide a line-by-line critique of the existing draft in this report. Overall the existing draft is: • Enormously broad and generic and lacks coherence both within the

Law itself and with respect to wider private sector development and competition policy.

• Unclear as to the specific problems that the law is intended to ad-dress (beyond a plethora of commonly-cited SME constraints).

• Oriented to direct intervention to promote and protect SMEs. • Unspecific or unclear about responsibility and authority within gov-

ernment for specific elements of the law. • In many places, apparently, poorly drafted.

The impression gained is that the existing draft does not actually consti-tute a practical legislative instrument. It appears closer to a rather aspi-rational and exhaustive mission statement on all SME matters, whether


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or not they are within the legitimate remit of government that might have been prepared at the culmination of a conference on SME promotion in the early 1990s. As a consequence the Law’s relevance and feasibility must be questioned.

Possible remedial steps for better formulation of an SME Law. As noted above, if possible, the SME Law should be revisited. An obvious starting point should be a re-evaluation as to whether a specific SME Law is needed (given that many countries have achieved dynamic SME performance without a specific law), and if so, what its purpose should be. Such an evaluation will necessarily bare a close resemblance to a RIA process, in which a number of elements are essential: problem analysis, formulation of options, feasibility assessment and stakeholder consultation. Such steps would appear important in achieving focus, practicality and endorsement of influential stakeholders. • Problem analysis: for a specific SME Law this is unlikely to mean

cataloguing the entire range of problems that SMEs face in Indone-sia. These are already well known and the subject of a plethora of government policy, regulation and intervention. The problems that a specific SME Law is likely to address relate to the focus and efficacy of government itself: issues arising because of the inappropriate-ness of existing policy, regulation, intervention and practices across government towards SMEs.

• Clear, distinctive objectives: wider experience indicates the im-portance of identifying the distinctive contribution a specific SME Law will make. This is unlikely to be in terms of direct intervention (i.e. yet more SME promotion and protection measures), but in terms of improving a number of higher-level functions within gov-ernment which are currently absent or inadequate: - ensuring better coordination and coherence of government pol-

icy, regulation and intervention relating to SMEs across all areas of government;

- overseeing policy formulation, regulation and the efficacy of government programs relating to SMEs;

- maintaining representation of SME-related issues within gov-ernment and the legislature.

• Feasibility assessment: an SME law needs to prescribe roles, re-sponsibility and authority for specific elements within that Law. It should be consistent with other legislation (e.g. Laws on Decentrali-zation) governing government roles and authorities and make a real-istic assessment of the capacity of government to perform specified actions and the feasibility of achieving desired outcomes. One par-ticular area of concern with the proposed Law is that authority for SME matters is currently diffused and subject to considerable inter-agency competition. In the absence of higher level, unified authority on both the formulation of the SME Law and the feasibility of its im-plementation appear compromised.

Business For-malization

Increase Awareness and Political Willingness – greater awareness and political willingness to address problems related to business formal-ization is required. In the past, the focus was mainly on operational pro-cedures, such as the introduction of OSS. However, without addressing the key constraints within the system of business formalization, such operational improvements will only have a limited impact. Major altera-tions to reduce the time to register business and to focus the scope of


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business registration are recommended. In a next step, discussions need to be initiated to find a broader consensus on the proposed new business registration policy. Adjust New Draft Law on Business Registration (RUU-WDP)- MoiT has drafted a revised Business Registration Law to remove some un-derlying constraints of the present legislation. However, the draft law does not address the key constraints identified in the RIA process: reg-istration is still the last step within the business formalization process and the scope for registration is now enlarged to include non-profit or-ganizations. In addition, the proposed centralized system in the form of a new registration agency is not consistent with decentralization legisla-tion. It is strongly recommended that the draft be revised to address these shortcomings. Further specification of the proposed registration policy: The pro-posed new registration policy needs further specification. It is recom-mended to conduct detailed RIAs on specific aspects of the proposed new registration system, for example, the exemption of sole proprietors and/or micro and small enterprises, information requirements, and the improvement of co-ordination between government agencies. It is strongly recommended to conduct a detailed RIA on the Trade and In-dustry License legislation and to exempt SME from registration accord-ing to their size. Develop Concept for Improved Implementation: It is recommended to keep implementation of registration at the local level. Given that there are concerns about local governments’ competence or willingness to ful-fill this task with clear national guidelines, complemented by an incen-tive system, should be considered. Improvements in the internal effi-ciency of business registration organizations can be achieved by using performance targets, rigorous measurement of operational results and incentive schemes. It should be the role of Central Government to em-power Local Government to achieve these targets. In this respect the role of Central Government, in terms of guidance and in terms of control and sanctions needs to be clearly defined. The use of IT within the reg-istration process can be used to speed up the process and simplify the administrative process. Develop concept for compliance: reducing evasion of registration might be addressed by the following measures: (i) introducing exemp-tions for small business according to size, (ii) increasing technical and administrative capabilities, (iii) decreasing registration compliance cost and unnecessary requirements, (iv) increasing knowledge of the respec-tive legislation and benefits of formalization, (v) discouraging evasion, possibly by introducing stronger sanctions5. Control / Data Management – the requirements aiming to control the legality of business pose a significant burden to business. Those con-trols on the other hand are designed to protect consumers, investors, and creditors. To compensate the loss of government control in the pre-registration phase it is necessary to strengthen the co-ordination among government agencies on national, provincial, and local level. The control

5 Current Law on Registration No.3/1982 sanctions are max.3 months prison or max. IDR 3m but apparently never implemented


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function, which remains with business registrars is to notify those gov-ernments agencies involved in the formalization process. An informa-tion cross-check system between Government agencies backed up by LAN would leave it up to the responsible governments agencies to monitor compliance under their jurisdiction. Improving the overall man-agement of the company database in terms of information gathering, storing, updating, and facilitating access third parties must complement this process.

BI Regulation on Collateral

After having conducted round-table discussions with several banks it remains unclear to what extent the BI - collateral regulations are a con-straint for SME lending. Some of the banks experience the regulations as a constraint, while other banks do not. However, the discussions confirmed, that at least for first-time customers banks will always ask for collaterals which are accountable as loss-reserve according to the BI regulation. For existing customers, most of the banks seem to have a more flexible policy and most of them seem to accept movable assets or even receivables as collateral. In the meantime, Bank Indonesia has formed an internal working group on collateral issues and the TA will link up with this working group for the discussion of more detailed recommendations.

Challenges ahead: Institu-tionalizing regu-latory review

The capacity building measures in regulatory review has been highly appreciated by all participants and there is a clear demand for an ex-tended support in future. However, in order to have a sustainable im-pact, the issue on how to institutionalize regulatory review on national level has to be addressed. ADB TA on Deregulation and Competition has already come up with recommendations for a future institutionaliza-tion of RIA. The key issues are: As a long-term objective, RIA should be integrated in an Indonesian Administration Act. Such a basic act is still missing in Indonesia and would provide the future legal base for the institutionalization of RIA. Short-term measures should include:

Develop procedures and regulations on how to conduct RIA within Ministries;

Introduce RIA within ministries by appointing one Department responsible for RIA;

Assign an oversight body for external quality control in order to assure consistency and quality for the ministerial RIA process;

Assign an institution in charge of the development of RIA-related regulations and guidelines and to provide training to all ministries and local Governments.

In addition, the national Government is challenged by the local Govern-ments: the four pilot Governments under the TA expect the national Government to become active and to provide guidelines, regulations and support for the implementation of RIA on local level.

