I n d o n e s i a s B u s i n e s s Environment 2014

C. I n d o n e s i a s B u s i n e s s Environment 2014

C.1. Major Roadblock to Business Competitiveness: an Insight for Policy Prioritization There are 5 major impediments that are perceived by Indonesias private sectors as having the highest degree of barriers for their businesses see Figure 2, namely Business licensing 35 of respondents; customs procedures and trade regulation 3 2 ; a c c e s s t o i n a n c e 3 0 ; infrastructure, transportation and logistics 28; as well as limited availability of skilled-workers 28. This inding re lects largely the situation business sector have to deal with in a routine basis. In Indonesia, u n l e s s we u s e a s e r v i c e f ro m t h e agentbrokerage, it will take years in order to get a complete-set of license to be legally registered as a business entity in the speci ic sectors. It sometime will take weeks for the importers to have their products being loaded from the ship and have them stored in their warehouse, not solely because of congested port and inef icient customs procedures, but also stringent trade rules. It is also 2 until 3 times much cheaper for fruit distributors in Jakarta to import orange fruit from China than have it delivered from Medan, because of highly inef icient domestic logistics, infrastructure, and transportation system. Entrepreneurs in Indonesia are also facing 2 or 3 times higher price of investment credit than in other major developing countries in Asia, like China, Malaysia, and Thailand. Furthermore, Indonesias employers have to pay higher mandated wages for a much lower human capital than that of Thailand, Malaysia, and China. Respondents, in general, also indicate the problems in the taxation, legal certainty, corruption, electricity, and land-related problem to have negative impact for their businesses, though not as severe as the previously mentioned top 5 major impediments. All of this means high cost and serves as major roadblock for business competitiveness. Outside the option that has been provided in the questionnaire, respondents also highlight a few of other signi icant impediments to business growth, namely currency and raw material. There are 2 major issues regarding the currency and why business might be negatively affected by that. Firstly, at pre-2011, before the current account de icit took place in Indonesias economy and while the commodity was still booming, the Central Bank of Indonesia Bank Indonesia had preferred to keep the rupiah strong. It might be good news for the importers and the consumers, but it certainly hurts the competitiveness of export-oriented manufacturing irms, especially the labor-intensive industry. Papanek et.al. 2014 found that from 2008 to 2011, workers “real wage” purchasing power stayed essentially the same, but the cost of labor for exporters increased 27 because of the exchange rate appreciation over that time. They said that Indonesias exchange rate management system at that time seemed to ignore its impact to domestic production, employment, and certainly the industrial development. Secondly, starting from late 2011 until now 2014, rupiah is seeking the way to its new equilibrium level which is attributed largely to the changing dynamism of how the investors are seeing Indonesias economic fundamental. As investors are in a high expectation for structural reform measures 6 STRENGTHENING BUSINESS COMPETITIVENESS FOR A PROSPEROUS INDONESIA and policy breakthrough from the government in order to improve the economic fundamental, Rupiah is often going up and down in a high variability re lecting largely of how con idence the investors are with the reform and breakthrough package being launched by the government. Therefore, in this period, the stability of rupiah has become a very big issue for businesses, especially the ones that linked intensively with international trade and investment activity. The main message here is that keeping the currency low to support manufacturing competitiveness is essential to be done, however it should not interfere with the need to have a signi icant degree of stability. That is to say, the central bank of Indonesia Bank Indonesia should not let Rupiah moving down very aggressively and in a high variability in the name of boosting manufacturing export competitiveness, because it will create instability and u n p re d i c t a b i l i t y e nv i ro n m e n t fo r b u s i n e s s e s , t h u s h a r m i n g t h e i r competitiveness instead. Another speci ic impediment raised up by the respondents is the availability of raw and supporting materials for the industry. Usually, irms tend to import quality materials from abroad as a part of their production process. The drawback of doing this is that it is quite expensive; combined