Memperbaiki Lingkungan Usaha Di Indonesia Melalui Reformasi Pendaftaran Usaha Dan Perizinan
IMPROVING THE BUSINESS ENVIRONMENT IN INDONESIA
THROUGH BUSINESS REGISTRATION AND LICENCE REFORM
JOHAN CHAHYADI
POSTGRADUATE SCHOOL
BOGOR AGRICULTURAL UNIVERSITY
BOGOR
2015
STATUTORY DECLARATION
I, Johan Chahyadi, hereby declare that the master thesis entitled ―Improving
the Business Environment in Indonesia through Business Registration and
Licence Reform‖ is my original work under the supervision of Advisory
Committee and has not been submitted in any form and to another higher
education institution. This thesis is submitted independently without having used
any other source or means stated therein. Any source of information originated
from published and unpublished work already stated in the part of references of
this thesis.
Herewith I passed the thesis copyright to Bogor Agricultural University.
Bogor, September 2015
Johan Chahyadi
H151120141
SUMMARY
JOHAN CHAHYADI. Improving the Business Environment in Indonesia through
Business Registration and Licence Reform. Under Supervision of RINA
OKTAVIANI and ERAN BINENBAUM.
The ease of starting a business in Indonesia is still relatively difficult
compared to neighbouring Association of Southeast Asian Nations (ASEAN)
countries. To improve the business environment and increase the participation of
Small and Medium Enterprises (SMEs) in the private sector, the Indonesian
Government has implemented several policies to accelerate registration and
licensing services for starting a business. However, in the last 10 years, these
reforms have been slow to take effect. The aim of this study is to evaluate the
business registration and licensing reforms which the Indonesian Government has
applied through deregulation and the establishment of One-Stop Service (OSS),
namely Pelayanan Terpadu Satu Pintu (PTSP), in order to increase the efficiency
of starting a business in Indonesia.
The findings show that the difficulties of starting a business have reduced,
but Indonesia still features lower in ease-of-business rankings than neighbouring
countries. The Doing Business Reform Simulator 2015 shows that by
consolidating procedures and abolishing the minimum capital requirement,
Indonesia‘s starting business ranking and DTF score can increase, making the
country one of the top ASEAN performers. Further, by streamlining business
registration and licensing through OSS, the licence office has been able to
determine the starting business procedure with clarity and certainty, and with
minimum cost and time. These actions are motivating new businesses to formally
register, which in turn is improving local economic conditions.
Keywords: starting a business, reforms, business environment, business
registration and licensing, One-Stop Service.
RINGKASAN
JOHAN CHAHYADI. Memperbaiki Lingkungan Usaha di Indonesia melalui
Reformasi Pendaftaran Usaha dan Perizinan. Di bawah bimbingan RINA
OKTAVIANI dan ERAN BINENBAUM.
Kemudahan memulai usaha di Indonesia masih relatif sulit dibandingkan
dengan beberapa negara anggota ASEAN (Association of Southeast Asian
Nations). Untuk meningkatkan lingkungan bisnis dan meningkatkan partisipasi
Usaha Kecil dan Menengah (UKM) di sektor swasta, Pemerintah Indonesia telah
menerapkan beberapa kebijakan untuk mempercepat layanan pendaftaran dan izin
untuk memulai bisnis. Namun, dalam 10 tahun terakhir, hasil dari reformasi ini
berjalan lambat. Tujuan dari penelitian ini adalah untuk mengevaluasi reformasi
pendaftaran usaha dan perizinan yang diterapkan oleh Pemerintah Indonesia
melalui deregulasi dan pembentukan One-Stop Service (OSS), yaitu Pelayanan
Terpadu Satu Pintu (PTSP), dalam rangka meningkatkan efisiensi memulai bisnis
di Indonesia
Penelitian ini menunjukkan bahwa kesulitan untuk memulai usaha telah
berkurang, namun Indonesia masih memiliki peringkat kemudahan usaha lebih
rendah dibanding beberapa negara-negara tetangga. Doing Business Reform
Simulator 2015 menunjukkan bahwa dengan mengkonsolidasikan prosedur dan
menghapuskan persyaratan modal minimum, dapat meningkatkan peringkat untuk
memulai usaha dan nilai DTF, membuat Indonesia sebagai salah satu performer
terbaik di ASEAN. Selanjutnya, dengan mengkonsolidasikan pendaftaran usaha
dan perizinan melalui OSS, kantor perijinan dapat menetapkan prosedur memulai
usaha dengan kejelasan dan kepastian serta dengan biaya dan waktu yang
minimum. Tindakan ini memotivasi usaha baru untuk mendaftarkan usahanya
secara resmi, yang pada gilirannya meningkatkan kondisi ekonomi lokal.
Kata kunci: memulai usaha, reformasi, lingkungan usaha, pendaftaran usaha dan
perizinan, pelayanan terpadu satu pintu
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IMPROVING THE BUSINESS ENVIRONMENT IN INDONESIA
THROUGH BUSINESS REGISTRATION AND LICENCE REFORM
JOHAN CHAHYADI
Master Thesis
as a requirement to obtain a degree
Master of Science in
Economics Program
POSTGRADUATE SCHOOL
BOGOR AGRICULTURAL UNIVERSITY
BOGOR
2015
Externally Advisory Committee Examiner: Dr. Ir. Iman Sugema, M.Ec
ACKNOWLEDGMENT
My greatest gratitude goes to Allah SWT God Almighty, who provided me
with the opportunity to obtain a scholarship and study abroad.
I would like to acknowledge all people who contributed and gave their
invaluable support. In particular, my gratitude goes to my supervisors, Professor
Dr Ir. Rina Oktaviani, M.Si and Dr Eran Binenbaum, who were very generous
with their comments, encouragement and critique. I would also like to thank the
lecturers and staff of the University of Adelaide, especially Athena Kerley,
Niranjala Seimon and Augustine Bhaskarraj for their support and assistance
during my study at the University of Adelaide.
I would also like to acknowledge Elite Editing for giving me editorial
assistance to improve the quality of my thesis. The editorial intervention was
restricted to Standards D and E of the Australian Standards for Editing Practice.
Finally I would like to thank my friends (Handoko, Yusmita, Ari), to my
parents, to my beloved wife Nia Karunia, and our lovely children, Fathi and
Aisyah, for their prayers, sacrifice and support through this process.