4.1.2 Business Development Services: SME Portal SME Portal The label SME portal is misleading as SME are not the main target

group for the portal, as only a very limited number of SME are currently in the position to use modern ICT. But there is an urgent need to im-prove the knowledge and information base available to national and lo-cal governments for decision making, as well for BDS providers, donors


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and private sector institutions. The basic idea of the SME portal is to provide a specialized search engine for SME information in Indo-nesia. Experience suggests that an information system initiated by short-term development assistance project will only become viable if it is embed-ded within—and adds value to—a local host, who has an on-going in-terest in maintaining and updating the system. Therefore, the main initial task in the development of an SME portal was to identify and select a technical host and conceptual partner that will guarantee sustained in-volvement and a long-term life cycle beyond the period of TA support. Through a competitive tender process, IndoExchange has been se-lected as the developer and host of the SME platform. On occasion of the kick-off meeting at Bappenas, IndoExchange has presented an up-dated implementation plan for the project as well as navigation mock-ups and a first graphic design. As results of a number of progress meet-ings between the Technical Team, ADB TA and IndoExchange, the fol-lowing changes have been agreed on:

The SME portal is part of the overall indoexchange.com portal. Loading time should not exceed 30 seconds;

The SME Portal should receive at least 5 % of IndoExchange.com’s unique visitors during the initial phase. The results should be pre-sented in visits and page views. ADB TA will receive regular data on IndoExchange’s visits and page views.

The daily update schedule should follow the regular indoex-change.com routine and timing.

The participants agreed to launch the SME portal in Bahasa Indone-sia first and build the follow-up in English as soon as possible

A CD-Rom-based, offline version of the SME portal (technically pro-vided by IndoExchange) will be promoted for further distribution to selected target groups and multipliers (Bappenas).

The platform was launched in early October 2003 under the domain name www.info-ukm.com.

Figure 16): Opening page Info – UKM


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First results and challenges ahead

The following table provides an overview on promising first results in term of website-hits for the period of end of September until October 13, the period of the launching of the website.

Figure 17): Hit Statistics Info-UKM.com

The key issue for the next implementation phase are: Continuous socialization and promotion: Info-UKM needs to

be socialized and promoted among the potential users; Establish a strong network of stakeholders in terms of ac-

cess to information: Info-UKM needs to be linked with potential information providers (Government, donors, and private sector organizations) in order to have easy access to new and actual information;

Linking Info-UKM with other Homepages such as banks, Government institutions, NGOs, SME-specific homepages etc for further socialization and promotion.

Expanding on-line consulting services: On-line consulting was quite frequently used during the start phase. For the time being, IndoExchange can provide in-house consulting on spe-cific issues, which are related to the organizations fields of com-petence. In order to expand the consulting services, it will be im-portant to establish a network with other consultants.

4.1.3 Finance: Credit Reporting System

4.1.3.1 Background

Addressing constraints in access to fi-nance

The current TA has identified the principal impediments to any im-provement in the competitiveness and growth of SMEs in Indonesia. One of these impediments is the difficulty SMEs’ experienced in dealing with commercial lenders and the reliance these lenders place on obtain-ing collateral prior to advancing credit.

This issue was first identified in 2001 as part of Technical Assistance program ‘SME Development (ADB TA 3417)’. In July 2001 a report ‘The Credit Information Environment in Indonesia’ recommended the estab-lishment of a credit reporting system in Indonesia. It concluded that the establishment of such a service would benefit:

Hits (Entire Site Successful) 42,279Hits (Average per Day) 3,019Page Views 6,734Page Views (Average per Day) 481Document Views 2,526Unique Visitor 1,028Links 162Inquiry (Average per Day) 8Most Active Hours 11.00 – 12.00Most Active Day Wednesday

Source: WebTrends Analysis 30/9/2003 00:00:0 – 13/10/2003 23:59:59


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lenders by • reducing the incidence of non-performing loans • improved productivity • lead to a strong expansion in the credit market • remove the need for lenders to ask for collateral

SME’s and consumer credit borrowers, through: • easier access to financial services • greater flexibility in their relationship with lenders • freeing up working capital as banks reduced their reliance on

collateral

The conclusions and recommendation in the 2001 report were based on experience in other countries, including developing trends in the Asia Pacific region.

Importance of credit reporting systems world-wide.

The positive impact of a comprehensive credit reporting service on bank lending and credit markets in general is now so well established and ac-cepted as to make further study almost superfluous. However a recent study, ‘Tullio Jappelli and Marco Pagano – Information Sharing in Credit Markets: A Survey’, CSEF Working Paper No. 36, found that

• bank lending is higher (as a % of GNP) in countries with more intensive information sharing;

• breadth and depth of credit markets around the world is directly related to the amount of information sharing;

• default risk is lower.

In an address to the 3rd Consumer Credit Reporting World Conference in October 2002, Professor Michael Staten of Georgetown University said that with access to better information about individuals, lenders can more accurately measure and price for risk, with the following re-sults:

• the quantity of loans demanded is stimulated; • fewer high risk borrowers are rationed out; • loan markets work more efficiently, with a greater volume of

lending at lower cost.

Credit reporting systems operate in all developed credit economies and are increasingly common in the Asia Pacific region, namely: Hong Kong, India, Japan, Malaysia, Pakistan, Philippines, Shanghai, Singapore, South Korea, Taiwan, Thailand.

4.1.3.2 The Current TA Project – Facilitating a Credit Reporting System in In-donesia

Building on rec-ommendation of TA 3417

Following the recommendations of TA 3417 work commenced in 2002 on developing a blueprint and structure for a credit information bureau to cover SME and consumer credit transactions. An outcome of TA 3417 had been the establishment of a Credit Bureau Steering Commit-tee with representatives from Bank Indonesia, the banking associations, SMoCSME and MOIT. A team from the TA was assigned to work with the Steering Committee to complete a feasibility study into the formation of a credit information bureau, including the following tasks:

(i) review the experience of other credit bureaus in the region and make recommendations for best practice;


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(ii) specify and implement a scoping study into the quality and nature of credit information held by banks and Bank Indone-sia, to determine the nature and viability of a possible future credit bureau;

(iii) define the specific services to be provided; (iv) review legal and regulatory matters that may affect the op-

eration of a credit bureau; (v) explore and discuss organizational and funding proposals for

a future credit bureau with relevant government, banking in-dustry and international agencies.

Credit Bureau Steering Com-mittee

Progress was slower than had been hoped due to difficulties encoun-tered in coordinating the various stakeholders in the Steering Commit-tee, coupled with initial uncertainty about the participation and expecta-tions of Bank Indonesia. Throughout September and October 2002 there was extensive consultation with representatives of the banking in-dustry and key government and Bank Indonesia representatives cover-ing:

• banking industry representation in the Credit Bureau Steering Committee;

• consensus on medium and longer term objectives; • differing views on ownership of the credit bureau (put aside un-

til completion of the initial stages of the project); • debate on whether to build a new system or modify the existing

SID service operated by Bank Indonesia; • whether to proceed with a Scoping Study into credit data held

by the banks, prior to a decision on a credit bureau; • longer term funding of the project – estimated to be US$4 mil-

lion to US$6 million.

The first formal meeting of the Steering Committee took place in Janu-ary 2003. Attending by invitation were three representatives of Interna-tional Finance Corporation (IFC). The meeting approved:

• Terms of Reference of a Scoping Study covering credit customer data held by the banks and Bank Indonesia, plus legal issues possibly impacting a future credit bureau.

• Agreed that Trans Union Advantage Pty Ltd of Australia be in-vited to tender for the data analysis and technical sections of the study.

• Agreed on the participation of banks in the Scoping Study to be drawn from members of Perbanas, Himbara, Foreign Banking Association, Bank Indonesia (SID), a Regional Bank and a non-bank finance company.

The IFC representatives at the meeting indicated IFC was prepared to contribute funds to the Scoping Study.

4.1.3.3 Scoping study

In March 2003 a meeting of Scoping Study participants (the Study Se-cretariat) was held at Bank Indonesia. It was agreed to proceed with the Scoping Study and Bank Indonesia was requested to negotiate (on be-half of the participating banks) appropriate agreements with Trans Un-ion Advantage (TUA) covering the conduct of the Study. It was further


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agreed that Bank Indonesia would provide support staff to assist the ADB TA team in liaising between the participating banks and TUA.

Delays were experienced in obtaining funding approval for the Study (US$122,000). Following two months of discussions and correspon-dence It was agreed in June 2003 that IFC would provide US$100,000 with the balance to be provided by Bank Indonesia.

Further delays were experienced in finalizing the agreements between TUA and the Study Secretariat, with agreement not being reached until September 2003. Initial briefings of study participants by TUA and ADB consultants took place during June and September and the Scoping Study documentation was finalized.