with unstable currency, it would inancially harm the companies. However, reliable suppliers of raw materials–in term of production scale and quality–are not yet available at the domestic level, so that switching to source input domestically is not a viable option at the moment. There is a gap between the capacity of local supporting industry such as raw material suppliers and the potential demand of manufacturing sector, especially, the light industries, such as textile and apparels. Sourcing the raw materials domestically would be of their signi icant bene it, as they will be able to gain more given the narrow margin in the lower- value added market. FIGURE 2. Major Obstacles to Business Competitiveness Note: the igure is in the percentage to total respondents Source: Authors calculation based on APINDOs survey on business competitiveness 2014 7 STRENGTHENING BUSINESS COMPETITIVENESS FOR A PROSPEROUS INDONESIA Major Impediments to Business Business Regula on Licensing Customs Procedures and Trade Regula on Access to Finance Infrastructure, Transporta on, Logis cs including ICT Infrastructure Limited Availability of Skilled-Workers Legal Uncertainty and Weak Jus ce System, esp related to Business Taxa on Labor Regula on Electricity Corrup on Poli cal Instability Others Land-related problems Crime and The 0 5 10 15 20 25 30 35 40 2 5 9 10 11 21 22 23 26 28 28 30 32 35 We also found that as the irms scale varies, they tend to perceive a different degree of severity for each problem Figure 3. For small enterprises employing less than 10 workers, it is the access to inance said more than half of respondents, then followed by business licensing 50 and limited availability of skilled workers 43 that are perceived to be the most hampering problems. It still holds true for the case of medium enterprises employing 50 to 100 workers, except now they perceive a more balance degree on the severity of those problems.³ The condition is quite different for the large enterprises employing more than 100 workers, whereby labor regulation, customs procedures and trade regulation, infrastructure, transportation, and logistics, as well as legal uncertainty are perceived as the major impediments for their business. Small-and-Medium Enterprises SMEs are struggling to expand their business scaleactivity, thats why the most important aspects for them is how to get enough inancial support and quality workers to help grow their companies, as well as how the regulation can be ine-tuned so that they wont get so burdened by the signi icant c ompliance cost usually created by excessive business regulationlicensing. On the other hand, larger enterprises concern more about customs, trade regulation, trade infrastructure and logistics as they are dealing with trading activities more intensively than SMEs. Labor regulation is also a more pressing issue for them, as they have to deal with labor union, high uncertainty in minimum wage setting process, as well as high severance pay. The main reason why these problems are more prevalent in large enterprises than in SMEs might be that pressure for compliance to labor regulation is higher in large enterprises than in SMEs. Although SMEs will expectedly be the one that is hurt the most by high minimum wage and severance pay, they can still go “underwater” informal without having signi icant pressure for compliance because labor union is not that powerful in SMEs. Legal uncertainty is perceivably a more concerning problems for large enterprise than for SMEs because large enterprises often have to secure million or even billion dollar business transaction, sometimes with foreign partners, so that they become more demanding for improvement in legal system than SMEs do. 3 FIGURE 3. Major Impediments to Businesses: SMEs Vs. Large Enterprises Notes: SMEs employ less than 100 workers; Large Enterprises employ more than 100 workers Source: Authors calculation based on APINDOs survey on business competitiveness 2014 Around 35 of respondents in medium enterprises category chooses access to inance, business licensing, and limited availability of skilled workers as their top 3 major impediments for their businesses. 