Challenging Reforms

Indonesia

Economic News

22 Jul 2010
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Indonesia's government is pushing ahead with reforms to improve the business environment and the reputation of the country among foreign investors.



Indonesia's low score on a global comparative study of business environments, announced last week by the World Bank, addressed key areas that will be improved upon following the implementation of the reform package already announced by the government.



The report Doing Business 2007: How to Reform, which was published in cooperation with the World Bank's private sector arm IFC (International Finance Corporation), ranked Indonesia as 135 out of 175 countries reviewed in regard to business regulations.



The study reviewed 10 areas of doing business, covering the opening and closing (licences and permits, registering property), operations (tax, labour, obtaining credit) and the protection of businesses.



According to the study, some of Indonesia's weak points include procedures for obtaining a business registration number, which takes up to 97 days in Indonesia compared to a regional average of 46.3. Also, employing workers and paying taxes proved to be a rather complicated and time-consuming undertaking for businesses operating in the country. The study highlighted the difficulties for an employer in terms of hiring and firing, with the latter being an expensive option that tends to blindly favour the employee.



While the total tax rate is slightly lower in Indonesia (37.2%) than the average in the region (42.2%), the study found that the time and number of payments needed in Indonesia are almost double the regional amount.



Even though the lower ranking sounds alarming, many analysts believe that things aren't as bad as they look.



First of all, as World Bank economist and co-manager of the report Caralee McLiesh told reporters, "The problem is that the whole world is getting better, so it is not enough to reform just a little bit, to maintain the current position."



While reforms have commenced under the government of President Susilo Bambang Yudhoyono after taking office in November 2004, many in the business community are disappointed with the pace of implementation. Expectations were very high especially given the confounding majority with which the President was elected, providing him with an extraordinarily strong mandate.



Observers however agree that the reforms that have been announced, followed by their successful implementation, will boost the reputation of the business climate. Several also argue that the slow speed of implementation is not fully the government's fault.



Ever since President Yudhoyono and his cabinet took office, Indonesia has been hard-hit by a series of natural and human disasters such as the tsunami that claimed many lives in Aceh, the second Bali bombing, the Yogyakarta earthquake and the recent 'mini-tsunami' that struck West and Central Java. These events have drawn heavily on the resources of the young cabinet, and have negatively affected the vigour with which reforms were promised, and delivered.



More importantly, data gathering for the study took place up to January this year. This means that substantial and widely commended reform packages in the past eight months have not been taken into account.



In February an ambitious infrastructure policy package of 153 new measures was announced. While characterised as rather theoretical, if and when implemented the policies are expected to significantly improve the conditions for investment in infrastructure.



Analysts welcomed the focus on simplifying land acquisition procedures, long a complicated and timed consuming process in Indonesia, and several fiscal incentives aimed at promoting private participation in the sector.



The government also announced, in July, a financial sector policy package, aimed at strengthening banks and non-bank financial institutions. Together with interest rates that are moving downwards, this is expected to facilitate easier credit disbursement to businesses.



The most comprehensive policy package, encompassing taxation, labour, customs and excise, small and medium sized enterprises and the bureaucracy, was announced in March.



The package of 85 policy actions targets the issues where Indonesia had a low score in the World Bank study.



It includes the passing and implementation of a new investment law and replacing two old laws that separately covered domestic and foreign investment. It also aims to simplify business-licensing procedures reducing the time to establish a company from the average of 97 days to obtain a business registration number to a maximum of 30 days.



The package furthermore foresees revisions to the current taxation, trading and labour laws.



However, when major demonstrations erupted after the new, much more flexible labour law was sent to parliament, the government backed down and withdrew it.



They have now embarked on a more pragmatic course, preparing the grounds by discussing new drafts first with the labour unions before sending the bill to parliament.



Also the deliberation by parliament of the latest tax bills experienced a delay, as they were sent back by parliament on procedural grounds.



Sources within the business community, preferring to remain anonymous given the highly political nature of the issue, who saw the draft laws and characterised them as 'very business friendly', told OBG last week that deliberations by parliament are expected to commence before the end of the year, and implementation is foreseen in the second quarter of 2007.



In the meantime the government is taking a shortcut by setting up Special Economic Zones (SEZs) in cooperation with neighbouring country Singapore, in Batam, Bintan and Karimun. Business procedures will be simplified, labour regulation will be loosened and several fiscal and financial incentives will be provided, as announced by the government.



The changes have brought quick results, with a preliminary total of seven new investment projects worth $566.4 coming in after the launching of the project in early July.

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