Removing Investment Constraints

KOMPAS/PRIYOMBODO

An officer explains the One-Stop Service (OSS) integrated business licensing facility to applicants on Wednesday (11/9/2019) at the office of the Investment Coordinating Board (BKPM) in Jakarta. The government has made a series of regulatory improvements and eased licensing procedures to attract more investment to Indonesia.

The impact of a trade war between the United States and China has not only cause a decline in world trade but also the fall in the flows of the foreign direct investment. Data from the United Nations Conference on Trade and Development (UNCTAD) shows that the flow of the global foreign direct investment (FDI) continued to slide in 2018, falling by 13 percent to US$1.3 trillion.

However, the flow of foreign investment to developing countries rose 2 percent, and the increase even reached 4 percent to the Asian region. The flow of foreign investment into Asia was the largest, reaching $512 billion, mainly from a relocation of Chinese investment.

At least 33 companies from China have relocated their investment, with 23 companies relocating to Vietnam and 10 others to Thailand, Malaysia and Cambodia. Unfortunately, none of them relocated to Indonesia.

The fact was quite shocking to the government and really upset President Joko “Jokowi” Widodo. In fact, investment realization has long been a major problem in Indonesia. It also turns out that on average, the realization of investment commitment reaches less than 40 percent. Thus, it means that there is still interest from investors to invest in Indonesia. Moreover, Indonesia has received an investment grade status.

ANTARA FOTO/YULIUS SATRIA WIJAYA

A worker harvests fresh oil palm fruit bunches at a plantation in the Cimulang area, Bogor regency, West Java, on Tuesday (10/9/2019).

The problem that discourages investors is uncertainty. The uncertainty that is often complained about and impedes investment is mainly related to the complexity of licensing procedures. A number of regulations have caused complicated licensing procedures. The government has identified more than 70 laws that hamper investment. There are overlapping authorities between sectors or between the central and regional governments.

The breakthrough in the simplification of licensing procedures through the implementation of the online single submission (OSS) apparently did not work in resolving the problem. The electronic-based integrated licensing service system has not been able to simplify licensing procedures because a number of ministries or institutions still hold the licensing authority.

In addition, there is no synchronization between the investment policies of the central and regional government. Investors are promised that an investment permit can be completed within three hours by the Investment Coordinating Board (BKPM). However, this commitment can be fulfilled if all the requirements are complete, including location permits, building permits, environmental permits and disturbance permits that must be administered at the regency/city level.

Meanwhile, there are no procedural standards as technical guidelines can be used in the issuance of permits. At present, each regional government has its own standards.

KOMPAS/PRIYOMBODO

Monitors surround a female officer waiting to serve customers of the One-Stop Service (OSS) integrated business licensing facility on Wednesday (11/9/2019) at the office of the Investment Coordinating Board (BKPM) in Jakarta. The BKPM has set an investment target of Rp 792 trillion (US$56.15 billion) for 2019, comprising Rp 483.7 trillion in foreign direct investment and Rp 308.3 trillion in domestic investment – of which Rp 395.6 trillion has been realized in the first half of the year.

Breakthrough

The government has pledged to simplify the investment licensing process. Policies related to investment according, to the plan, will be integrated into a single regulation, namely the Omnibus law. This is because there are too many regulations that must be synchronized and harmonized. However, if the President only gives a one-month deadline for drafting the Omnibus Law, it certainly has the potential to cause a greater problem.

The government must consider all aspects and involve all stakeholders in the consolidation between sectors and the consolidation of the central and regional governments.

Despite facing regional autonomy, the government can use incentive and disincentive instruments so that local governments can contribute optimally. In addition to licensing, bureaucratic and other administrative issues that are quite ironic are those related to taxation. Indonesia ranks 112^th out of 190 countries in the ease of tax payment.

The problem that investors often complain about is not the tax rate, but the taxation system and facilities. At the heart of the problem is the general standard in taxation procedures that creates fair play.

KOMPAS/SAIFUL RIJAL YUNUS

Oil palm plantations in Laolae district, East Kolaka regency, Southeast Sulawesi, as seen on Monday (2/9/2019).

Not to mention the complexity of land acquisition for industry and limited infrastructure that causes high logistics costs. In short, the main handicap is not just an institutional problem, but structural. Therefore, the discourse of changing the Investment Coordinating Board (BKPM) into the Investment Ministry will be enough to solve the problem.

The most basic thing that must be done in the short term is a concrete decision that can be implemented immediately. The commitment to implementing the Omnibus Law will be useless if the government cannot realize it. The government must have a strategy so that the Omnibus Law can be realized immediately while reducing the risk of its complexity.

Just focus on several leading manufacturing sectors that have a major impact on the economy, such as those that provide optimal added value, create jobs and can foreign exchanges.

Leading industries that can be prioritized include plantation-based downstream industries, such as palm oil and rubber processing, as well as the mining sector. Downstream palm oil products will open export access to non-traditional export destination countries as well as a solution to the ease the pressure resulting from the smear campaign made by the European Union and the United States on Indonesia’s palm oil, while the downstream industry in the mining sector will spur metal-based and petrochemical industries.

KOMPAS/TOTOK WIJAYANTO

Enny Sri Hartati

Various kinds of facilities and incentives for such priority industries would certainly be worth it. However, an incentive or facility that will cause a further increase in the trade deficit should be avoided.

Enny Sri Hartati, Senior Researcher, Institute for Development of Economics and Finance (Indef)