Bogor, September 2015
Johan Chahyadi
TABLE OF CONTENTS
LIST OF FIGURES
xi
LIST OF TABLES
xi
LIST OF ABBREVIATIONS
xii
1 INTRODUCTION
1
2 BACKGROUND
3
3 LITERATURE REVIEW
7
Previous Studies
7
The Role of Business Registration and Licensing
8
Decentralisation and Complexity of Business Registration and Licensing 10
4 GOVERNMENT EFFORTS TO IMPROVE THE BUSINESS
ENVIRONMENT
12
Regulation Reform
12
Institutional Reform and the Establishment of PTSP
13
5 DISCUSSION
17
The Effect of Regulation Reform on Procedures, Costs and Time
17
Effects of Regulation Reform on Starting-a-Business Ranking
18
Improving the Quality Of Local Business Regulation
24
OSS and Starting-a-Business Indicators
27
Streamlining Effect on the Business Environment
30
Good Practise of Starting a Business in Regional Level
32
6 CONCLUSION
34
REFERENCES
35
BIOGRAPHY
40
LIST OF FIGURES
Figure 2.1 Comparison of country ranks in starting a business in 2014
(DBR2015)
4
Figure 4.1 OSS licensing process
16
Figure 5.1 Trend in the starting-a-business index in indonesia and East Asia
and the Pacific Region
23
Figure 5.2 The Regulatory Impact Assessment (RIA) process
25
Figure 5.3 Three levels of OSS authority (units, offices, departments)
28
Figure 5.4 Cost and time required to establish a business in
selected Indonesian cities
29
LIST OF TABLES
Table 2.1 Indonesia‘s business establishment indicators, 2003–2014
4
Table 2.2 Large, micro, small and medium firms in Indonesia, 2009–2012
5
Table 2.3 GDP share of Indonesia‘s SMEs and large enterprises, 2005–2012
5
Table 3.1 Business trade licences (SIUP)
11
Table 3.2 Company registration certificates (TDP)
11
Table 4.1 Types of business trade and industrial licences required starting new
enterprises
15
Table 5.1 Comparison of burden of starting a business in DBR2015 and reform
regulation targets
20
Table 5.2 Comparison of Indonesia‘s starting-a-business indices with other
ASEAN countries in 2014
22
Table 5.3 Simulation using the doing business reform simulator 2015
24
Table 5.4 Benefits and costs of the first alternative (without policy changes)
26
Table 5.5 Benefits and costs of the second alternative
27
Table 5.6 Time and cost required to obtain legal business status
31
Table 5.7 Number of business licences issued in Yogyakarta
31
Table 5.8 Economic development indicators of Yogyakarta, based on business
trade licence issuance, 2006 to 2011
32
LIST OF ABBREVIATIONS
ADB:
Asian Development Bank
BKPM:
Badan Koordinasi Penanaman Modal
(Indonesian Investment Coordinating Board)
DB:
Doing Business
DBR:
Doing Business Report
DKI:
Daerah Khusus Ibukota (Special Capital Region)
DTF:
Distance to Frontier
FCO:
Foreign and Commonwealth Office
GDP:
Gross Domestic Product
IDR:
Indonesian Rupiahs
IT:
Information Technology
KPPOD:
Komite Pemantauan Pelaksanaan Otonomi Daerah (Regional
Autonomy Watch)
MSMEs:
Micro, Small and Medium Enterprises
NPPKP:
Nomor Pokok Pengusaha Kena Pajak (Tax Number)
NPWP:
Nomor Pokok Wajib Pajak (Tax Number)
OECD:
Organisation for Economic Cooperation and Development
OSS:
One-Stop Service
PERDA:
Peraturan Daerah (Indonesian Regional Regulation)
PTSP:
Pelayanan Terpadu Satu Pintu (One-Stop Service)
SIUP:
Surat Izin Usaha Perdagangan (Trade Business Permit)
SMEs:
Small and Medium-Sized Enterprises
SOP:
Standard Operating Procedure
TDP:
Tanda Daftar Perusahaan (Business Registration)
UNCTAD:
United Nations Conference on Trade and Development
USAID:
United States Agency for International Development
1
1 INTRODUCTION
Investment in the private sector has become a key driver for sustained and
rapid economic growth. More than 90 per cent of employment opportunities in
developing countries are provided by the private sector (World Bank 2004b). In
Indonesia, the private sector has become a significant driver of economic growth,
contributing 60 per cent to gross domestic product (GDP), and almost 70 per cent
of total employment in Indonesia (Asian Development Bank [ADB] 2012, p. 1).
Business environment regulations have a substantial effect on decisions
about the location of investment and resources. The success or failure of an
enterprise is affected by costs, risks and barriers to competition, which emerge
through the implementation of government policies (World Bank 2004b). An
excellent business environment will supply incentives and opportunities for the
private sector, and stimulate firms to be more productive and provide more
employment opportunities through new investment. Conversely, a deterrent
business environment hinders investment. Poor business conditions more likely
correspond to restricted business regulations, which hamper the growth of new
business.
At present, the investment climate in developing countries is an important
factor in economic development. Among the fundamental characteristics of a
rapidly growing country is a good business environment for private enterprise
(Perkins et al. 2012; Xu 2011). A critical starting point for improving the business
environment is reducing the difficulty of firm registration. Many countries have
reformed the registration process by simplifying the business and licensing
process, to reduce costs, time and procedures associated with registering as a
formal enterprise. The World Bank introduced the ‗Doing Business‘ indicators in
its first Doing Business Report in 2004 (World Bank 2004). According to
Djankov (2009), since the publication of these indicators, the Report has led to
193 reforms that simplify business registration in 116 countries, between 2003
and 2008. Reforms have been dominated by improvements in entry regulation
areas, such as online business registration, business document standardisation,
reduction of minimum capital requirement and in-court and notary registration as
an option. Many researchers believe that cumbersome entry regulations may
hinder the establishment of new businesses (Bruhn 2008; Djankov et al. 2002;
Kaplan, Piedra & Seira 2011; Klapper, Laeven & Rajan 2006), which is important
for fostering the establishment of new firms and increasing entrepreneurial
activity.
In the last decade, the Indonesian Government has enforced several
policies to improve the procedures for establishing a business, by deregulating,
simplifying and streamlining business registration and licensing processes, to
reduce costs, days and number of procedures required to establish an enterprise.
