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Licensing Reform in Indonesia: What’s Next after the One-Stop Shop?

April 12, 2017

By Erman Rahman

According to the World Bank’s 2017 Doing Business report, Indonesia has improved the ease of doing business over the last year, rising in rank from 106th in 2016 to 91st in 2017. The report, which ranks economies on 10 business regulatory areas, cited significant improvement in the area of “starting a business,” with the time it takes reduced from 48 to 25 days.

Indonesia business

Micro and small enterprises account for 98.8 percent of total businesses in Indonesia. However, an arduous licensing process often hinders their ease of doing business. Photo/Conor Ashleigh

The impressive jump in ranking is an outcome of the strong commitment from the Joko Widodo (Jokowi) administration since taking office in 2014 to improve Indonesia’s investment climate. More recently, the government announced that it would remove expiration dates of trading licenses (SIUP) and business registration (TDP) (previously they had to be renewed every five years). Although the tangible impacts of this effort to reduce costs and burdensome licensing timeframes are still marginal, the move clearly shows the government’s strong commitment in this area.

Indonesia’s push toward decentralization that began in 2001 brought with it enormous power to the local governments, including the increased ability to generate revenue from the people in the form of taxes and levies, and particularly so from local businesses. To obtain the necessary licenses to operate, local businesses had to apply at various local government offices in a painstaking process that was not transparent, allowing for back-room dealing in a burdensome process that hampered economic growth.

During this time, The Asia Foundation and local civil society organization partners developed the first one-stop shop (OSS) model to licensing reform, which integrated business licensing in one office at the district level, established standard operating procedures for licensing, provided transparent information for license applicants, and offered channels for raising complaints.

In 2006, the Ministry of Home Affairs (MoHA) nationalized the OSS model, making it a model for a good business climate, corruption prevention, and bureaucratic reforms. Since then, according to the MoHA, more than 90 percent of 497 districts in Indonesia had established the OSS model by 2013. While this marked an improvement, our research at the time indicated that the majority of these OSS had limited authority to process numerous types of licenses required by the local governments. This meant that many micro and small enterprises (MSEs)—which account for 98.8 percent of total businesses in Indonesia—were still forced to go outside of the OSS to local government offices to obtain sectoral licenses.

To address this issue, the Foundation implemented a sub-national business licensing program, USAID-KINERJA, which has supported 40 local governments in Aceh, East Java, West Kalimantan, and South Sulawesi provinces—40 percent of the total of 99 districts in the four provinces—to improve their licensing services, including increasing the licensing authority of the OSS, simplifying the types of licenses required, and improving OSS business processes.

The program’s most significant impact has been on the reduction of the number of licenses required to formally run a business. Prior to the program, each local government required over a hundred types of licenses, most of them sectoral. Through the program, in Wajo District in South Sulawesi alone, the local government reduced the number of business licenses from 107 to 16 by merging and repealing licenses that are not under the authority of the local government. However, today local governments cannot take the next step in simplifying licensing since the remaining licenses are required by the national government through various sectoral regulations.

Jokowi’s administration is currently working to deregulate the business climate, including through license simplification. However, further simplification of licenses faces political resistance from various technical ministries, despite the agreement that some licenses are considered redundant.

In 2014, the government issued a Perpres (presidential regulation) to establish a simple, one-page license for MSEs, known as IUMK, that would in theory remove the need for them to apply for other types of licenses such as SIUP, TDP, and other permits.

In practice, however, this has not happened. Although the KINERJA program helped the government to formulate and disseminate implementation guidelines for the IUMK, many sub-national government officials are still not aware about the Perpres. And the regulations governing other types of licenses have not been revised to recognize the relatively new Perpres. In addition, most of the banks and micro-finance institutions still require an SIUP and/or a TDP as one of the requirements to obtain credit. The ASEAN Economic Community requires all MSEs to have an identification number to do business in other ASEAN countries—another obstacle for Indonesia’s MSEs given the arduous licensing process.

Many laws and regulations need to be harmonized with the Perpres for it to be effective. This should not be limited to the licensing sector, but also in the banking sector and government procurement to maximize the benefits for the MSEs.

The government would be wise to prioritize this reform agenda to further improve Indonesia’s business climate. By doing so, the current administration would inch closer to achieving its “Nawacita,” a nine-point list of priorities. Civil society, well-experienced in this sector, stands ready to support the government in this important reform effort.

Erman Rahman is a senior program director for The Asia Foundation in Indonesia. The views and opinions expressed here are those of the author and not those of The Asia Foundation or its funders.

Related locations: Indonesia
Related programs: Inclusive Economic Growth


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