8 STRENGTHENING BUSINESS COMPETITIVENESS FOR A PROSPEROUS INDONESIA Access to Finance SMEs Business Licensing Limited Availability of skilled workers Large Enterprises Customs Procedures Trade Regula on Labor Regula on Infrastructure, Transporta on, Logis cs include ICT Legal Uncertainty This survey was asking the respondents on how they perceived about the position and trajectory of business competitiveness in Indonesia in general as compared to other developing countries in Asia. The tendency of responses is that in general the current position of business competitiveness in Indonesia is considered worse as compared to other developing countries in Asia majority of 49.52 respondents said so, however they felt that at least it keeps improving over time 61 of respondents. It means that though the current position of competitiveness is still lacking to other developing Asia countries, theres still positive trajectory in place. This study disaggregates competitiveness indicators into 16 elements see Appendix A. Most respondents perceived that all the 16 elements are considered as Indonesias structural weaknesses, meaning that all the 16 competitiveness elements are perceived to be worse than those of other developing countries in Asia. However at the same time, most respondents also felt that the quality of all the 16 competitiveness elements are keeping the pace to those of other developing Asian countries, if not pulling ahead. Figure 4 summarizes the assessments on t h o s e 1 6 e l e m e n t s o f b u s i n e s s competitiveness. The horizontal axis captures the current position of business competitiveness in Indonesia for each element. It records the portion of respondents perceiving each element in Indonesia to be worse than other developing countries in Asia. The motivation of why the data on the horizontal axis is presented in this way is that we want to highlight which competitiveness elements are perceived to be the worst among others, so that it might bene it policy makers in term of policy prioritization given limited resources yet unlimited, or very high, expectation from the business sector. The vertical axis, on the other hand, provides an insight about the competitiveness trajectory in Indonesia, by measuring the extent to which the respondents felt that the business competitiveness in Indonesia is improving, in the sense that it is keeping the pace, if not pulling ahead of other developing Asian countries over time. At one edge, there are competitiveness elements that experience signi icant improvement and position well above others, included here are political stability, macroeconomic policy, availability of clusters, ICT infrastructure, taxation, inance, and business regulation group 1 as depicted in Figure 4. At the other edge, t h e r e a r e a l s o t h e e l e m e n t s o f competitiveness that have both stagnant improvement and poor position in the competitiveness level, such as logistics infrastructure, innovation infrastructure, and legal certainty and enforcement group 4. In between, there are improving elements, yet still positioned poorly in term of their competitiveness level, such as IPR system, the quality of education system, linkage between universities and private s e c t o r s , a s w e l l a s s u p p o r t f o r entrepreneurship group 2. The practice of hiring and iring of the workers in Indonesia, albeit ranked very poorly in the GCI 2014- 2015 data, is still perceived as less disadvantaged elements compared to other components, with a stagnant improvement group 3. In term of policy sequencing given limited governments resources, it might be best t o i r s t l y p r i o r i t i z e o n t h e competitiveness elements which Indonesias lacking the most, namely the elements that fall under the group 4 and group 2. However, considering that the 9 STRENGTHENING BUSINESS COMPETITIVENESS FOR A PROSPEROUS INDONESIA competitiveness trajectory of group 4 is less satisfying than group 2, the government might want to prioritize group 4 irst, then moving on to group 2. After nurturing those disadvantaged elements, it is equally important for the government to paying attention also in improving the lexibility of hiring and iring of the workers group 3, while also keeping the relatively stronger elements under the group 1 from falling behind, and making their competitiveness level even better compared to other developing countries in Asia. Note: the red line depicts the general situation on Indonesias business competitiveness, while the magenta dot captures the competitiveness condition horizontal and trajectory vertical for each element de ined in the survey Source: Authors calculation based on APINDOs survey on business competitiveness 2014 FIGURE 4. Assessments on the Elements of Business Competitiveness 10 STRENGTHENING BUSINESS COMPETITIVENESS FOR A PROSPEROUS INDONESIA Group 1: Less disadvantaged Signi icant improvement Group 2: Disadvantaged Signi icant improvement Group 3: Less disadvantaged No Signi icant improvement Group 4: Disadvantaged No Signi icant improvement Poli cs Macro Clusters ICT Infrastructure Taxa on Finance Reguler IPR Educa on System Universi es Skilled labor Entrepreneurship Innova on Legal Logis cs Infastructure hiring and firing 30 40 50 60 70 Comara ve Disadvantage 55 60 65 70 75 80 Impr ov emen t C.2. Labor Market Condition: R i g i d R e g u l a t i o n , L o w Compliance, and Shortage of