Structure and Scope

The Study is a detailed investigation into customer account data held by the banks to determine what data quality issues may need to be ad-dressed prior to establishing a credit reporting service in Indonesia. It will also assist in determining the likely functionality and structure of a future credit reporting service. Participants are limited to ten financial in-stitutions, Bank Indonesia, eight commercial banks, including a foreign bank and one regional bank.

Objectives 1. Analyze and evaluate the quality and integrity of customer identity and account status information held by banks;

2. Determine whether customer information within the banking sector can be used to build a credit reporting data-base;

3. Determine whether customer information held by the banks can be used to identify and cross reference business people to the busi-nesses they own and control;

4. Evaluate the ability of banks to modify their data collection and stor-age of customer information, if required;

5. Determine what standard criteria could be adopted by the banks in reporting customer information to the proposed credit bureau;

6. Analysis and evaluation of customer data received from participating banks, including: Determining the extent of valid data contained in each data field

and comparing each bank’s level of data quality and richness; Cross validate customer identity data over all product portfolios

within a bank to determine whether the quality of customer iden-tity data is consistent across all portfolios;

Determine the incidence of individual customers with multiple loans from one or more banks to assist in quantifying the benefit of a credit bureau;

Review level of automation for each product portfolio; Review of Systems/Data Integration – customer identity informa-

tion across products; Review customer demographics stored in each bank’s credit ap-

plication system and the customer information sent to the bank’s accounting system at account set-up;

Review the extent of customer level data stored in the bank’s customer database;

Expected out-comes

1. Identify and report on the issues facing stakeholders in establishing a credit bureau covering commercial (SME) and consumer lending transactions.


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2. Recommend key targets and strategies to be adopted in establish-ing a credit bureau.

3. Report on the data held within BI’s Debtor Information System and the suitability of that data for use in the future credit bureau.

4. Recommend strategies and action points required to implement a credit reporting service in Indonesia.

5. Document high-level functionality, outlining the services stake-holders may reasonably expect from the proposed credit bureau, based on the results of the Study.

Completion Date

The Scoping Study is progressing but is behind schedule.

Eight banks have recently provided data for analysis by TUA. TUA ana-lysts will complete an examination of Bank Indonesia’s SID by mid No-vember. It is currently expected that a draft report for discussion will be completed by TUA by end January 2004, with a final report and presen-tation in the second week of February 2004.

4.1.3.4 Tasks and issues to be addressed separate from Scoping Study

Code of Practice

It is recommended that a future credit bureau operation be regulated and operate within a set of information privacy principles and operating guidelines. No later than January 2004 the ADB TA team will circulate the following papers for consideration by the Credit Bureau Secretariat:

Draft “Information Privacy Principles”

Draft “Credit Bureau Code Of Practice”

Institutional set-up for a future credit reporting system

Authority to operate: There appear to be three possible legal models that could be consid-ered as a basis for authorizing the operations of a future bureau:

Bank Indonesia Act- what credit reporting activities are covered and what are its limitations.

Financial Services Authority Act- the potential advantages and disadvantages.

Special Credit Reporting Legislation. At this stage the Bank Indonesia Act appears to be the most attractive option as it already has the power to authorize a private sector credit bureau and is a known entity. Preliminary advice has been sought from a reputable law firm covering each of the above options. It is hoped to receive this advice by end December 2003.

Ownership and operations, po-tential investors and tentative cost

The three possible models are: 1. Banks are majority shareholders and major customers; 2. Banks are major customers but are not shareholders; 3. Bank Indonesia is sole owner and operator.

Potential Investors: 1. Banks through banking associations or individually; 2. IFC and ADB;


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3. International Technical Partners (potentially five); 4. Bank Indonesia (doubtful); 5. Ministry of Finance/Financial Services Authority; 6. Local Venture Capital.

Estimated Cost The total investment cost are estimated to amount up to US$ 6 million with initial set–up cost of US$ 4 million and subsidized operation during 2 to 3 years, amounting up to US$ 2 million.

Future role of Bank Indonesia

Possible future roles and functions of Bank Indonesia are: 1. Provide legal authority (license) for operation of the bureau; 2. Legalize the bureau and require banks to provide data and use

services; 3. Legalize bureau, require banks to support the bureau and act as

Regulator; 4. Minority shareholder and act as Regulator; 5. Majority or total ownership.

In many respects Bank Indonesia could be seen as the ideal, obvious choice as the Regulator of a future credit bureau. In the early stages the bureau will be restricted to recording bank information. Bank Indonesia has an existing role as the banking industry regulator and has the confi-dence of the banks as an impartial authority. As the bureau becomes established and pressure builds to extend its membership to non-bank creditors, these new members could be required to enter into binding agreements to place themselves under the authority (for credit reporting purposes only) of Bank Indonesia (as credit bureau regulator). Such agreements would be a condition of credit bureau membership.

Should Bank Indonesia be prepared to accept this responsibility, it would need to consider the potential for a perceived conflict of interest where the Regulator is also a shareholder, or operator of the bureau.

Outlook The Scoping Study results will be published no later than February 2004. Prior to their publication the important issues listed above must be given attention. It will be difficult to progress the credit bureau project any further until the matter of ownership and control is settled. The ownership structure and future operating protocols of the bureau should be agreed to, at least in principle, no later than the end February 2004.

Questions relating to the credit bureau’s legal status need to be clearly identified and matters such as the bureau’s future Code of Conduct will require attention. Potential technical partners need to be contacted and invited to submit their proposals and these will need to be carefully scru-tinized and evaluated. This evaluation process will require a dedicated team of appropriately qualified individuals. Funding and operating budg-ets will need to be agreed.

Assuming a decision to proceed early in 2004, there will be an urgent need to appoint a full time executive team to take ownership of the pro-ject and drive it forward. These decisions should not be deferred. They are central to the success of the bureau project.


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Assessment of local businessenvironment and BDS markets

SME survey onBusiness

Environment

Design Action Plans for:Regulatory Review

OSSStrengthening BDS

Implementation of ActionPlans according to

priorieties

BusinessEnvironment

(BE)

BusinessDevelopment

Services(BDS)

Detail assessmenton One Stop

Services

Assessment oflocal Government

officials’perception on BE

Focused GroupDiscussions for

2 sectors per area

Generic BusinessDevelopment

Services(4 sectors per

location)

Specific BusinessDevelopment

Services(2 sectors per

location

4.2 Work on local level Overview According to TA Terms of Reference, work on the local in 4 districts

(Parepare and Bulukumba in South Sulawesi and Sragen and Pati in Central Java) is focused on:

Regulatory review of local regulations; Support implementation of One-Stop Services for business

licenses; Facilitation of BDS.

Main focus during the first implementation phase was data collection in the four participating districts with regard to business environment, one-stop services and business development services. The data collection was completed in early March 2003 and the results were used as input for the Action Planning Workshops in Makassar and Semarang.

Figure 18): Instruments for Assessment of Local Business Environment

4.2.1 Summary of results of local assessment Key findings of Business Environment Survey in Central Java

Access to raw materials and markets are rated highest among the problems faced by SMEs. These problems are manifestations of underlying constraints such as:

Infrastructure: Despite infrastructure being better in quantitative or coverage terms (e.g. no. of telephone lines, surfaced road area) than in South Sulawesi, SMEs rate infrastructure poor in Central Java, presumably due to qualitative aspects;

Limited communication: poor infrastructure and underdeveloped networks among SMEs restricts access to information (e.g. internet);

Regulations hamper access to raw materials in specific sectors, e.g. wood sector.


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With more than 50% of SMEs having credit, access to finance is remarkably high. Despite this, 40% to 70% of all respondents claim that access to finance as a problem. This raises the question whether existing financial services offer appropriate products for SME, for exam-ple credit for investment versus working capital. More detailed research will be required to explore this situation.

Figure 19): Relation between infrastracture and problems with access to markets

Key findings of Business Envi-ronment Survey in South Su-lawesi

Access to raw materials, markets and finance is regarded as the key constraint, both from SME and Government perspectives. The problems cited above are manifestations of more specific con-straints, notably:

Low degree of business formalization restricts access to credit; minimal business formalization in the form of a SIUP li-cense is a precondition for access to credit. However, obtaining business licenses presents SME with a range of regulatory and bureaucratic problems.