However, the progress of business registration and licensing reform in Indonesia
has been slower than in neighbouring countries. The objective of this study is to
examine business registration and licensing reform through deregulation and the
establishment of Pelayanan Terpadu Satu Pintu (PTSP), or One-Stop Service
(OSS), to improve the business environment and increase the participation of
small and medium-sized enterprises (SMEs) in the private sector.
2
The next chapter presents the background of the current condition of the
ease of starting a business in Indonesia, and its connection with SMEs operation
in the private sector. Chapter 3 reviews the literature on business-establishment
indicators, and their relationship with complex business registration and licensing.
Chapter 4 describes the Indonesian Government‘s reforms. Chapter 5 discusses
several improvement options for regulation and institutional reform, and their
effect on business registration and licensing. Chapter 6 concludes the thesis.
3
2 BACKGROUND
Indonesia is a country with rich natural resources and the fourth largest
population in the world. It is also the largest economy in Southeast Asia, with a
potential market of more than 240 million people, with robust domestic demand.
These factors make Indonesia an attractive investment destination for international
investors. According to the World Investment Prospects Report 2013-2015
(United Nations Conference on Trade and Development [UNCTAD] 2013),
Indonesia was ranked in the top five prospective investment destinations,
alongside other emerging economies such as Brazil, India and China.
Another indicator describing business climates around the world is the
Ease of Doing Business Index, issued by the World Bank Group and International
Finance Corporation since 2004. The Doing Business Report 2015 (DBR2015)
measured business establishment indicators—such as number of procedures, cost,
time and capital requirements—to identify the rank of starting a business in major
cities, such as Jakarta, in 2014. The Report studied the obstacles faced by local,
medium-scale enterprises in 189 countries, in formally registering. 1 Indonesia
actively conducts business regulation reforms, in order to enhance the efficiency
of the business environment. The DBR2015 reported that to start a business in
Jakarta (Indonesia‘s largest business city in this survey), an entrepreneur took 52.5
days to complete 10 procedures, at a cost of 20.1 per cent of income per capita, in
2014. As shown in Table 2.1, the ease of starting a business has significantly
improved in Indonesia since the DBR was published in 2004. In 2014, the time
needed to start a business had been reduced by 31 per cent from 2003. The cost
only decreased by 15 per cent, and the minimum capital requirement was around
44 per cent less than in earlier years.
As Table 2.1 demonstrates, Indonesia ranked 155 of 189 countries in the
ease of starting a business. The number of procedures has been reduced (but not
dramatically), and the minimum capital needed has changed less as a percentage
of per capita income than other Southeast Asian countries. Among ASEAN
countries, the efficiency of starting a business in Indonesia is far below Singapore
and Malaysia, but is higher than Cambodia, and of a similar ranking to Laos (See
Figure 2.1). Laos is far less developed than Indonesia.
1 Formal Business is a Limited Liability Company (Doing Business 2015)
4
Table 2.1 Indonesia‘s business establishment indicators, 2003–2014
DB
2004
Indicators
DB
2005
DB
2006
Rank
(sub-index indicator)
DB DB DB DB DB DB DB
2007 2008 2009 2010 2011 2012 2013
DB DB
2014 2015
161
168
171
161
155
155
166
158
155
-Procedures (no.)
12
12
12
12
12
12
11
11
10
10
9
10
-Time (days)
168
151
151
97
105
77
62
49
48
48
82
52.5
-Cost (per cent of income per
capita)
136.7 130.7 101.7 86.7
80
76.7
25
25.8
23.5
22.7
20.5 20.1
-Minimum capital (per cent of
income per capita)
69.1
62.8
DB rank
Number of countries surveyed
130
145
48.9
41.7
38.4
74.2
59.7
53.1
46.6
42
38.5 35.5
115
135
123
129
122
121
129
128
117
114
155
175
178
181
183
183
183
185
189
189
Source: Doing business (2015b)
In Indonesia, the private sector is characterised by a large number of
SMEs. These have dominated Indonesian economic activities for a long time, as
shown in Table 2.2, in 2012 more than 90 per cent of the 56.5 million business
units across all sectors were SMEs. Table 2.3 shows that SMEs make a significant
contribution to GDP, accounting for more than 57.48 per cent in 2012.
Singapore
Malaysia
Thailand
Vietnam
China
6
13
75
125
128
Lao PDR
154
Indonesia
155
Philippines
Brunei Darussalam
Cambodia
Myanmar
161
179
184
189
Source: World Bank (2014)
Figure 2.1 Comparison of country ranks in starting a business in 2014 (DBR2015)
Table 2.2 Large, micro, small and medium firms in Indonesia, 2009–2012
2009
Share (% )
2010
Share (% )
2011
Share (% )
2012
Share (% )
Large firms
4676
0.01
5150
0.01
4952
0.01
4968
0.01
Micro, small, medium
firms (total)
52764750
99.99
53823732
99.99
55206444
99.99
56534592
99.99
Micro firms
52176771
98.88
53504416
98.86
54559969
98.82
55856176
98.79
Small firms
546463
1.04
568397
1.05
602195
1.09
629418
1.11
Medium firms
41336
0.08
42008
0.08
44280
0.08
48997
0.09
Total firms
52769426
53828882
55211396
56539560
Source: Ministry of Cooperatives, Small and Medium Enterprises Republic of Indonesia (2015)
Table 2.3 GDP share of Indonesia‘s SMEs and large enterprises, 2005–2012
2005 (%)
2006 (%) 2007 (%) 2008 (%) 2009 (%)
2010 (%)
2011 (%)
2012 (%)
Large firms
44.05
41.51
41.56
41.65
41.95
42.17
42.52
42.52
Micro, small, medium firms
(total)
55.95
58.49
58.44
58.35
58.05
57.83
57.60
57.48
Micro firms
-
33.24
32.96
32.82
32.66
32.42
32.02
31.32
Small firms
39.31
10.71
10.85
10.87
10.4
10.78
10.99
11.65
Medium firms
16.64
14.54
14.62
14.66
14.65
14.63
14.59
14.51
Source: Ministry of Cooperatives, Small And Medium Enterprises Republic Of Indonesia (2015)
5
5
6
SMEs‘ importance as an engine of economic growth largely derives from
their large numbers, rather than their average productivity. According to
Tambunan (2011), the low productivity of Indonesian SMEs correlates to the low
quality of human capital, low technology content and poor access to financial
institutions. This common problem, which hinders the value added of SMEs, may
be due to the characteristic of Indonesian SMEs, whereby 70 per cent of them are
still active in the informal sector (ADB 2012, p.1). The Enterprise Survey (2009)
listed the informality problem as number two in the list of top 10 problems stifling
business expansion in Indonesia. The survey of 1400 firms in Indonesia in 2009
found that around 65 per cent of enterprises were unregistered when firms began
business. The firms with formality levels was less than 30 per cent in Indonesia
(Enterprise Survey 2009). Many new entrepreneurs delayed registration of their
company for almost 2.5 years after the commencement of business, much longer
than the average time in other countries, where less than one year was required.