Skilled-Workers Labor market condition in Indonesia is among the most rigid in the region where regulations concerning the creation and t e r m i n a t i o n o f e m p l o y m e n t relationships are relatively costly. This study reveals that the majority of 60.4 respondents agreed that the current regulatory environment surrounding labor market in Indonesia is detrimental for their business growth and competitiveness. The agreement rate is even higher for the large enterprises 74.4 as compared to the SMEs 53. It relates to the previous inding that the larger enterprises see labor regulation as a more concerning problems than SMEs do, noting that pressure from trade union and for compliance are higher in large enterprises than in SMEs. FIGURE 5. How Successful Are Indonesias Business in Competing with other Comparable Competitors in other Developing Asia Countries? Source: Authors calculation based on APINDOs survey on business competitiveness 2014 All in all, apart from the fact that all the impediments being identi ied are prevalent and deteriorating for the businesses, there is still a modest optimism among the private sectors showing that they feel quite successful in competing with the rivals from other developing countries in Asia. Around 73 of respondents said that they either feel quite successful, successful, or very s u c c e s s f u l i n c o m p e t i n g w i t h t h e comparable irms in other developing Asia countries. However it must be of note that as the irms scale get smaller, they tend to feel more unsuccessful in competing with other comparable irms from developing Asia countries see Figure 5. Small and medium enterprises SMEs ind it harder to successfully competing with other irms from developing Asia countries than large enterprises do. 11 STRENGTHENING BUSINESS COMPETITIVENESS FOR A PROSPEROUS INDONESIA Very Unsuccessful Unsuccessful Quite Successful Successful Very Successful 7,14 21,43 71,43 5,77 21,15 51,92 19,23 1,92 7,69 69,23 23,08 3,77 22,64 60,38 12,26 0,94 100 90 80 70 60 50 40 30 20 10 Per cen tag e of R esponden ts Small Medium Large Total At the central of rigid labor market regulation in Indonesia is minimum wage that is ever increasing and highly uncertain in term of its determination process as well as highly binding and expensive mandated severance payment. Minimum wage in Indonesia is pretty expensive by developing-manufacturing countries standards. It increases in a fast rate and is not really linked much to the productivity improvement of the businesses. From 2000 to 2013, minimum wage has increased more than six fold, while the labor productivity has barely been doubled. This, then, leads to a sharp increase in the cost of labor input required to produce one unit of output unit labor cost, which rises 11.1 annually or have almost been quadrupled in the last 13 years see Figure 6. If the labor cost continues to increase so fast that productivity cannot even keeping the pace with it, Indonesia will soon risk l o s i n g i t s c o m p e t i t ive n e s s a s a production base. FIGURE 6. The Dynamics of Minimum Wage, Productivity, and Unit Labor Cost in Indonesia, 2000-2013 Note: unit labor cost is de ined as total compensation in current prices divided by real output in constant prices that is adjusted for increases in output prices. It is assumed that Indonesias employers pay or compensate their workers at minimum wage rate. Unit labor cost gives an estimation on the cost of labor input required to produce one unit of output. The value in the igure above is presented as a relative to its 2000s value. Source: APINDOs staff calculation based on World Bank-World Development Indicators 2014 and Badan Pusat Statistik 2014 12 STRENGTHENING BUSINESS COMPETITIVENESS FOR A PROSPEROUS INDONESIA 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 7 6 5 4 3 2 1 Lab Prod GDPperson employed Minimum wage Na onal Average Unit Labor Cost Stop Recrui ng More New Workers for a Certain Periods Raising the Prices to the Buyers Inves ng More on the Technology Reducing the Number of Exis ng Workers Cu ng Down Bonus Outsourcing some of the Business Lines to other Companies Not Relevant Cu ng Down Budget for Training Reloca ng Business to the Cheaper Region Others 0,00 10,00 7,55 20,00 30,00 40,00 50,00 60,00 3,21 16,64 16,98 19,81 23,58 25,47 29,25 42,45 57,55 This study seeks to know deeper on how the private sector is likely to respond in the case of minimum wage increase. From the survey, we found that majority of the irms being surveyed will respond through: not recruiting more new workers for a certain period, passing the cost increase onto the consumers, and investing more on the technology see Figure 7. In the aggregate terms, it will mean lower employment creation, higher consumer prices higher in lation, and