Ease of Doing Business Packages
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Last year,the Office of the Coordinating Minister for the Economy started discussing the road map of reform for the ease of doing business and competitive advantage improvement for small-medium scale businesses.
Through a series of multi-stakeholder discussions and consensus, President Joko Widodo announced mid-2016 a working matrix wrapped in Policy Package XII. The content of the matrix was arranged according to the ease of doing business framework (EoDB) of the World Bank as a tool to help identify areas of improvement and the performance index improvement (ranking) target.
After the issuance of the package, how has its realization been in the field, especially in the main locus of implementation? To what extent has been the response to the policy and the operational preparedness of regional administrations? Do business people as beneficiaries feel the impact of the deregulation/de-bureaucratization, which are the main instruments of the package’s implementation?
This article, which is based on the results of the 2017 evaluation of the Regional Autonomy Watch (KPPOD), will show a number of key findings and offer strategic intervention options for the acceleration and sustainability of future structural reforms.
The long journey
Genealogically, the root of the importance of "ease of doing business" lies in the thinking of Peruvian economist Hernandode Soto on dead capital (The Mystery of Capital, 2000). Ownership of business units or land frequently ends only as dead assets if it is not supported by a formal system of regulating property rights. “Poor people” does not always mean having nothing. The weakness of the legal structure keeps them poor; bad bureaucracy keeps business players moving from informal to formal spheres or upgrading from micro-scale to small and medium-sized enterprises (SMEs).
Indonesia has long experienced a similar situation. The stock of regulations is abundant, but frequently ensnares the private sector from producing at full force. Arduous licensing bureaucracy forces people to choose to stay in the informal sphere, even though they would pay a number of opportunity costs (security protection, access to bank credits, and others). The ease of doing business, which means opening business opportunities at the grassroots level, is seen as a strategy to address inequalities and being left behind. Only recently, although results are not as good as expected, ease of doing business has become one of the three pillars supporting the economic policies on equitable distribution.
Therefore, deregulation (simplification of the number and types of rules) and de-bureaucratization (efficient business process) primarily means opening access and encouraging productivity. Obviously, it is simply nonsense if local governments claim to be in favor of SMEs but do not address the procedures, time, and costs for starting a business.
Business players have been blocked in the upstream by multiple layers of legalization. Assets are difficult to duplicate, even dead (dead capital), in line with the difficulties of enter the market or the weak institutional incentives prepared by the state. If business productivity constitutes the basis of the competitiveness of regions and the state, the absence of such strong institution – citing Daron Acemoglu and James Robinson in Why Nations Fail (2012) – slowly contributes to the collective failure of the nation.
One year after the issuance of the package was a quick win which is promising: the ranking of EoDB increased from 106th(2016) to the 91st position this year. This achievement is actually a historic leap. For the first time, Indonesia has moved into two digits, and is even recorded as the top reformer among 190 countries. With this preliminary proof, the government is then targeting a more ambitious leap: a rank of 30th in 2018!
However, achievement is not yet optimal or reliable to be used as a foundation for sustainability. Comparatively, and in the context of competing in the era of the ASEAN Economic Community (MEA), we are left behind by our neighbors: Malaysia (23), Thailand (46), even Vietnam (82). There is still much room for improvement in terms of policy or especially implementation.
First, the policy framework, substance and credibility requires serious work at home. Currently, no less than 204 regulations have been revised – including by deleting, merging, simplifying and delegating the licenses –but the level of intervention is only in the executive sphere. In fact, the root cause of derivative regulation lies in the laws so that a number of problematic basic permits (company registration marks/TDP, Hinderordonnantie/HO, and others)continue to persist. The government wants to work quickly and may not want to deal with politics in the House of Representatives (DPR), but taking shortcut routes cripples the framework of deregulation.
On the other hand, part of the policy’s substance even distances the objectives of the package from to open business opportunities. The negative list (DNI) for foreign investors to control shares of one- and two-star hotels marginalizes local businessmen in the lower levels of the accommodation business. Similarly, the credibility of the policy is at stake when a clause of the 30 percent tariff discount for electricity usage after midnight is engineered by PLN to apply only to additional consumption. Policy coordination and horizontal implementation at the center become visible challenges throughout the preparation of the matrix and implementation in the field.
Second, even though there has been a leap in ranking, the regional performance of a number of indicators has not moved significantly, and is even getting worse. Starting a business as a decisive indicator of small-scale investment has fallen from the rank of 151st (2016) to 167th (2017). Meanwhile, the indicator of avoiding dead capital, namely property registration, has fallen from 118th (226) to 123rd (2017). If the target in the content of the package matrix is taken as a benchmark, we immediately see a long road ahead. Meanwhile, the transfer of land rights costs Rp 183 million for the processing of permits/requirements in the six existing procedures.
Another aspect is the sharp local variations. Starting a business is fairly efficient in Jakarta, Surabaya, and Pontianak, while entrepreneurs in Makassar and Palembang have to go through more procedures and longer hours. Variations are more crucial with respect to the substance of the affairs: some regions apply permits with no legality (letter of business domicile/SKDU in Surabaya, Medan and Pontianak, fiscal letter/SKF in Manado), adding to a string of street-level bureaucracy without SoP (village head recommendations in Makassar) and the string of permits which locks the next permits, shifting state "authorization" to citizens in approving/rejecting permits (neighbor approval), double permits for similar functions (Environmental Management and Environmental Monitoring Efforts – UKL/UPL, Environmental Management Letter – SPPL and HO) in the management of buildings in business zones.
These variations appear to be a mix of autonomous will with the wrong discretion and an absence of national standardization (NSPK), which brings confusion and even the risk of uncertainty in doing business.
Third, policy communication has not flowed smoothly from the central government to the regions or from regional governments to entrepreneurs. Different perceptions or the lack of information about the content of the packages have implications for the slow policy responses in 10 key business cities (let alone in remote areas of the archipelago).
In turn, policy resonance is heard weakly in the meeting rooms of business associations so that they face difficulties in monitoring its implementation within local governments, let alone feel its meaningful and clear benefits. It is not surprising that in the fundamental issue of licensing agencies, inter-regions have not agreed to strengthen one-stop integrated services (PTSP) as a single point of access (one-stop service) and have instead chosen the sectorial regional work unit (SKPD), which is an extra stop.
Big job
It is, of course, difficult to expect to see much of the impact and benefits related to investment entry in one year since implementation. Structural reform on the supply side always requires a time lag, especially if it is not supported by the demand side (purchasing power) in the context of today’s global economic slowdown. However, with the limited measure of performance indicators (outputs), the government still needs to engage full power to push the engine of change forward. The initial path has been hacked out, but making it meaningful and sustainable is a big job.
Looking at the current change framework, a master plan is necessary. The solidity of policy, the coherence of the matrix content and the level of intervention needed to change the laws are issues hard to deny. Looking at Malaysia, we should consider moving from an incremental approach to a fundamental strategy. Institutionally, this would mean the need for a cost-benefit analysis: whether to only use a working mechanism in the form of a technical working group and the current implementation task force of the package, or if it needs a new option to form an oversight body with units for policy coordination/implementation between ministries/agencies, between centers and regions, between local governments and entrepreneurs.
The needs of business players are certainly much larger and more complex. However, the success in arranging deregulation is the first step to give important signals to the market that the government is serious about doing great work ahead. Like a cholesterol test, EoDB results do not describe the overall health condition, but if cholesterol is not maintained at just the right level, many other organ functions are impaired.
ROBERT NA ENDI JAWENG
Executive Director of Regional Autonomy Watch (KPPOD), Jakarta