Regulations and retributions related to raw materials for specific sectors restricts access to input materials, (e.g. wood);

Poor communication infrastructure results in marketing con-straints and isolation from markets;

Limited business networks result in information constraints.

Relation be-tween business formalization, access to credit and problems with regulations

The following figures indicate a clear relationship between business formalization, access to credit and problems with regulations:

Businesses which have processed the general business licenses SIUP have better prospects of getting credit;

The process of obtaining SIUP seems to be burdensome for businesses, as businesses with SIUP raise far more complaints about regulatory problems than businesses without SIUP.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Roads surfaced Telephone/HP Computer Internet access Use e-mail

Communication infrastructure related to market information problems

Sragen Pati

Sragen: 72% have problems with market information

Pati: 47% have prob-lems with market

information


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Figure 20): Business Formalization and Access to Credit

Findings of BDS survey

The surveys on BDS were divided in two parts, one survey addressing generic BDS and a second survey addressing specific BDS. Generic BDS are defined as those services generally applicable to all busi-nesses, such as accounting, management, finance etc, while specific BDS are more specialized services only applicable to specific sectors or types of industry. In close consultation with the local working groups, the TA has identified the following sectors as the main target for BDS inter-ventions: Sragen: textile (batik) and furniture Pati: bronze workshops and tapioca processing industries Bulukumba: food processing industries and handicraft Parepare furniture and metal processing workshops The results of the survey on generic BDS indicate clearly that aware-ness and use of such services is very low in all locations. Rather than seeking advice from external consultants, SMEs try to solve problems by themselves or look for advice from family members or business part-ners, as following chart demonstrates:

Figure 21): Where SME get advise from

The survey shows that it is very difficult to ask (micro) enterprises about

Where SME get advise from

0% 5% 10% 15% 20% 25% 30% 35%

Familiy

Private Friends

Business friends

Associations

Private Consultants

Solve the problem alone

Other sources

BulukumbaParepare

Business Formalization and Access to Credit

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Have Credit Have SIUP Regulation problems

SME with:

Bulukumba

Parepare


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‘generic’ services unrelated to their specific context, sector, business processes and problems. General understanding of services is therefore difficult to ascertain, hence a narrow focus on specific services related to specific sub-sectors is required.

Promising re-sults for specific services

Results of survey on sub-sector specific services are promising: aware-ness is generally reasonable; there is interest in testing services and in-dications of willingness to pay, as shown in chart 21. However, actual use of services is low, indicating a mismatch between supply and de-mand: services or service providers are either absent, have inappropri-ate features or are inadequately promoted.

Figure 22): Demand for specific services

Conclusions 1. When interpreting the results it is important to bear in mind that the types of enterprises under consideration are mainly micro enter-prises (between 70% to 90%, depending on location). Micro enter-prises are generally low users of fee-based BDS.

2. Main business constraints relate to inadequate access to: a. Finance b. Input and output markets c. Information

3. Most businesses have underdeveloped networks and sources of in-formation. They mostly rely on themselves, family members and business partners for information and advice.

4. Results indicate that best prospects for improving access to informa-tion, markets, etc. is through strengthening and expanding commer-cial relationships (suppliers, brokers etc.).

4.2.2 Local Action Plans Local planning workshops

A core cooperation activity with the four local Governments of Pati, Sragen, Bulukumba and Parepare has been the organization of plan-ning workshops in Makassar and Semarang. The main objective of these workshops was to outline action plans for the four districts in the field of business environment (especially regulatory review), one-stop services and business development services, based on the findings of the various assessments. The workshops have been attended by repre-sentatives of each local working group on business environment and

Interest in services Parepare

0% 20% 40% 60% 80% 100%

Wood drying services

Wood carving services

Local product exhibition

Wood bulk purchase


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BDS as well as representatives of the local parliaments and have in-cluded:

Introductory seminar on regulatory review: The objective of the seminar was to increase awareness among key local and provincial Government officials for the need for regulatory impact assessment to improve the local business environment.

Presentation of survey findings: The TA team has presented the main findings of the SME surveys on business environment, OSS and BDS to the representatives of the local working groups and media representatives.

Local action plans: Based on the presentation of the local as-sessments the workshop participants of each district were in-vited to outline a local action plan for regulatory review, one-stop service and facilitation of BDS.

Action Plans for Regulatory Re-view

The development of the action plans for Regulatory Review for all dis-tricts were more or less identical and include the following activities: 1. Selection of two regulations for review, based on a criteria list pro-

vided by the TA team; 2. Training in regulatory review, provided by the TA PDC team; 3. Conducting regulatory review for the two selected regulations; 4. Outlining of regulatory reports.

Action Plans for One-Stop Ser-vices

With the exception of Bulukumba district, all other counterpart districts have introduced one-stop-services. However, each of the OSS varies in terms of services provided, institutional set-up and procedures. The na-tional workshop on Business Formalization and OSS, which was organ-ized in cooperation with SMoCSME in February 2003 in Sidoarjo (East Java), provided an excellent opportunity for all participating districts to compare progress in establishing OSS across various districts. The fact, that the district of Sidoarjo has already introduced ISO certification for their OSS appears to have motivated the TA partner districts to improve the performance of their own OSS. Based on the findings of the national workshop and the regional planning workshops, individual action plans were developed for each district with following objectives:

Figure 23): OSS Targets

OSS comparison in terms of services and staff

0

5

10

15

20

25

30

Parepare Sragen Pati

Total Number of Services

Total Number of Businessrelated services

Total Number of Staff

Total Staff related toBusiness Services


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Parepare: Local Government regulation on introduction of new services,

especially business-related services; Consolidation legal status of OSS as ‘office’ (presently ‘unit’); Increase staff capacity related to the introduction of new services Budget allocation for OSS; Study tour to Sidoarjo and Gianyar.

Bulukumba: District Head decision on establishing OSS; District Head decision on staff assignment for OSS; Study tour; Budget allocation for OSS; Local Government regulation on OSS.

Sragen:

Increase number of services; Develop monitoring system; Capacity building for OSS staff; Legal status for OSS; Study tour.

Pati:

District Head decision on delegation of authority for additional services to be included in the OSS;

Improve processing time for HO license by reducing the number of field officers involved;

Staff capacity training; Study tour.

Action Plan for Facilitation of BDS: provincial level and local level

Due to the fact that BDS markets are not limited to district borders, ob-jectives for the facilitation of BDS are addressed at two levels:

On the provincial level, the TA has introduced a program for the de-velopment of new services. Based on the findings of the BDS survey, existing BDS providers have been informed about the market potential for new services and have been invited to come up with proposals for services to be introduced. For the provincial program, the TA is cooper-ating with the University Hassanudin (Makassar) as local partner for South Sulawesi and University Diponegoro (Semarang) as local partner for Central Java as well as with BPPT, the National Agency for Re-search and Applied Technology, as technical resource institution. The process for the development and introduction of new services is structured in the following steps:

1. Orientation workshop for BDS providers for promoting the sup-port scheme and dissemination of market information. BDS pro-viders are invited to submit a proposal for new services;

2. Pre-selection of service proposals based on proposals (long-list);3. Presentation of proposals (short-list); 4. Training on market research and final selection; 5. Development of marketing plan; 6. Service-specific development; 7. Service launching.

For the facilitation of BDS on local level, the working groups have de-veloped local actions plans, which mainly focus on collection and dis-


Mid-term Report

semination of information on BDS providers. Only Parepare has devel-oped a more specific action plan, which includes activities for the facili-tation of a wood drying service in Parepare and linking BDS providers with financial institutions. The problems in developing more detailed and specific action plans lie in local Government’ incomplete understanding of BDS and, consequently, difficulty in defining the role of local Gov-ernment in facilitating BDS.

4.2.3 Findings of mid-term review and planning for the 2nd implementa-tion phase

Mid-term review workshops

The results achieved as per the end September 2003 were discussed with representatives of the working groups in two mid-term review work-shops in Makassar and Semarang. Based on the findings of the mid-term review, the working groups outlined the planning for the 2nd imple-mentation phase October 2003 until July 2004. Detailed planning will be completed by the end of November 2003, as further discussions with the working groups are required.

