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
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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
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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
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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
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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.
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STRENGTHENING BUSINESS COMPETITIVENESS FOR
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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
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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
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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
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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.
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STRENGTHENING BUSINESS COMPETITIVENESS FOR
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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
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STRENGTHENING BUSINESS COMPETITIVENESS FOR
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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.
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STRENGTHENING BUSINESS COMPETITIVENESS FOR
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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.
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STRENGTHENING BUSINESS COMPETITIVENESS FOR
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FIGURE 12. Access to Electricity, Year 2011
Source: World Development Indicators, World Bank Data 2014
D. Business confidence and moving forward beyond