The significant level of informality could be caused by several factors.
Tambunan (2011) stated that SMEs in Indonesia have to deal with complex
business regulations and restrictions, such as business registration and licensing
procedures. These might cause many SMEs to operate informally. Loayza (1997)
argued that the informal sector emerges when a government imposes taxes and
excessive regulations but is not able to enforce compliance. A business owner
must consider whether the benefits of obtaining a business licence exceed the cost
and time required to formally register.
By registering, new SMEs or informal SMEs can increase their economic
capacity. Formality helps firms access financial and business services from the
government or banks, and increases the opportunities to expand. Improvement of
business registration increases the creation of new firms, thus strengthening the
private sector (De Sa 2005). Therefore, business registration and licence reform
are strongly correlated to a friendly business environment.
7
3 LITERATURE REVIEW
Previous Studies
Significant effects of the business registration reform include a lower cost
of firm registration, smaller informal sector and increase in the creation of new
companies. Evidence exists from empirical studies investigating the correlation
between ease of business registration and the creation of a business in the formal
sector.
The cost of business registration is a crucial factor affecting micro, small
and medium enterprises (MSMEs) to register formally. MSMEs country
indicators show a solid, statistically substantial link between business registration
and formal MSMEs (Kushnir, Mirmulstein & Ramalho 2010). The study analyses
data on 125 million MSMEs, collected between 2007 and 2010 in 132 countries.
The database included 89 million MSMEs operating in emerging markets. After
controlling for the growth rate (gross national income per capita), it was found
that countries in which establishing a business is costly, and those that often
require unofficial payments, are negatively correlated with the participation of
MSMEs in the formal sector.
An important channel for fostering entrepreneurship in the formal sector is
reform of business registration and the simplification of legal procedures.
Investigating the effect of the business environment on entrepreneurship, Klapper,
Lewin and Delgado (2009) estimate the correlation between the indicator of
entrepreneurship from the World Bank Entrepreneurship Survey with business
environment factors that are good governance indicators, ease-of-starting-abusiness rankings, simplified business legal reform and implementation of
electronic registration. The study used World Bank Entrepreneurship Survey data
in 101 countries, from between 2000 and 2007. The researchers found significant
correlation between business-entry density rates (the number of new firms per
capita) and ease-of-starting-a-business rankings, the number of procedures, the
cost of starting a business and good governance indicators. A country that
provides an inexpensive, simple business establishment and efficient governance
experiences more rapid business entry and entrepreneurial activity.
Similar empirical research by Klapper and Love (2010), using crosscountry panel data from 92 countries from between 2004 and 2009, identified a
significant correlation between business environment reforms and the number of
new firm registrations. They used a sub-index of the starting-a-business indicator
in the DBR: costs, days, number of procedures and minimum capital requirement
for starting a business to measure the significance of registration reform on new
business entry density. The study found that small business registration reforms
(below 40 per cent) will not significantly change the number of new registered
firms.
Other country-level studies in Mexico and the Philippines found similar
benefits from the deregulation of starting a business. Bruhn (2008) examined the
effects of a substantial reduction in the number of registration procedures and the
establishment system for rapid business start-up on new business creation and
other economic outcomes in different municipalities in Mexico. The study used
household data from a Mexican employment survey from 2000 to 2004, in 34
8
districts. The author found that deregulation reduced registration procedures from,
on average, eight to less than three, increased the number of newly registered
firms by five per cent and employment by 2.8 per cent in eligible industries.
The municipality of San Jose de Buena Vista in the Philippines has also
experienced the positive effects of reforming business registration and permits
procedures. Gumasing (2013) studied the improvement of the business
environment through the streamlining of business licensing and permits to
develop formal MSMEs, between 2008 and 2011. Gumasing (2013) found that the
implementation of a one-stop business registration office substantially reduces the
number of procedures and costs, and optimises the time taken to process and
receive business permits. Consequently, the reforms increased the number of
formal MSMEs, and yielded additional revenue for the local government.
The Role of Business Registration and Licensing
To start a business, firms first have to legally register their business entity
and acquire a business licence with the business registration authority (a public
entity). According to the World Bank (2013a), the registration procedure consists
of all activities that a new business must complete, including gathering all
essential permits and licences, filling out forms and registration notices and being
verified by government authorities. Time and money must be spent in establishing
a new business.
Governments commonly implement a business registration and licensing
rule. Low-level entrepreneurs require legal business documents when making
legal business agreements or trading with private or public entities. According to
Pudyatmoko (2009), a licence has three functions: as the legal base of a company;
as an instrument that ensures legal certainty; and as an instrument that protects the
interests of enterprises, the government or society. The document serves as proof
that the business owner has met the requirements for operating a business. A
business licence corresponds to a prior permit from the government for business
people to conduct business operation (De Sa 2005). Permitting the operation of a
business or trade is intended to reduce disturbances and illegal conduct in business
operations. Additionally, other important argument for maintaining business entry
regulations is to maintenance compete business environment in private sector,
ensuring quality and safety of services and goods, and securing the rights of
workers in the company and consumers can be met (Keppel, Binh & Spatz 2006).
The business registration and licensing process plays an essential role as
the legitimate source of reliable business information, not only among business
entities in the private sector but also for the government. Business registration is
important as a reliable database of information for government legal officers and
other companies (Arrunada 2007). Dependable information is important, in order
to reduce transaction costs with all public and private business entities. Manh,
Tuan and Tas (2006) stated that company registration plays at least two very
important roles in the development of the private sector: it provides business
information to the private sector, and protects its interests. Moreover, the benefits
of business registration continue beyond the establishment process. Historical data
of companies, recorded during the registration process, will be required by many
entities (private or public institutions) as reliable information. For example, when
9
making decisions about investments or when seeking business partners. Business
registration is also a source of statistical information for government planning,
monitoring and business sector development. However, business registration and
licensing can be cumbersome when the process for acquiring such licences
deviates from regulatory purposes. The legal instrument can significantly increase
the barriers of entry into a market, the burden of time and expense in starting a
business, and ultimately reduce the freedom of companies to conduct business.
