Indonesia is Left Behind compared to Vietnam in the Investment Process
Jakarta, Transformasi—The business licensing process in Indonesia is far more complicated compared to our main competitor in attracting foreign investment in the labor intensive manufacturing sector, which is Vietnam. This can at least be seen from the time required to obtain business licenses in Indonesia, which is longer than Vietnam. This situation is one of the key issues for Indonesia, which currently is trying hard to attract investment to promote economic growth.
This is the result of a study case conducted by the Center for Public Policy Transformation (Transformasi) on the investment competitiveness in Indonesia, especially in the business licensing sector. The study case, which was implemented during August-October 2015, was done by comparing the business licensing process in Indonesia with Vietnam. In addition to relying on secondary data, this research is also based on primary data in the form of interview with businesses in export oriented manufacturing sector, particularly in furniture sub-sector.
Senior Researcher of Transformasi, Joanna Octavia, on Friday (9/10), revealed that Vietnam was chosen as comparison for several reasons. First, Vietnam is the direct competitor of Indonesia to attract foreign investment in labor intensive manufacturing sector, in which some foreign investments are moving out of China due to increasing wages there. Second, players in the furniture industry have related the decline of Indonesia’s furniture export to the sharply decreasing orders from western countries as a result of the global financial crisis on 2007-2008. Within this period, the market share of Vietnam in the global furniture industry has grown by 7 percent in 2009, while Indonesia has only managed to capture 4,4 percent of market share.
“Thus it is interesting to compare the benefits and losses of starting a new business in both of these countries, as a way to measure their business competitiveness,” said Joanna.
From five different business licensing types, Vietnam is able to provide a much faster service in obtaining four of them compared to Indonesia. These five business licenses are: Tax Registration, Land Certification, Building License (IMB), Registration Certification (TDP), and Investment Certification. Tax registration in Vietnam only needs 1 month, while in Indonesia it takes 2 months. Land Certification in Vietnam requires 6 months, in Indonesia 36 months. Land Certification only takes a month in Vietnam, in Indonesia up to 3 months. Registration Certification in Vietnam only needs 0,75 months, in Indonesia up to 2 months. Only in obtaining Investment Certification Indonesia is faster (2 months) compared to Vietnam (3 months).
There are two main factors that causes Indonesia to take longer in its business licensing process compared to Vietnam. First, the commitment of Vietnam in attracting investment is stronger, especially in reforming its legal licensing framework an reforming services in investment related institutions. Licensing officials in general are very hepful, and companies do not have to rely their relationship with a high ranked official to overcome barriers. In the other hand, in Indonesia, good relationship with a high ranked official is very important, and licensing officials are not considered helpful and efficient. This situation prolongs the licensing process.
Second, the ease of extending expired licenses. In Vietnam, companies can utilize the automatic extension system. Meanwhile, in Indonesia, licenses must be extended manually. Also, licenses in Indonesia have different expiration dates. This means companies will continuously be engaged in license extension process.
Third, furniture companies (which are the objects of this research) in Indonesia are generally located within Industrial Estates, which theoretically means that the licensing process will be faster and more efficient, as a way to attract private sector investments. However, according to the interview with an executive official of a Furniture Company, even though the Company is located within an industrial estate in Indonesia, its factory does not receive the support as large as the support received to its factory in Vietnam. Thus, industrial estates in Indonesia fail to provide a simpler business licensing services to manufacturing companies.
Fourth, the excessive number of licenses and geographical distribution of licensing authorities are other negative points in Indonesia. This situation makes furniture companies must go back and forth to different institutions to obtain excessive number of licenses and permits. The first step or license that must be obtained in establishing and legalizing a foreign company in Indonesia is issued by the notary and national government. The next step, which involves processing physical licenses, sectoral licenses, and business registration, is mainly issued by the local government and subdistrict, village, and the surrounding neighborhood. Often the licenses issued by the District also require recommendation letter from a Subdistrict or Neighborhood level authority. This adds one more layer to the licensing process.
The excessive number of licenses and permits also addts to the cost, measured both by money and time. To legally operate a furniture manufacturing business in Indonesia, a furniture company must obtain a total of 80 licenses, starting from company licenses, land and building registration, to trade and manufacturing licenses.
Fifth, lack of transparency. The biggest complaint to the business licensing process for furniture companies is the lack of transparency, especially related to the required supporting documents. Most of the licenses in Indonesia require a large number of supporting documents, such as KTP (Identification), NPWP (Tax Registration Number), and recommendation letter from the Head of RT/RW (Neighborhood Association/Community Association). However, the description of such required documents is often unclear. For example, the list of required supporting documents to obtain expatriate license includes the applicant’s passport photocopy. In the actually application process, the black and white photocy prepared by the company is rejected on the grounds that it is not a color passport photocopy.
Joanna continued that this research also shows that bribery is not the main issue for businesses in both countries. Companies actually expected some illegal payments. This indicates that the bribery itself is not the issue, but the frequency of it is. As the number of licenses needed and licensing authorities involved increases, the opportunity for corruption also rises.
“In our interview, the Furniture Company has paid illegal payments for most of the 80 licenses it needed to obtain. Therefore, the excessive number of licenses can be said as the main disadvantage in Indonesia, because it is directly proportional to illegal payments,” said Joanna.