higher degree of automation preferring to use machines and technology in the production process rather than laborers. All of this is a response from the private sector to maintain the competitiveness and ef iciency of their irms following the forced increase of wages that is n o t o r i g i n a t e d f ro m p ro d u c t iv i t y improvement. It appears to us that minimum wage will be neutral in its effect to purchasing power, because of likely higher consumers price following that, and possibly aggravate the trend of jobless growth Indonesia is experiencing now via more prevalent automation as it is more costly to hire workers than to invest in machine. FIGURE 7. How do Firms Respond to Minimum Wage Increases? Note: the igure is in the percentage to total respondents Source: Authors calculation based on APINDOs survey on business competitiveness 2014 13 STRENGTHENING BUSINESS COMPETITIVENESS FOR A PROSPEROUS INDONESIA Firing the workers and relocating to a cheaper region are not among the irst choice the irms have in mind in responding to minimum wage increase, because it would create another high cost for businesses considering the highly expensive and binding severance payment mandated by labor regulation in Indonesia. In some cases, bringing out a manufacturing plant from Bekasi west java to Semarang central java might not be viable since employers will have to pay certain amounts of severance payment to the workers in Bekasi that are being dismissed as a response to choosing a lot cheaper workers in central java instead. Indonesia has the highest severance pay level measured in salary weeks in the region – it is even higher than that of advanced economies in Europe and North America Continent. In average, if employers in Indonesia want to dismiss a worker, they have to pay averagely about 58 weeks of salary, as opposed to employers in major manufacturing economies, like China, which have to pay only equal to averagely 23 weeks of salary. After all, the government capacity to enforce compliance with minimum wage and severance pay legislation is notably limited, making the labor law ineffective in protecting the rights of workers. The World Bank 2010, 2014 reported that the majority of 66 of employees are not receiving severance pay at all when they are dismissed from their works, while 27 employees still received less than the mandated amount. It is estimated that only 7 of employees are receiving full amount of severance pay. In addition, during 2000 to 2011, the non-compliance rate to minimum wage legislation ranges between 30-40, indicating that not all eligible employees receive minimum wage as mandated by legislation. ILO estimation 2013 further shows that around 36.2 percent employees in Indonesia earned less than the provincial minimum wage. Not only do businesses need to comply with expensive hiring and iring cost, they are also facing mounting pressure from the government to comply with rather premature governments social protection programs, namely the BPJS Badan Pe ny e l e n g g a ra J a m i n a n S o s i a l in employment BPJS Ketenagakerjaan as well as in healthcare BPJS Kesehatan. We found that although the majority of the irms have received government-based socialization program regarding the BPJS, they havent yet fully complied with the regulation. Around 63 respondents admitted that they have been given socialization program from the government, yet 65 of them confessed that not all of their workers have been registered as members of either BPJS in employment BPJS Ketenagakerjaan or BPJS in healthcare BPJS Kesehatan. For those irms, which are not yet fully complied with the BPJS, the average percentage of their workers being registered as members of BPJS in either form is only around 34 for BPJS Ketenagakerjaan and 36 for BPJS Kesehatan. The main reason of why they are not fully complied with BPJS is not that they cannot pay for the insurance premium. Instead, they are more concerned about the clarity of the procedures, the legal certainty, as well as how the BPJS will be overlapping with the existing private insurance scheme the irms already provided for their employees. Speci ically, many irms majority of 34 respondents are questioning the mechanism of Coordination of Bene it COB between BPJS and private insurance scheme that is already provided previously by the employers. They mostly complain about the vagueness of COB procedures and how it will potentially create 14 STRENGTHENING BUSINESS COMPETITIVENESS FOR A PROSPEROUS INDONESIA high cost for business because of double p a y m e n t , t h u s h a r m i n g b u s i n e s s competitiveness. Rigid labor market regulation combined with lack of enforcement, as Indonesia typically does, result in a situation of which everybody is hurt: business becomes