4.2.3.1 Regulatory review

Overall, the local Governments have indicated high interest in the topic of regulatory review, but it became obvious, that the originally planned 2-day training was not sufficient to enable the working group to conduct the regulatory review. Additional support was provided to conduct stakeholder meetings and for a more intensive coaching in cost-benefit analysis. The main achievements, highlights and future plans for each location are:

Parepare Selected regulations: Regulation 1 ‘Pajak Tambang Galian C’ (Tax on Mining of group

C minerals)

Regulation 2 ‘Tempat Pelelangan Ikan’ (Fish Auction Facilities)

Process: The issues that prevent the group from furthering the process are: (i) definition of problems, (ii) specification of options, (iii) analysis of costs/benefits, and (iv) procedures for consultations. The working groups were unsure as to the problem with which the analysis should start, whether it is the historical problem underlying the issuance of the regulation or the current problem that may necessitate Parepare to re-vise the regulation (or issue a new regulation). Indeed, a RIA process may be used as an ex-ante analysis (to a proposed regulation) as well as an ex-post evaluation (to an existing regulation). Therefore, RIA process may start with either problem definition, depending on the ob-jective of the review. Further, the working groups also did not clearly specify proposed options. With regard to the analysis of costs and bene-fits, the groups have disproportionately emphasized quantitative aspects of the analysis. The combination of theses factors contributed to the groups’ (mis)perception that RIA appears as a ‘difficult and lengthy’ ex-ercise.

RIA Report: After intensive coaching, the groups gained more confi-dence to complete the RIA process. It was decided that Parepare would concentrate on one regulation only, namely, regulation on ‘Tax on the


Mid-term Report

mining of group C minerals’. The RIA report of this regulation is being fi-nalized. It is expected that the result of this analysis will be presented before the Mayor (Walikota), vice mayor, and key leaders of DPRD/local parliament together with the ADB TA team.

Planning for the future: In addition to finishing above RIA (and issuing whatever revisions that may result from it), Parepare has initiated a ‘self-generated RIA initiative’ to review 8 out of 12 proposal regula-tions of the 2004. In order to do this, the RIA working group has stresses the need to have an extended, detailed training on costs/benefit analysis and to establish an on-going internet communica-tion with the ADB TA BDS. Other plans of Parepare are important for in-stitutionalizing RIA, namely (i) to issue a Bupati decree on establishing a new and permanent RIA team, (ii) to request the DPRD to issue a rec-ommendation requiring that the submission of certain kinds of proposed regulation must be accompanied by a RIA report, and (iii) to socialized RIA to key persons (Bupati & DPRD). The group also considers that the issuance of a national policy requiring RIA for all local regulations would be of paramount importance in ensuring that RIA continues at local level.

Bulukumba Selected regulations: Regulation 1: Retribusi SIUP (Retribution on Trade License), and Regulation 2: Pembinaan Usaha Industri (Support of Industrial Busi-

ness)

Process: RIA implementation in Bulukumba was planned to follow simi-lar routes as Parepare, but the process turned out to be far more diffi-cult. Progress on RIA was minimal even after the briefing on consulta-tion and intensive coaching were conducted. Coordination within the working groups and between the working groups and ADB TA, as well as the composition of the working groups themselves was sub-optimal. RIA report: SIUP contributes only limited revenue (IDR 11m per year) and compliance is very low. The procedure for processing SIUP im-poses a burden on small businesses in terms of cost and time. Two remedies to this problem could be considered: (a) reduce the burden for processing SIUP by repealing the reapplication requirement and/or re-ducing fees and/or exempting small businesses and/or speeding-up the processing time, or (b) to withdraw the regulation completely. The work-ing group is currently finalizing the RIA on SIUP. However, it seems that additional intensive support is required and that, given the difficulty of internet communication between TA and the working groups, further vis-its will be needed in order to finalize the RIA report. Planning for the future: Bulukumba is planning to review all regula-tions on retribution that generate revenue of less than Rp.10m per year and plans to introduce RIA to all technical units and to key persons. It is planned to issue a policy requiring RIA to be applied on selected regula-tions and to allocate the necessary budget for RIA implementation.

Pati Selected regulations: Regulation 1: Retribusi Ijin Gangguan (Retribution on anti-

nuisance permit), and Regulation 2: Usaha Pertambangan Bahan Galian Golongan C

(The Mining Activities of Group C Mineral Product)


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Process: At the time of the midterm review, the sole RIA effort in Pati has been the two-and-a-half day workshop. Follow-up visits were not possible because the groups were unprepared. Again lack of confidence in applying RIA because of the misconception it is difficult, lengthy, and has to be quantitative in nature has slowed the process. Immediately af-ter the midterm review, refresher training and discussion was conducted between ADB TA BDS and the RIA working group (mainly comprising senior officials from Pati). This effort successfully rectified the problems and the RIA has begun to progress productively.

RIA Report: The working group is finalizing the RIA on the regulation on ‘the Mining Activities of Group C Minerals’. The result of RIA is to be presented before Bupati, Vice Bupati, Local Secretary (Sekda), and key leaders of the DPRD (in parallel with the introduction of RIA to these key personnel by the ADB TA BDS). The regulation has sound environ-mental goals; however, its implementation has been problematic. Small business (miners) feels that its requirements are complex and difficult to satisfy and, consequently, compliance is very low. Two options might rectify these weaknesses: (a) to adjust the degree of complexity of the requirement according to business size (exempt small businesses), and (b) leave the regulation as it is, but provide small businesses with assis-tance to satisfy compliance requirements.

Planning for the future: The working group intends to apply RIA on several proposed regulations and to socialize RIA to key persons before developing a RIA policy for Pati.

Sragen

Selected regulations: Regulation 1: Retribusi Ijin Gangguan (Retribution on anti-

nuisance permit); Regulation 2: Retribusi Ijin Tebang & Angkut Kayu Desa/Olahan

(Retribution on license to cut and transport logs from public woods)

Process: Sragen needed only a minimum effort to commence RIA, i.e., the workshop and one follow-up visit. Independently, the group com-pleted RIA for both regulations and an additional self-selected regulation (on retribution on plantation yields). The result of RIA analysis has triggered the withdrawal of the regulation on ‘retribution on license to cut and transport logs from public woods’ and the ‘retribution on plantation yields’. RIA analysis has also contributed to the aware-ness of the local government as to the devastating effects that a ‘regula-tion on anti-nuisance permits’ has on the investment climate. This latter regulation has not yet been withdrawn, but the Bupati has issued a decree to the effect that certain types of new businesses are ex-empt from anti-nuisance (and other similar) permits/licenses. These newly exempted businesses are: (i) companies located in an in-dustrial zone, (ii) companies whose operations is environmentally friendly, and (iii) companies that potentially contribute to local economic growth and expansion of employment.

RIA Report: The working group has finalized the RIA report on both regulations. Although the regulation has been withdrawn, the ADB TA BDS continues to provide feedback to improve RIA implementation and RIA reporting, to encourage learning and sustainability of the RIA initia-tive.


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Planning for the future: Unlike other districts, Sragen sees no neces-sity to socialize RIA to the Bupati. Socialization to key DPRD (local par-liament) personnel is regarded as more important to ensure adoption of the RIA initiative.

Key findings and issues

All four districts regard regulatory impact assessment as a useful tool and are interested in applying the methodology in future. The local Gov-ernments are aware that regulations are a key aspect in creating a con-ducive environment for local economic development. Among the four participating districts, Sragen seems to be most advanced as RIA is ex-plicitly regarded as an instrument to create an investment friendly envi-ronment. Key findings from the experience of introducing RIA in the four pilot dis-tricts are: 1. Effective introduction in RIA requires more than one or two training

inputs. The review of the first two regulations should be closely guided and supported by an experienced instructor and special coaching is required during the development of regulatory options and cost/benefit analysis. Serious introduction of RIA at the local level requires considerable resources and political commitment to make those resources available;

2. It is recommended to establish RIA units at the national or provin-cial level to provide support. RIA units would act as central refer-ence points from which local governments may seek assistance in case of difficulties experienced during the RIA implementation process. However, in order to assure demand-orientation of sup-port, assistance should be provided on a cost-sharing basis. Out-sourcing support and training activities to specialized institutions (universities, consulting firms) should be considered in order to pro-vide the local Governments with the opportunity to select from a va-riety of training providers.