The burden of strict company registration regulations likely outweigh the benefits,
because they have an adverse effect on the businesses that were meant to be
protected.
Djankov et al. (2002) and McLeod (2006) have argued that politicians and
bureaucrats regulate the entry of firms with the aim of rent-seeking. Ruling
enterprises exploit complex business registration procedures to increase their
market power and profits (Djankov et al. 2002). As the ruling enterprises
benefited from the low cost of information and organisation, cumbersome entry
regulations may increase the cost to new firms, and prevent competition.
Resultantly, large corporations use their power to avoid complex entry
regulations, or may even protect them.
Brito-Bigott et al. (2008) found that there is a strong positive correlation
between complicated business registration rules and corruption. Their study found
that the number of procedures, the time required and fee paid to start a business
and conduct a contract and register a property correlated with the corruptioninduced effect. Business applicants may pay bribes to avoid strict procedures and
avoid costs. The more interactions between public officials with discretionary
power and entrepreneurs when arranging business registration, the greater the
level of corruption. Government officials can control the supply of public goods
and manipulate the rules of private economic activities with unclear definitions
(Rose-Ackerman 1996). They deviate from regulations for personal benefit by
manipulating registration processes, conducting additional procedures or receiving
or rejecting them for unclear reasons (Brito-Bigott et al. 2008).
SMEs are most affected by rigid business regulation. New businesses are
rarely registered formally, and operate in the informal sector to avoid government
monitoring, because of unclear information, prohibitively high costs and complex
procedures (Keppel, Binh & Spatz 2006). Consequently, firms do not receive
adequate services from the government to protect or develop their businesses
(Keppel, Binh & Spatz. 2006). Moreover, the government is expected not to
collect taxes or fees from business registration and licensing processes, as an
institution‘s financial resources are a tool to manage competition. The use of
business licensing to pursue these goals will reduce transparent regulation,
increase the exploitation of regulations for rent-seeking and lead to uncertainty
over the business registration and licensing process (Ho 2010). Therefore, the
major challenge for regulators is designing a procedure that balances ease of
starting a business with protecting public interest. It will remove bottlenecks that
restrict the growth of and investment in informal enterprises, and lead to
productive developments.
10
Decentralisation and Complexity of Business Registration and Licensing
Decentralisation and regional autonomy, implemented since 2001, has
given greater authority to local governments to determine local regulations,
including those relating to the authority to administer business licences and tax. In
an autonomous system, the central government only determines norms, standards,
principles and procedures, and local governments are given the freedom to
construct local regulations based on national guidelines. Since decentralisation
and the implementation of regional autonomy, Indonesia has transformed rapidly
from a highly centralised state to one of the most decentralised countries, with 34
provinces and 502 districts (Republic of Indonesia 2013, p.378).
The purpose of decentralisation in Indonesia was to improve public
services, facilitate the entry of investors and make investment a driver of local
economic growth. Regional autonomy enables local governments to decide the
best regional policies. In terms of the investment climate, regional governments
have more freedom to promote local and foreign investment through business
policies, providing simple, fast, inexpensive and transparent services. Good
business practices regarding local investment are essential to increasing national
investment performance. However, many local governments create business
licensing regulations on their own terms, and implement national regulations
differently. Rapid decentralisation has led to counterproductive, overlapping and
inconsistent regulations across the national economy. After decentralisation, there
was a proliferation of illegal local government taxes and fees that negatively
affected local investment and impeded the openness of the internal market
(Organisation for Economic Cooperation and Development [OECD] 2012). In a
2011 survey of approximately 1500 local regulations from 240 regencies/cities in
Indonesia, the Komite Pemantauan Pelaksanaan Otonomi Daerah (KPPOD,
regional autonomy watch) found that almost 81 per cent of Peraturan Daerah
(PERDA, Indonesian regional regulation) did not comply with appropriate higherorder (ministerial) regulations (KPPOD, United States Agency for International
Development [USAID] & The Asia Foundation 2011, p. 41). In terms of content
regulation, the problem (21 per cent) is that in business, licensing regulations are
related to clarity over procedures and standards of time and costs. Instead of
applying the authority of legislation on taxes and levies to create incentives,
eliminate distortions and market inefficiency, local governments use licensing
regulations to increase revenues. A regional survey conducted by the Ministry of
Trade found similar results. In 2010, they monitored and supervised the
implementation of Surat Izin Usaha Perdagangan (SIUP, business permits) and
Tanda Daftar Perusahaan (TDP,business registration) in 100 districts of Indonesia.
11
Table 3.1 Business trade licences (SIUP)
Description
The Ministry of Trade
Regulation no. 36/MDAG/PER/9/2007 on
the issuance of SIUP
and TDP
Local regulation
(PERDA)
Indicators
Comply
(% )
Do not
comply (%)
Cost
23
77
None
Charge
Days
53
47
3 working days
5-7 working days
Required
documents
10
90
Subscribe, NPWP, HO,
SITU
Source: Directorate of Business and Trade (2010)
There is disharmony between national and local government on trade
licence and business registry regulations, which inhibits the acceleration of
business trade licence services in regional areas and negatively affects the
development of a good business climate (Directorate of Business and Trade
2010). For example, more than 70 per cent of local regulations on issuing SIUP
and TDP charge fees, although according to the Ministry of Trade, they should be
free (see Tables 3.1 and 3.2).
Table 3.2 Company registration certificates (TDP)
Comply
(%)
The Ministry of Trade
Regulation No. 36/MDAG/PER/9/2007 on the Local regulation (PERDA)
Do not
issuance of SIUP and
comply (%) TDP
Cost
19.2
80.8
None
Charge
Days
48.5
51.5
3 working days
5-7 working days
Required
documents
33.3
66.6
Description
Indicators
Subscribe, company balance
sheet, HO, SITU, list of
shareholders document
Source: Directorate of Business and Trade (2010)
Overall, the action taken by local governments have not fully engendered a
friendly business climate. Local regulations impede the promotion of regional
investment and hinder long-term sustainable economic development.