increasingly uncompetitive, workers get u n p r o t e c t e d , a n d e m p l o y m e n t opportunities for the jobseekers tend to decrease. It, then, leads towards a lose-lose situation, rather than a win-win one. Nobody bene its from the system. Another element in labor market that is critical to boost countrys productivity, enhance business competitiveness in the global market, as well as transform Indonesia into one of high-income countries in the future is the availability of skilled workforce. In Indonesia, this is quite an issue. Indonesia still has a relatively small size of labor pool equipped with tertiary education post-secondary education, including academy, university, college, etc.. In this education level, workforces are equipped with relevant analytical and technical capabilities necessary for middle to higher skilled jobs. Based on the latest World Bank data, only 7.1 labor force in Indonesia is having tertiary education. This igure is very low as compared to other developing-manufacturing countries, which are essentially Indonesias closest competitors in the global manufacturing markets, such as Malaysia 21, Philippines 28, as well as Pakistan 25 and Sri Lanka 17 for lower-value added market see Figure 8. Indonesia is only better than the less- developed countries, namely Cambodia. As Indonesia aspires to be one of high-income countries in the future, it is worth to use South Korea as a model, where 35 of its workers are already receiving tertiary education. Source: World Development Indicators, World Bank Data 2014 FIGURE 8 . Percentage of Labor Force with Tertiary Education of total 15 STRENGTHENING BUSINESS COMPETITIVENESS FOR A PROSPEROUS INDONESIA 40 35 30 25 20 15 10 5 South Korea 2007 Philippinese 2008 Pakistan 2008 Malaysia 2008 Sri Langka India 2010 Indonesia 2008 Cambodia 2009 Per cen tag e of Labor F or ce 35 28,0 25,1 21,2 16,8 9,8 7,1 2,1 The shortage of skilled-labor in Indonesia has been evident nowadays. From the APINDOs survey, we found a majority of 59 respondents saying that they have dif icult times in inding skilled workers, especially the middle-skill workers⁴. The dif iculty in inding the middle-skill workers, as compared to the condition of 3 years ago, has been perceived as remain unchanged by majority of 44 respondents, while the other 29 feel an increasing dif iculty; only a minority of 27 respondents saying that its been easier to ind so. The data that we found from professional association has a similar tone with our survey indings. For instance, in engineering services, Indonesia is predictably lacking of around 1.2 million engineers, which is attributed to the low growth rate of engineering graduates in Indonesia 164 graduates per year per million of people as compared to other developing countries, like Malaysia 367 graduates per year per million of people. As for nursing services, if Indonesia fails to increase the ratio of nurse per population from currently low 1:2850 to ideally 1:851, there would be a shortage of 87,618 nurses in relative to the potential demand by 2019 Keliat, et.al, 2013. A more macro data by the World Bank and BPS estimated that by 2025, Indonesia would experience a shortage of 10 million of s k i l l e d l a b o r s . G i v e n h i g h y o u t h u n e m p l o y m e n t a n d e d u c a t e d unemployment rate in Indonesia, which is around 22 and 9 respectively as c o m p a r e d t o a v e r a g e n a t i o n a l unemployment rate, which is around 6, and youth and educated unemployment rate in other countries⁵, it gives us a sense that its not only about lacking the number, but more importantly also lacking the quality, e.g. the skill doesnt match to the updated need of the market, the skill of the graduates is still in the low quality, etc. It has been a common perception in the business community that the skill pro ile of Indonesian workers has not evolved along with the demands of the labor market. The problem clearly doesnt originate solely from poorly performed formal education sector, but also from the ill functioning of the informal education offered by the companies, i.e. on-the-job training, which is often more useful, practical, and critical for workers skill acquisition. Early indications are pointing out that rigid labor market regulation might have something to do with lack of training and education being offered by private sectors. Labor regulation is deemed to focus too heavily in the protection side, which it never does because of lack of enforcement, yet fails to incentivize and stimulate employers to provide training critical for workers productivity improvement. The key is in the more active engagement from the private sectors as well as governments will to provide inancial incentive and support for the improvement of training capacity and quality