3. The composition of and political support for the RIA team is crucial for successful implementation of RIA and in order to achieve real impact. The RIA core team should include, at least, representatives from local Government (head of local Government or his/her repre-sentative, Office for Legal Affairs [Biro Hukum], line departments), private sector representatives–depending on topic of regulation to be reviewed– and representatives of local parliament.

4. RIA should be institutionalized from the beginning. In order to pro-vide a strong legal base for RIA institutionalization, local parlia-ments are recommended to issue local regulations on the scope of RIA:

a. make RIA compulsory for all regulations with direct im-pact on business activities, to be provided together with the draft of new regulations;

b. regulations on public participation in RIA and publication of RIA assessments;

c. institutional set-up for RIA team. 5. In order to ensure political support for the institutionalization of RIA,

local Governments would welcome a national regulation on RIA, which would provide guidelines on how to introduce RIA at the local level;

6. Establishing a RIA hotline: Even with extended basic RIA training, local RIA teams will still need support on specific issues. The pilot


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districts have therefore suggested establishing an e-mail hotline, to which the RIA teams can address questions.

4.2.3.2 One Stop Services

General Support for the establishment or improvement of OSS in the four dis-tricts was structured in following steps

1. Information collection on present status of OSS; 2. Socialization of functions and alternative models of OSS, in-

cluding a 2-day workshop in Surabaya for exchange of ex-perience, combined with a visit of the OSS in Sidoarjo, (East Java) which is regarded as one of the most advanced OSS in Indonesia;

3. Development of local action plans for establishing/improving OSS;

4. Support for implementation of local action plans; 5. Evaluation of results achieved as part of the ADB TA mid-

term review

Parepare Results: With the exception of the structural change of the OSS from ‘unit’ to ‘office’ (kantor) status, all local action plan objectives have been achieved. All general business licenses are now integrated in the OSS, which is especially important for SMEs. The OSS team is highly moti-vated to further improve service quality. The study tour to Sidoarjo and the discussion with Sucofindo–the institution, which has ISO-certified the OSS in Sidoarjo–proved to be eye openers and the team is inter-ested to begin a similar process in Parepare. Planning for the 2nd implementation phase includes the following activities: 1. Finalization of change of OSS status from ‘unit’ to ‘office’; 2. Definition of efficiency indicators; 3. Customer satisfaction survey as preparation for certification proc-

ess; 4. Start process for ISO certification.

Bulukumba Results: After considerable delay, the Head of the local Government has finally issued the regulation for the establishment of the OSS in July 2003, much later than expected. In the meantime, additional OSS-related regulations have been issued, but the OSS is still not opera-tional. It is expected, that the OSS will become operational in early 2004. Planning for the 2nd implementation phase includes the following activities: 1. Establishing OSS as unit or ‘office’ (Kantor); 2. Assignment of OSS staff; 3. Budget allocation; 4. Improved coordination between the working group and the TA.

Sragen Results: The OSS staff is drawn from various related Dinas and performs

very well because they are conversant with the technical procedures


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and processes to finalize business applications. The head of the OSS has also taken the initiative to train staff in computer skills, re-sulting in faster and better service.

The OSS has disseminated transparent information, easily accessi-ble to SME applicants, on all application requirements, completion times and relevant fees. As a result completion times for HO and IMB applications have been reduced from 7 days to 6 days only.

The monitoring system for the processing of documentation applica-tion has been operationalized, producing detailed monthly reports of OSS activities and performance.

The OSS maintains good coordination with the relevant technical Dinas to ensure smooth processing of documentation applications.

The Bupati has issued a Decree (SK Bupati), dated 8 November 2003, to ease, reduce or even exempt retributions for new investors with the following criteria: (a) businesses in environment-friendly in-dustry(ies); (b) businesses located in the industrial zone of Sragen municipality; and (c) businesses which have a significant impact on economic growth and employment. The SK Bupati applies to the fol-lowing Business Licenses: (a) Principle Permit; (b) Land conversion and land use; (c) Construction Permit (IMB); (d) Nuisance Permit / Ordnance (HO); (e) General Business License (SIUP); (f) Company Registration (TDP); and (g) Industry Registration (TDI).

Planning for the 2nd implementation phase includes the following activities: 1. To issue a legislative decree (PERDA) on the Sragen district organ-

izational structure and tasks, in which the OSS status is designated as an ‘office’ prior end 2003, followed by a Bupati Decree outlining the tasks and functions of the OSS office;

2. Improving the quality of services by developing a Minimum Standard of Services;

3. Maintaining the present monitoring system; 4. Improving the quality of services by additional trainings, consumer

satisfaction surveys, and designing services via Internet and a com-parative study of the OSS at Bontang (East Kalimantan).

Pati Results: The process for establishing a fully fledged OSS is ongoing but slow The existing OSS office is only handling the HO permit; all other

permits / licenses are processed by the relevant Dinas. The process of including additional services in the OSS is still ongoing;

Processing time for completion of the HO permit is still too lengthy (about 20-30 days). One key reason for his is, inter alia, the large number of field staff involved

Planning for the 2nd implementation phase includes the following activities: 1. Developing an inventory of business licenses / permits to be proc-

essed by the OSS, including a Bupati Decree which delegates the authority from the relevant Dinas to the OSS Office;

2. Developing a Bupati Decree to streamline the number of field staff necessary to evaluate a business license application in the field;

3. Improving the quality of services by staff training, improvement of in-frastructure, developing a Minimum Standard of Services and de-


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veloping and implementing a monitoring and evaluation system; 4. A comparative study tour to Gianyar and Parepare to foster the local

Government’s commitment to develop the OSS Office.

Key findings and issues

1. It has become clear that the ability to establish and improve OSS depends greatly on the political will and commitment of local Gov-ernment leaders (District Head, Mayor, local parliament) and the mo-tivation of the OSS team. The TA has very limited influence on these factors. A key factor for success therefore is careful selection of par-ticipating districts before project start.

2. Presidential decree No. 8/2003 limits the number of ‘Dinas’ (depart-ments) per municipality to fourteen units. As most of the municipali-ties have already more than fourteen ‘Dinas’ units, the prospects of local Governments providing a new OSS ‘Dinas’ status–as has been recommended in the past–are very limited. OSS without ‘Dinas’ status has less authority, for example they do not have the authority to issue and sign licenses on behalf of other Dinas.

3. OSS will always be confronted with two conflicting objectives: to pro-vide user-friendly public services (e.g. in terms of low-cost services) and to generate income for local budgets. It is therefore important to combine OSS initiatives, which focus on procedural improvements, with regulatory impact assessment, which scrutinize the need for regulations.

4. The approach of study tours in order to facilitate learning from each others has proven successful: The national workshop in Surabaya as well as the individual study tours to Sidoarjo and Gianyar have moti-vated the working groups and brought up new ideas on how to im-prove the OSS in the pilot municipalities. Such learning could be in-stitutionalized in form of regional forum for OSS. There is an ongoing initiative in Central Java and Parepare has taken the initiative to es-tablish an association among the municipalities with interest for establishing OSS in South Sulawesi.

4.2.3.3 Business Development Services

The TA seeks to facilitate BDS on two levels: a) on provincial level by applying a service quality improvement program, implemented by the TA team in cooperation with Swisscontact and local facilitators; b) on lo-cal level through the local working groups.

a) Provincial Level

South Sulawesi: Quality Im-provement

Originally, it was planned to apply the same approach for quality im-provement in both provinces. However, the quality of the proposals submitted in South Sulawesi did not allow a direct selection of the ser-vices, as most of the proposals were unclear with regard to the services to be offered. The TA decided therefore to conduct intensive individual discussions with the pre-selected institutions with the objective to re-evaluate and re-define the services to be offered. This approach has de-layed the progress compared to the initial planning, but has proven worthwhile, as the services finally proposed have a clearer offer and higher potential for success. In South Sulawesi the TA has entered into cooperation with BPPT, the national agency for research and applied


Mid-term Report

technology. BPPT has accumulated a broad know-how in applied tech-nology, especially in the agribusiness sector, but has proved less suc-cessful in disseminating this know-how. This cooperation is a win-win situation: the project can offer BPPT’s know-how to BDS providers and BPPT can test a new technology dissemination approach.