12
4 GOVERNMENT EFFORTS TO IMPROVE THE BUSINESS
ENVIRONMENT
Regulation Reform
In 2006, the Indonesian Government published an investment policy
package, through Presidential Instruction No. 3 Year 2006, which was intended to
improve Indonesia‘s investment climate (Republic of Indonesia 2006). The policy
includes improvements in five areas:
1. General policy, with an emphasis on strengthening and improving
investment institutions, including accelerating business licensing activity
and capital investment, speeding up the establishment of companies from
150 to 30 days, and synchronising national and local government
regulations.
2. Customs sector reform.
3. Labour sector reform.
4. Promotion of the development of SMEs and cooperatives.
Overall, the investment package fulfilled the ADB‘s 2005
recommendation, which encouraged institutional improvement in order to manage
uncertainty in investment, informal costs frequently associated with bureaucratic
red tape and the streamlining of the national and local government investment
regulations (ADB 2005). Similar findings from investment monitoring of 500
companies in major Indonesian cities in 2006 also supported this
recommendation. A survey conducted by the Institute for Economic and Social
Research of the University of Indonesia and the World Bank recommended
streamlining and simplifying business registration licensing procedures, in order
to reduce rent-seeking actions, which were a major obstacle to investment in the
national and local government (LPEM-UI 2006). In supporting sustained business
reforms, the World Bank and International Finance Corporations periodically
publish the progress of business reforms in Indonesia. In 2010 and 2012, the
World Bank published two major reports about sub-nationals doing business in
major cities, to assist business reform by local governments.
Responding to the World Bank‘s DBRs, which state that starting-abusiness indicators were declining, and Indonesian performance was deteriorating
compared to neighbouring countries, the government enacted inter-ministerial
regulations in 2009, to accelerate start-up business registration (Ministry of Trade
Republic of Indonesia 2009). This was akin to a government task force, and
consisted of the Ministry of Home Affairs, the Ministry of Law and Human
Rights, the Ministry of Trade, the Ministry of Labour and Transmigration and the
Head of the Investment Coordinating Board. The regulation enacted a new legal
standard, which reduced the time and procedures necessary to establish a firm.
The main points were:
1. Use of the company name and legal status validation, registration and
announcement in the state gazette supplement of a Limited Liability
Company, and payment of non-tax revenue (Penerimaan Negara Bukan
Pajak, PNBP) must be completed in no less than eight working days.
13
2. The issuance of a tax number (Nomor Pokok Wajib Pajak [NPWP] and
Nomor Pokok Pengusaha Kena Pajak [NPPKP]) in no less than one
working day.
3. The issuance of a business licence (SIUP and TDP) at local governments
(provincial, district, city) can be finished simultaneously and must be done
in no less than three working days.
4. The issuance of the letter on the company‘s worker registration at the local
government (provincial government, district, city) and social insurance
membership must be completed in no less than five working days.
Sustaining business reforms, in February 2013 the government launched
17 policy packages to improve the business environment. Half of the initiatives
were related to simplifying and reducing the time required to start a new business
(Badan Pengawasan Pasar Modal [BKPM, Indonesian Investment Coordinating
Board] 2013). The reforms related to starting a business were:
1. The simplification of government regulations concerning company labour
registration and social security membership, so that the process of
obtaining worker registration can be completed in one and seven days,
respectively, by the Ministry of Law and Human Rights.
2. The issuance of SIUPs and TDPs in three working days at the PTSP
(OSS), by the Ministry of Trade.
3. The issuance of regional government regulations at PTSPs (OSSs), and
hand-over of licence authority from the Governor of the Daerah Khusus
Ibukota (DKI, Special Capital Region) Jakarta to the Head of the PTSP
(OSS) Office, DKI Jakarta by the Provincial Government of DKI Jakarta.
4. The revision of Limited Liability Company Law, in order to remove the
minimum capital and paid-in minimum capital requirement by the
Ministry of Law and Human Rights.
5. The issuance of tax regulations regarding online service tax reports by the
Ministry of Finance.
6. The simplification of payment methods of social insurance programs (e.g.,
working accident insurance, health insurance) by PT Jamsostek.
The World Bank (2014) stated that sustained reform actions with
substantial effects on time and cost efficiency are the use of electronic registration
systems (Sistim Administrasi Badan Hukum), for Limited Liability Company
registration in the Ministry of Law and Human Rights. Another important
development is the Ministry of Trade‘s Regulation No. 36/2007, which relates to
business trade licences, and stipulates a new TDP and SIUP filing process with no
cost, that can be issued simultaneously in three working days.
Institutional Reform and the Establishment of PTSP
To deal with inefficiencies in the licensing administration, and to reduce
the burden on business registration, the Indonesian Government reformed
institutions and regulations. They made the Ministry of Home Affairs Regulation
No. 24 Year 2006, and the Head of the Indonesian Investment Coordinating Board
Regulation No. 6 Year 2011 the legal bases and guides for establishing PTSP
14
(OSS) in local government (KPPOD & FCO 2014). The national government
encourages all provinces and districts/cities to ease investment and business
regulations by simplifying procedures, developing and enhancing integrated OSS,
eliminating non-official licence fees and implementing an electronic registration
system (Republic of Indonesia 2013).
New firms wanting to operate fully must complete various steps through
the registration and licensing department at local and national government levels.
This process generally occurs as follows (Asia Foundation 2007). The first steps
are related to fulfilling all requirements of the formal business or company act, by
obtaining a legal deed from the public notary, a tax registration number from the
Ministry of Finance, and getting permission from the Ministry of Law and Human
Rights. Approval from the national government is limited only for a Limited
Liability Company, while other legal business institutions—such as sole
proprietorship or limited partnership—do not need legalisation from the Ministry
of Law and Human Rights. The second step includes obtaining physical permits,
such as construction or building permits and nuisance and location permits, which
are mainly administered at the local level. New firms must obtain sectoral permits
to be allowed to operate in the trade or industrial sectors. For example, business
trade licences and industrial business licences. After all of these requirements
have been filled, a new firm can obtain business trade registration or industrial
business registration at the local government. The majority of small and medium
companies acquire licences and registration permits at the local level.