in the private sectors and designated national training center “Balai Latihan Kerja”BLK. The skill that requires a training and technical capability at the level more than a high school diploma, but less than a four-year university degree 4 5 The youth unemployment rate in the most populous countries like China and India is only less than 10; while China has less than 7 and Thailand only near 2 of tertiary graduates that are still unemployed 16 STRENGTHENING BUSINESS COMPETITIVENESS FOR A PROSPEROUS INDONESIA C.3. Infrastructure and Logistics Logistics infrastructure is a serious problem in Indonesia. Respondents perceive it as the major impediments for business competitiveness, as well as the least improving and the least competitive elements of competitiveness as compared to the situation in other developing countries in Asia. The quality of infrastructure, logistics, and transportation in Indonesia in several global rankings is ranked unsatisfactory, which is still well below the ranking of other major developing countries in ASEAN such as Malaysia and Thailand. Even worse, the World Banks Logistics performance Index LPI shows that Indonesia is currently placed 53 out of 160 countries. Even though there are improvements, Indonesias LPI is still below Vietnam, which has become a tough competitor for manufacturing production base in ASEAN region. Logistics and i n f r a s t r u c t u r e s a r e v i t a l f o r t h e competitiveness of manufacturing sectors, especially the export-oriented ones. The limitation of logistics infrastructure hinders national manufacturing supply chain, thus hampering business productivity and competitiveness. FIGURE 9. Major Problems in Trade Logistics Issues that Hampering Firms Trade Activity Note: the igure is in the percentage to total respondents Source: Authors calculation based on APINDOs survey on business competitiveness 2014 17 STRENGTHENING BUSINESS COMPETITIVENESS FOR A PROSPEROUS INDONESIA 0,00 10,00 20,00 30,00 40,00 50,00 60,00 70,00 Percentage of Respondents Process and Procedures in Customs and other Conges on Limited Applica on of ICT in Trade Ac vity Poor Quality of Roads and Bridges Poor Quality of Port andor Airport Infrastructure Long Dwelling Time Lack of Quality and Reliable Logis cs Services and Experts Poor Quality of Logis cs Suppor ng Infrastructures Lack of Quality and Reliable Transport Services Providers Others related Ins tu ons e.g. warehouse, cold storage, etc e.g. trucking, etc Through this study, we would like to identify where actually the problems lie. The irst major problem is related to the institutional infrastructure. The majority of 64 respondents rated the lengthy and complicated process and procedures in the customs and other related institutions as their major impediments to trade see Figure 9. This gets worsened by the fact that the application of ICT in trade activity is still notably limited. For instance, many exportimport documents cannot be uploaded via online and still require the traders to come to the several trade-related institutions which can be very costly to them. The Indonesias National Single Window NSW system was established to address these institutional issues by placing all the related institutions into one location. However, it hasnt worked quite effectively. The majority of 61 respondents expressed that the Indonesias NSW has not worked effectively. The NSW doesnt work the way it supposed to be, if not ineffective at all. The second problem lies at the poor quality of physical infrastructure in Indonesia. Delivery of goods from production center to portsairports is highly inef icient in Indonesia compared to neighboring countries in ASEAN. For example, in Malaysia, transportation from Pasir Gudang production center to Tanjung Pelepas Port within 56.4 Km takes 1-2 hours and needs cost in an amount of USD 450 per container. Meanwhile in Indonesia, transportation from Cikarang production center to Tanjung Priok Port within 55.4 Km takes much longer time of 4-8 hours and requires higher cost of USD 600 per container APINDO, 2014. What makes distribution in Indonesia more expensive than in Malaysia is that congestion is m o re s eve re a n d t h e q u a l i t y o f infrastructure is poorer in Indonesia than in Malaysia. Almost half of the respondents rated congestion as the second major impediments to their trade activity after customs problem, while 34 respondents feel that poor quality of roads and bridges is hampering the trade processes. With highly congested and damaged roads, it is then expected that moving out goods to another center point will be more expensive and takes longer time. This then will create not only expensive delivery cost, but also delivery uncertainty and unpunctuality, which is further creating disturbance for the whole supply chain system and forcing the irms to bear higher inventory cost, thus repressing further their competitiveness. 