Results of the tender process

Participating organization in orientation workshop 64 Submitted proposals 29 Pre-selected proposals 16 Selected proposal for further investigation 10 Final selection for service development 6

Profile of se-lected services

The following table provides an overview on the selected services in South Sulawesi

Figure 24): Selected Services in South Sulawesi

Name of Institution and Location

Service to be developed

1) LP3UK, Maros Wooden Dry Kiln Leasing services

Tool rental, design services 2) BDS Melati, Bukukumba Training sugar cane production management

Product certification services (food process-ing)

3) BDS Marendeng, Makasar Training cacao fermentation technology Support access to market (trading)

4) LPT INDAK, Bulukumba Training Food Technology in various sectors 5) BDS Matirotasi, Barru Training processing fishery products,

Access to markets (trading) 6) Kospermindo, Makassar Training seaweed management and produc-

tivity improvement

In addition, one provider is expected to participate in the BDS-finance linking activities, which will start in the 2nd implementation phase.

The selected services are consistent with the BDS market analysis con-ducted: all services are sector-specific and most of them offered on a commission basis in order to overcome limited willingness to pay among the mainly micro and small enterprises in South Sulawesi. Three of the selected providers are expected to provide services in the target dis-tricts.

Linking financial services and non-financial services

One of the findings of the Business Environment Survey was that SMEs in South Sulawesi have considerably less access to financial services than SMEs in Central Java. Services to improve access to finance are therefore of high priority and both districts have listed this topic in their actions plans. However, as the topic of improved access to finance is relevant for the whole province, the TA has suggested addressing the issue in cooperation with Bank Indonesia, which has started an initiative at the national level for improving links between financial institutions and BDS providers. Preliminary discussions between BDS providers and banks in Parepare indicate a clear need for further intensive discussions


Mid-term Report

between the two parties. BDS providers often have unrealistic expecta-tions about banks’ lending procedures and criteria and are in many cases, ill prepared to offer appropriate services to banks. Banks on the other hand often mistrust consultants (partly based on former experi-ence, but also due to the fact, that credit officers often generate a part of their income from commissions on lending) and ask for strict qualifica-tion of BDS providers. Bank Indonesia and the TA have agreed to proceed in three steps:

1. BI will invite all banks for an initial discussion to identify banks that are interested in working with BDS providers. For that pur-pose the TA will invite the manager of the Bandung-based SPMC (Service Provider Management Center, a joint initiative started this year between Bank Indonesia West Java and Swiss-contact, which seeks to link BDS providers and financial institu-tions in West Java) to present the SPMC concept and initial ex-periences.

2. A follow-up discussion with interested banks to identify potential services to be provided by BDS providers

3. The project intends to facilitate a meeting between the participat-ing banks and potential BDS providers how to link the two par-ties effectively.

Central Java The process in Central Java follows the quality improvement approach, developed and applied in other regions by Swisscontact (see chapter 3.2.2). To date the selected BDS providers have joined a training ses-sion on market research and have conducted their own research for services proposed. Based on the results, the original business plans will be updated and marketing plans developed. The launching of the ser-vices is expected in January 2004.

Results of the tender process

Participating organization in orientation workshop 75 Submitted proposals 35 Pre-selected proposals 19 Selected proposal for further investigation 14 Final selection for service development 14


Mid-term Report

Profile of se-lected services

The following table provides an overview of the selected services in Central Java

Figure 25): Selected services in Central Java Name of Institution and Location Service to be developed BDS Ijtihad, Brebes Target: Fried Onion Cluster, Brebes

Promotion and marketing of products for do-mestic markets

BDS Janka Tingkir, Sragen Target: Batik cluster-Girli Sragen

Training in batik coloring napthol salt Developing various batik designs

Parahita-UKSW, Salatiga Target: Batik clusters – Masaran Sragen

Training to improve quality of work Training in waste management Training to improve production efficiency Training to improve productivity Developing business networks

BDS Mitra Sejahtera, Pati Target: Tapioca clusters Pati

Training in cultivating cassava varieties Training in efficiency in peeling & drying Training in waste management

BDS Kuntum, Sragen Target: furniture clusters – Karangjati Sragen

Training in developing group dynamics Training in financial management for self-supporting groups

BDS LPPLSH – Purwokerto Target: 9 furniture industry clusters – Sragen

Management training: production planning, finance, business analysis Product development – antique touch, art carving, finishing, waste management Marketing training: marketing strategy – mar-ket opportunities – planning

BDS Asmindo, Jepara Target: 400 micro-small rattan furni-ture units–Sidi Gede and Teluk Wetan, Jepara

Training in planning and developing business Training in product design Facilitating market access on fee-basis

DETRO Consulting, Jepara Target: 3,000 micro-small furniture firms in Jepara

Training in business management Training in financial management Training in production management Training in marketing on fee basis

BDS Kanigoro, Pati Target: ship-owners and fishermen in Juwana, transport businesses

Training in Lost Wax Casting brass industry Training in high tension metal casting for tur-bines, propeller blades, village power plants, car and motor cycle wheels

BDS Bahari Bangkit, Rembang Target: fishermen producing 250 tons/year

Training and equipment provision for vacuum packaging of processed fish to improve hy-giene and longer life cycles

BDS Yayasan Fatayat, Pati Target: micro women home indus-tries in and around Pati

Training in producing snacks from abundant supplies of glutinous rice powder and ba-nanas Training in packaging, labeling, marketing

BDS Simpati, Pati Target: micro-small handicraft clus-ters in 6 villages

Training in developing handicraft from wood and coconut shells Training in design, quality, and marketing Facilitating access to financial institutions

BDS Pesantren M. Huda,Pati Target: cattle breeder groups, Mar-goyoso, Pati

Training in developing cattle-feed from silage and tapioca concentrate Leasing of mixer equipment

BDS Mikro Pro Patria, Semarang Target: Micro finance institutions (MFI), BPR, small market banks, vil-lage banks (BMT), other financial in-stitutions

Management training for MFIs, etc.. Training in small business accounting Credit analysis Principles of collateral and contracts Credit monitoring and evaluation system

Among the selected providers, nine are expected to provide services in the target districts.


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Support to pro-vincial Govern-ment on cluster development

At the request of the Provincial Government, the TA provided three ses-sions on capacity building for fifteen pre-selected BDS providers man-aging fifteen clusters. The content of capacity building was inter alia, methods and tools of sub-sector analysis, FGD, developing question-naires for sub-sector surveys, drafting initial feasibility studies, drafting project designs using the log-frame and adjusting project size to gov-ernment budgets.

b) BDS facilitation on local level

Problems in de-fining local ac-tion plans for BDS facilitation

The promising results of work on local level in the fields of regulatory re-view and OSS stands in stark contrast to a lack of progress in assisting local Government to take on a more facilitating rather than delivery role in BDS. As mentioned earlier, all local working groups have experienced considerable problems in defining specific action plans for BDS facilita-tion. Establishing an inventory of BDS providers was stated as a key ob-jective in all action plans. However, with the exception of Parepare, all working groups faced difficulties in this task because of limited under-standing of BDS. For example, the working groups complained that there were few identifiable BDS providers. It transpired that this was as a result of their misperceptions: the working group members were searching for formal institutions–preferably with a sign stating ‘BDS pro-vider’ over the door–rather than trying to identify appropriate solutions to SME problems, whatever their legal form or structure. The TA has identified a number of other basic constraints which inhibit Government’s ability to facilitate BDS: Despite the fact that all districts have considerable budgets for SME

support, there is lack of political motivation or bureaucratic incen-tives to relinquish control over direct implementation and delivery activities;

Inadequate capacity to identify, select and work flexibly with private BDS providers;

Generic SME support programs with little grounding in analysis of SME constraints.

One lesson from this experience is that the constraints that led the SME development community to question the ability of government to play a direct role in delivering BDS, appear equally to inhibit government’s abil-ity to facilitate BDS.