Table 4.1 illustrates the complexity of establishing a new business. New
enterprises must deal with different local departments, each of which have their
own processes of issuing licences, and requirements for documents that must be
supplied before applying for a business, trade or industrial licence.
15
Table 4.1 Types of business trade and industrial licences required starting new
enterprises
Stage in Licensing
Process
Name of License/Permit
Name of Institution in Charge
Company Formation
Personal Identification (KTP)
Sub District Office
Deed of Establishment
Notary
Domicile Letter (Surat Domisili)
Kelurahan (sub District Office)
Tax ID (NPWP)
Tax Office of Ministry of Finance
(Central Government)
Approval
of
Deed
of
Establishment (SK Pendirian PT)
Ministry of Law and Human Right
(central government)
Approval Letter (SP)
Investment Coordinating Board
(Central Government)
Principal Permit
Dinas
Perindustrian
dan
Perdagangan (Local Office of
Industry and Trade)
Land Usage Permit (SIPPT)
Dinas Tata Kota (City Planning
Office)
Enviromental
(ANDAL/UKL/UPL/SPPL)
Badan Pengelola Lingkungan
Hidup
Daerah
(Local
Enviromental Body)
Building
(IMB)
Dinas Penataan dan Pengawasan
Bangunan (Local Office for
Building Permit and Control)
Initial Approvals
Land and
License
Building
Construction
Permit
Nuisance Permit (UUG)
Final Operating License
Business Registration
Permanent
(IUT)
Operating
Dinas Penataan dan Pengawasan
Bangunan (Local Office for
Building Permit and Control)
Licence
Investment Coordinating Board
(Central
Government,
BPMPKUD)
Industrial Permit (TDI or IUI)
Dinas /Sudin Perindustrian dan
Perdagangan (Local Office of
Industry and Trade)
Trade Licence (SIUP)
Dinas /Sudin Perindustrian dan
Perdagangan (Local Office of
Industry and Trade)
Business Registration (TDP)
Dinas /Sudin Perindustrian dan
Perdagangan (Local Office of
Industry and Trade)
Source : OECD ( 2012, p.147)
16
OSS were established to amalgamate the management of business
licensing—usually scattered across different technical departments—into a single
office or department. The OSS receives the delegation of authority from the
technical department, which has a licensing authority. The OSS process starts
with registering an application, and ends with issuance of the licence, and is all
done in the one place (KPPOD & Foreign and Commonwealth Office [FCO]
2014). In theory, a new company wanting to obtain a trade licence only needs to
deal with the licensing office (OSS), instead of many government offices (see
Figure 4.1).
Economic
Section
HO/SITU
Location Permit
Planning
Office
Industry
& Trade
office
Other
Office
IMB
SIUP,TDI,TDP
Other Sectoral
Permits
Business People
OSS
HO/SITU, Location
Permit, IMB,
SIUP,TDI,TDP,
Other sectoral permit
Source: Asia foundation (2010, p.3)
Figure 4.1 OSS licensing process
OSS reduce the time required to arrange licences, as administrative
proceedings are based on Information Technology (IT), data input is done once
and administration can be performed simultaneously (Asia Foundation 2007). In
Indonesia, the implementation of OSS was designed to eradicate corruption and
eliminate red tape (Wahid 2013).
17
5 DISCUSSION
The Effect of Regulation Reform on Procedures, Costs and Time
In the past decade, the Indonesian government has worked hard to create
new standards for business registration and licensing, to increase the participation
of the private sector in economic development. Not all reforms can be
implemented or have immediate effects on the ease of conducting business in
Indonesia, but there have been continued efforts to improve public services.
The Ease of Doing Business Survey, conducted by the World Bank in
Jakarta in 2014, can be used to measure the extent of the changes achieved for
establishing a business in Indonesia. There are several requirements for starting a
new business (see Table 5.1). First, in terms of establishing a Limited Liability
Company, founders can obtain approval for the deed of establishment of a
company in around six days. This exceeds the target of the reform (eight working
days). The use of an electronic registration system and the simplification of
procedures by the Ministry of Law and Human Rights have substantially reduced
the time and number of procedures that must be gone through. In 2013, four
procedures were required (World Bank 2013b). Now, only two procedures are
necessary, in order to obtain company name clearance, sign company documents,
pay non-tax revenue for legal services and receive the deed of company
establishment. Nevertheless, processes could be more efficient if the owner could
directly apply for the establishment of a company without having to go through a
notary service. The recently implemented online registration system could be
more open if the founder had the same authority as a notary to access the system.
An open-access method of business registration is used by most countries with
high rankings regarding starting a business (Davis & Hygate 2011). Additionally,
to accelerate the establishment of a new company, Davis and Hygate (2011)
recommended that procedures one, two and 10 be consolidated with an integrated
electronic system between the Ministry of Law and the Ministry of Tax. This is
reasonable, because every new business must have a tax number immediately, and
the Ministry of Law already has the company profile.
However, the paid minimum capital requirement for establishing PT is still
a major obstacle, and has not been abolished, which is not in accordance with
previous reform targets. New start-up businesses must pay a direct-cost deposit of
1.25 million Indonesian Rupiahs (IDR), equivalent to 35.5 per cent of income per
capita, before starting business. In contrast, most Asia-Pacific Economic
Cooperation countries (World Bank 2012) and neighbouring countries (such as
Singapore, Malaysia, Thailand, Vietnam and Laos) have abolished this cost
(World Bank 2010). The minimum capital is considered the main barrier for new
entrepreneurs in Indonesia to expand their companies. Consequently, SMEs
choose sole proprietorship, as there is no needed for formal registration, and they
generally operate in the informal sector.
Table 5.1 shows that business owners can obtain both business trade
licences and company registration documents simultaneously, at OSSs. The
regulation for obtaining these w
THROUGH BUSINESS REGISTRATION AND LICENCE REFORM
JOHAN CHAHYADI
POSTGRADUATE SCHOOL
BOGOR AGRICULTURAL UNIVERSITY
BOGOR
2015
STATUTORY DECLARATION
I, Johan Chahyadi, hereby declare that the master thesis entitled ―Improving
the Business Environment in Indonesia through Business Registration and
Licence Reform‖ is my original work under the supervision of Advisory
Committee and has not been submitted in any form and to another higher
education institution. This thesis is submitted independently without having used
any other source or means stated therein. Any source of information originated
from published and unpublished work already stated in the part of references of
this thesis.