18 STRENGTHENING BUSINESS COMPETITIVENESS FOR A PROSPEROUS INDONESIA Indonesias logistics cost could be up to 27 see Figure 10, yet its service quality is still very poor. This cost is higher than those of other major developing countries in ASEAN, like Malaysia 13 and Thailand 20, and still more expensive than Indonesias closest competitor in manufacturing products, namely Vietnam 25. From the survey, we also found that the logistics cost tend to be more expensive over time, while the quality of transportation and infrastructure remain unchanged. Almost 80 of respondents said that their logistics cost as a relative to the irms total cost has increased as compared to the condition of 3 years ago. Most respondents also see no signi icant improvement in the quality of transportation system and infrastructure see Figure 11. The increasing logistics cost might arguably be a re lection of infrastructure development failing to keeping up with the fast pace of economic progress. Hence, more truck are entering the unchanged roads capacity, more containers are shipped via more crowded ports andor airports, thus longer lead-time and higher cost because of congestion in many points. FIGURE 10. Logistics Cost: Indonesia Vs. Selected ASEAN and Advanced Economies Source: State of Logistics Indonesia 2013 19 STRENGTHENING BUSINESS COMPETITIVENESS FOR A PROSPEROUS INDONESIA WorseMore Expensive for Logis cs Cost Unchanged Be er 100 90 80 70 60 50 40 30 20 10 Per cen tag e of R esponden ts Logis cs Cost 20,75 79,25 Quality of Transporta on System 36,54 79,25 Quality of Infrastructure 20,75 79,25 53,85 9,62 15,24 51,43 FIGURE 11. Logistics Cost, Transportation and Infrastructure Quality, as Compared to 3 Years Ago Note: the igure is in the percentage to total respondents Source: Authors calculation based on APINDOs survey on business competitiveness 2014 Apart from the trade logistics issue, there is another more essential and profound problem regarding the infrastructure in Indonesia, namely the electricity. The percentage of people having access to the electricity is still very low by developing countries standard see Figure 12. Only 73 of Indonesias population in 2011 has access to electricity; this means there are more than 60 million of lives that still dont have access to the electricity. This igure is very low as compared to those of Malaysia, China, and Thailand where almost all their citizens have already had access to electricity. The issue on electricity in Indonesia should not be viewed only in term of the coverage, but more importantly also in term of the quality. The APINDO survey found that almost all the irms have experienced blackout, at least once in a month. Averagely, there are 8 times of blackout in a month, or equal to twice blackout per week or 104 times blackout annually. Every blackout happened for 3 hours long in average. That means there is a loss of 6 hours per week or 1 day per month or 13 days per year because of blackout, which can be used instead for production activity. The monetary loss of this blackout is predicted to be around 11 of irms annual sales. 20 STRENGTHENING BUSINESS COMPETITIVENESS FOR A PROSPEROUS INDONESIA It is worth to analyze the issue on electricity region by region. We found that the incidence and the cost of blackout have been higher in Medan than in other parts of Indonesia that were being surveyed. Re s p o n d e n t s i n M e d a n i s u s u a l ly experiencing 30 times blackout per month, meaning that almost everyday they have to deal with the blackout. For 3 hours long of every blackout, it is costing private sectors in Medan up to 20 of their irms annual sales see Figure 13. This brings up a negative effect to manufacturing development in Medan in a signi icant amount. As national and regional governments strive to develop downstream manufacturing base for agriculture and forestry sectors in Medan, there is a pressing need to signi icantly and immediately boost the quality of electricity in Medan. Without reliable electricity access, the manufacturing plant cannot be operated, thus making Medan to continue highly rely on its primary activity and natural resources, and further get left behind by other regions in term of development status. This applies also for other regions aspiring to improve their welfare; reliable electricity access is an important determinant for inviting in manufacturing plant critical for boosting up the regions development. 21 STRENGTHENING BUSINESS COMPETITIVENESS FOR A PROSPEROUS INDONESIA FIGURE 12. Access to Electricity, Year 2011 Source: World Development Indicators, World Bank Data 2014

D. Business confidence and moving forward beyond