Research also found that both countries have shown improvement, but Indonesia remains behind in terms of ease of doing business. Vietnam continues to make great improvement in business licensing since the Furniture Company opened its production facility in 2002. In 2006, the Vietnamese Government introducted The Unified Enterprise Law to address issues arising from The Enterprise Law of 2000, like the increased number of business license from around 180 at the end of 2002 to 340 at the end of 2005. The Unified Enterprise Law attempts to eliminate licensing more needed for business registration, by putting into more details the forms, procedures, and other requirements.
The improvement of Vietnam’s performance has also been recorded in the Ease of Doing Business survey conducted by the World Bank, where the number of procedures and time required to start business in the country has decreased from 12 procedures in 62 days in 2004, to 10 procedures in 34 days in 2015. In addition to that, the International Finance Corporation reported that since the effective date of further reform in business licensing procedure on 1st June 2010, the government has successfully saved 4 million USD per year for approximately 80,000 businesses throughout Vietnam. One example of this reform was the reduced time needed to obtain a business registration license, from 15 to 5 working days.
Meanwhile, improvements in Indonesia are not consistent. In 2004, a business owner wanting to start a business in Jakarta must go through 12 procedures that takes around 168 days. Data from the World Bank shows that business climate has increased since the Furniture Company began to apply for business licenses in 2011, with 11 procedures taking 49 days to reach the stage of business registration. In 2015, the number of procedures has decreased to 10, but the time required to complete the registration has increased to 52,5 days.
The development of OSS at the local level to facilitate business licensing process has been reported to be able to reduce time, cost, and the number of requirements to obtain licenses. But, this has also give birth to two issues for businesses: increasing number of licenses issued by the local government, and creating discrepancy in the processing standard between districts. For example, from 176 district level OSS, 15 percent (26 OSS) needs 1-2 days to issue the Company Registration (TDP); 44 percent (77 OSS) meets the national standard, which is 3 days, and the remaining 41 percent (73 OSS) needs more than 3 days (Rustiani, Rahman and Mustafa, 2012).
Even though both countries have managed to simplify their business licensing procedure, the condition in Vietnam on 2002 (6 – 12 months) is not that much different than in Indonesia on 2011 (3 years), despite being separated by ten years.
“So, this shows that business licensing reform in Indonesia is occurring at a much slower rate compared to other neighboring countries in Southeast Asia,” said Joanna.
In addition to that, there is a lack of information related to licenses and permits, both in terms of specific things that companies must possess, and the reasoning behind this. One of the important examples is the Nuisance Permit system, which is intended to address nuisance and hinderance arising from business activities. The history of business licensing system began in 1926, when the Dutch Colonial government issued a Nuisance Law under the initial Hinderordonnatie legislation, and “H.O license” that followed such Law. The issuant of Law Number 2007 on Spatial Management Planning made way to the introduction of zoning system in 2010. This system was intended to effectively guide businesses to a more appropriate location and eliminate individual assessment against each business in each location, thus reducing the need for nuisance permit. However, in practice, efforts to deregulate nuisance permit system face challenges from the government’s authority decentralization, causing the local government to use their authority to still use the issue of nuisance caused by a business.
Based on these findings, Transformasi proposes a number of recommendations. First, the elimination of unnecessary licenses. The abundance of licenses issued at all levels of government shows the need to conduct inventarization of licensing requirements to reduce conflict and duplication. One reason behind the mushrooming of licenses is various levels of government and institution often have direct financial interests in creating new licenses and business costs. Hence, the government needs to simplify the licensing process by reevaluating and eliminating unnecessary or unjustified licenses.
Second, a well functioning online application and payment system. Another ICT improvement that can be made in addition to application and payment system is warning mechanism embedded in ICT tools and automatic extension facility to expired licenses.
Third, smooth transition from the old to the new system. According to reports, many investors still submit their application directly to the ministry and sectoral institution, or postpone its submission. This shows that they are not familiar with the national OSS system. This familiarity level should be improved through strategic marketing efforts, for example by making and distributing a tutorial step by step video, and conducting free training for companies on the latest licensing process, or providing updates related to regulations.
Fourth, integrating licensing system at the national and local level. Since the era of decentralization, licensing authorities in Indonesia have been scattered in various levels of government, ministry, and institution. Currently, Indonesia uses two electronic system: SPIPISE for processing national level licenses; and electronic licensing system at the local government level. Ultimately, these two systems should be integrated to eliminate confusion and provide assurance to investors that the licensing process in Indonesia has been standardized at all levels.
Fifth, expanding the license granting authority to Special Economic Zones and Industrial Estates: the experience of Furniture Company in opening its factory within the industrial estate in Indonesia is far from satisfactory, due to the limited assistance obtained by the company. Industrial estates should have been intended to overcome rigid and hindering regulation regime, and create a more conducive business climate in specifc areas. In Vietnam and China, and other countries with successful One Door Licensing Procedure, the application is submitted and managed by the authority within the Special Economiz Zone and Industrial Estate.
About the Center for Public Policy Transformation (Transformasi)
Transformasi is a networked think tank that engages policy makers, scholars, and the public in the investigation of public problems. Transformasi is established and organized as a network of domestic and international institutions committed to the development and implementation of evidence based policy making by finding and implementing solutions, and monitoring and evaluation such solution results.
Transformasi underlies the policy innovation steps in Indonesia to find pragmatic and tested solutions in order to address economic and social issues. A new paradigm in public policy innovation can provide a new paradigm for real changes in Indonesia.
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