Parepare In contrast to the action plans of the other districts, the Parepare work-ing group has included two specific activities in their BDS action plan: a feasibility study for a wood drying oven and the idea of linking BDS pro-viders and financial institutions. The TA has supported the working group to prepare terms of reference for the feasibility study and the local Government has allocated a budget of IDR 25m for the study. Unfortu-nately, the selection process for the BDS provider to conduct the feasi-bility study was not very transparent. However, it is encouraging that – with political commitment and dynamic government officials – some level of cooperation between local Governments and BDS providers may be feasible on a limited basis. The initiative for linking BDS providers and financial institutions is fol-lowed up by the TA in the cooperation with Bank Indonesia.


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5. Outline Planning 2nd Implementation Phase

5.1 Remaining staff capacity

Capacity plan-ning

The planning for the second implementation phase has to take into con-sideration very limited staff capacity remaining. The following table pro-vides an overview of the remaining capacity.

Figure 26): Remaining staff capacity

Consultants Topic Remaining

Peter Bissegger TL 4.1T. Kameyama RIA 0Robert Hitchins Field BDS 0Rob Hitchins Home BDS 0Bruce Bargon Field CB 0.3Bruce Bargon Home CB 1.0313Kai Hauerstein RIA 0Jochen Vorfelder Field BDS 0Jochen Vorfelder Home BDS 0.4606Mukti Asikin BDS 6.0999Buddy Ibrahim BDS 5.3667Andi Ikhwan CB 3.2332Konta Damanik OSS 0.5501Rustiani Frieda OSS 1.8001Hari Setianto RIA 1

Total remaining capacity 23.9419

Main capacity constraint in the field of RIA

The overall remaining staff capacity amounts to approximately 24 months, or an average of approximately 3 MM per month for the remain-ing project period of 9 months. The remaining capacity for BDS and Credit Reporting System and OSS appears sufficient; however, the capacity for Regulatory Impact As-sessment is extremely limited. As the need for follow-up activities is high in the field of RIA, both at the national and local levels, the BDS and OSS consultants might be requested to support the RIA activities, par-ticularly at the local level.

5.2 Focus of support for 2nd implementation phase

5.2.1 National level

The following planning outline was presented and discussed during the Mid-term Review Workshop in Bogor. Detailed planning is in the proc-ess of being prepared and will be presented in early December.

Regulatory Im-pact Assess-ment

A considerably input in terms of content was provided during the first implementation phase in the field of the SME law and Business Regis-tration. The challenge for the 2nd implementation phase is to find com-mitment from decision makers in order to initiate changes on the basis


Mid-term Report

of the results of the regulatory impact assessment.

SME Law For the SME law, the project can support the Technical Team to organ-ize stakeholder meetings for discussion of the latest proposal for a re-vised SME law, but the project does not have capacity to conduct a de-tailed RIA on the new draft law. Such an exercise would require consid-erable capacity as preliminary reviews of the latest proposal indicate considerable need for discussion and improvement. However, as the draft has to date only been discussed internally within SMoCSME, feed-back through stakeholder meetings and guidance on what matters need to be regulated and which do not to be regulated might provide impor-tant input for a revised version of the draft.

Business For-malization

The project has devised a revised scheme, which would improve the present situation considerably. Whether the project can provide addi-tional input, depend mainly on the decision of the Technical Team and the Ministry of Industry and Trade as to whether they are interested in beginning a broader stakeholder discussion on the proposed business formalization scheme. The project is more than willing to provide addi-tional support to the TT, if the TT is complemented with representatives of the MoIT Department for business registration. Potential support could include advocacy dialogue among stakeholders or a review the proposed new business registration law.

BI-Regulation on collateral

The project will conduct additional stakeholder discussions with banks in order to clarify the extent to which an adjustment of the regulation would result in increased lending to SMEs. In addition, the TA is interested in joining the BI internal working group on collateral.

Institutionaliza-tion of RIA on national level:

The TA is glad to see that the need for an institutionalization of RIA on the national level is recognized. The TA will support the Technical Team in outlining a draft concept for RIA institutionalization, which will serve as a basis for future advocacy activities.

Info-UKM The TA will support IndoExchange to establish a network of information providers, as well as in further promotion and development of the SME portal.

Credit Reporting System

Two missions of the TUA Team Leader for the scoping study are planned in November and December. During this time, the project will support the Team Leader in organizing meetings with all participating banks. In addition, the CRS consultant within the TA is mandated to conduct a format check on the bank customer data before these are sent to TUA. Parallel to the scoping study, the TA will further facilitate discussions among the banks regarding the future set-up of the credit bureau and address some of the legal issues, such as to draft and dis-cuss a code of operation for future CRS. In order to avoid further delay, it will be important to have a decision on the future set-up for credit reporting system early next year.

5.2.2 Local level

The input planning is based on the discussions held during the local Mid-term Review workshops and the local working groups. Currently,


Mid-term Report

the team is conducting additional discussions with the local working groups to fine-tune local action plans. The detailed plans will be pre-sented in early December.

RIA Follow-up is required in all districts to finalize RIA reports. In order to prepare the ground for future institutionalization, the TA will visit all dis-tricts and present the results of the RIA to key decision makers. De-pending on the results of these meetings, the TA will provide additional support for the institutionalization of RIA. As requested by the local working groups, the TA will establish a RIA hotline (either telephone or internet) for assisting the local working groups in conducting additional RIAs.

OSS The next steps for the OSS implementation are outlined in the local working plans. As in the past, the TA will support the implementation of the action plans, based on requests from the Working Groups. For Parepare, the TA will provide support for conducting a customer survey as a preparation step for ISO certification. It is expected that the cus-tomer survey will provide information, which will also be relevant for other districts. Documentation of monitoring to develop benchmark indi-cators will be another focus in all districts. Progress in Bulukumba and Pati has been very slow to date. During the visit to present RIA results, the project team will try to find commit-ment from key decision-makers for the implementation of work plans. The TA will endeavor to equip local government with a clearer concept of OSS in these two locations, including step-by-step OSS development so that they can refer to the concept at any point of time. The TA is also willing to discuss the working plan for adjustment / refinement upon lo-cal government’s request.

Documentation of success sto-ries

In contrast Sragen and Parepare are highly committed in both OSS and RIA. The TA suggests documenting the success stories from these two districts, partly to assist in their promotion of their region, but also to promote OSS and RIA activities among other interested local Govern-ments. The documentation will be provided in the forms of hardcopy and on-line features through info-ukm.com

BDS on local level:

Due to the difficulties faced in the first implementation phase, the project will try to apply a new approach in all locations: Based on the annual planning of local Government SME support activities, the TA will identify and focus on a limited number of activities with potential for cooperation with private BDS providers. Based on a joint problem analysis, the team will try to identify potential interventions in cooperation with BDS provid-ers. However, this approach can only become successful, if the local Governments are willing to allocate a part of the planned budget for out-sourcing activities to BDS providers through programs such as SME ca-pacity building, voucher and matching grant.

BDS on provin-cial level

The TA will continue with the process of service development and im-provement. In both provinces, intensive support will be provided for the development, testing and launching of the selected services. While the approach in Central Java will tend to be provided in the form of group training, the approach in Sulawesi will rely more heavily on individual support to service providers, in cooperation with BPPT.


Mid-term Report

Linking BDS and Finance

As mentioned above, the TA will start cooperation with Bank Indonesia in trying to link BDS providers and financial institutions. Once having identified potential banks, services and BDS providers, the TA will pro-vide capacity building for BDS providers. Close cooperation with the pi-lot project in Bandung is envisaged.

Common Ser-vice Facilities as additional topic?

The project has been approached by MoIT to consider the possibility of including some common service facilities (UPT) in the BDS program, in order to support these institutions to become more commercially ori-ented service providers. The TA has conducted an initial assessment of two institutions in South Sulawesi. The assessment indicates a clear po-tential in terms of services, but the shift towards commercial orientation would take considerable time and require intensive coaching, starting from business plan development and capacity building in various fields to support for accessing finance for investment, service development and marketing. Furthermore, in addition to UPT there are a large number of other simi-lar public services institutions. Before starting activities with individual institutions, it is recommended that a broader concept for the future di-rection of these service providers (not only those under MoIT) be devel-oped. Such a task is definitely beyond the scope of the ongoing TA. It is therefore recommended not to include public services providers in the TA activities.

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