Herewith I passed the thesis copyright to Bogor Agricultural University.
Bogor, September 2015
Johan Chahyadi
H151120141
SUMMARY
JOHAN CHAHYADI. Improving the Business Environment in Indonesia through
Business Registration and Licence Reform. Under Supervision of RINA
OKTAVIANI and ERAN BINENBAUM.
The ease of starting a business in Indonesia is still relatively difficult
compared to neighbouring Association of Southeast Asian Nations (ASEAN)
countries. To improve the business environment and increase the participation of
Small and Medium Enterprises (SMEs) in the private sector, the Indonesian
Government has implemented several policies to accelerate registration and
licensing services for starting a business. However, in the last 10 years, these
reforms have been slow to take effect. The aim of this study is to evaluate the
business registration and licensing reforms which the Indonesian Government has
applied through deregulation and the establishment of One-Stop Service (OSS),
namely Pelayanan Terpadu Satu Pintu (PTSP), in order to increase the efficiency
of starting a business in Indonesia.
The findings show that the difficulties of starting a business have reduced,
but Indonesia still features lower in ease-of-business rankings than neighbouring
countries. The Doing Business Reform Simulator 2015 shows that by
consolidating procedures and abolishing the minimum capital requirement,
Indonesia‘s starting business ranking and DTF score can increase, making the
country one of the top ASEAN performers. Further, by streamlining business
registration and licensing through OSS, the licence office has been able to
determine the starting business procedure with clarity and certainty, and with
minimum cost and time. These actions are motivating new businesses to formally
register, which in turn is improving local economic conditions.
Keywords: starting a business, reforms, business environment, business
registration and licensing, One-Stop Service.
RINGKASAN
JOHAN CHAHYADI. Memperbaiki Lingkungan Usaha di Indonesia melalui
Reformasi Pendaftaran Usaha dan Perizinan. Di bawah bimbingan RINA
OKTAVIANI dan ERAN BINENBAUM.
Kemudahan memulai usaha di Indonesia masih relatif sulit dibandingkan
dengan beberapa negara anggota ASEAN (Association of Southeast Asian
Nations). Untuk meningkatkan lingkungan bisnis dan meningkatkan partisipasi
Usaha Kecil dan Menengah (UKM) di sektor swasta, Pemerintah Indonesia telah
menerapkan beberapa kebijakan untuk mempercepat layanan pendaftaran dan izin
untuk memulai bisnis. Namun, dalam 10 tahun terakhir, hasil dari reformasi ini
berjalan lambat. Tujuan dari penelitian ini adalah untuk mengevaluasi reformasi
pendaftaran usaha dan perizinan yang diterapkan oleh Pemerintah Indonesia
melalui deregulasi dan pembentukan One-Stop Service (OSS), yaitu Pelayanan
Terpadu Satu Pintu (PTSP), dalam rangka meningkatkan efisiensi memulai bisnis
di Indonesia
Penelitian ini menunjukkan bahwa kesulitan untuk memulai usaha telah
berkurang, namun Indonesia masih memiliki peringkat kemudahan usaha lebih
rendah dibanding beberapa negara-negara tetangga. Doing Business Reform
Simulator 2015 menunjukkan bahwa dengan mengkonsolidasikan prosedur dan
menghapuskan persyaratan modal minimum, dapat meningkatkan peringkat untuk
memulai usaha dan nilai DTF, membuat Indonesia sebagai salah satu performer
terbaik di ASEAN. Selanjutnya, dengan mengkonsolidasikan pendaftaran usaha
dan perizinan melalui OSS, kantor perijinan dapat menetapkan prosedur memulai
usaha dengan kejelasan dan kepastian serta dengan biaya dan waktu yang
minimum. Tindakan ini memotivasi usaha baru untuk mendaftarkan usahanya
secara resmi, yang pada gilirannya meningkatkan kondisi ekonomi lokal.
Kata kunci: memulai usaha, reformasi, lingkungan usaha, pendaftaran usaha dan
perizinan, pelayanan terpadu satu pintu
© Copyright belongs to IPB, 2015
All Rights Reserved Law
Prohibited quoting part or all of this paper without including or mentioning the
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writing, preparation of reports, writing criticism, or review an issue; and citations
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Prohibited announcing and reproducing part or all papers in any form without
permission of IPB.
IMPROVING THE BUSINESS ENVIRONMENT IN INDONESIA
THROUGH BUSINESS REGISTRATION AND LICENCE REFORM
JOHAN CHAHYADI
Master Thesis
as a requirement to obtain a degree
Master of Science in
Economics Program
POSTGRADUATE SCHOOL
BOGOR AGRICULTURAL UNIVERSITY
BOGOR
2015
Externally Advisory Committee Examiner: Dr. Ir. Iman Sugema, M.Ec
ACKNOWLEDGMENT
My greatest gratitude goes to Allah SWT God Almighty, who provided me
with the opportunity to obtain a scholarship and study abroad.
I would like to acknowledge all people who contributed and gave their
invaluable support. In particular, my gratitude goes to my supervisors, Professor
Dr Ir. Rina Oktaviani, M.Si and Dr Eran Binenbaum, who were very generous
with their comments, encouragement and critique. I would also like to thank the
lecturers and staff of the University of Adelaide, especially Athena Kerley,
Niranjala Seimon and Augustine Bhaskarraj for their support and assistance
during my study at the University of Adelaide.
I would also like to acknowledge Elite Editing for giving me editorial
assistance to improve the quality of my thesis. The editorial intervention was
restricted to Standards D and E of the Australian Standards for Editing Practice.
Finally I would like to thank my friends (Handoko, Yusmita, Ari), to my
parents, to my beloved wife Nia Karunia, and our lovely children, Fathi and
Aisyah, for their prayers, sacrifice and support through this process.
Bogor, September 2015
Johan Chahyadi
TABLE OF CONTENTS
LIST OF FIGURES
xi
LIST OF TABLES
xi
LIST OF ABBREVIATIONS
xii
1 INTRODUCTION
1
2 BACKGROUND
3
3 LITERATURE REVIEW
7
Previous Studies
7
The Role of Business Registration and Licensing
8
Decentralisation and Complexity of Business Registration and Licensing 10
4 GOVERNMENT EFFORTS TO IMPROVE THE BUSINESS
ENVIRONMENT
12
Regulation Reform
12
Institutional Reform and the Establishment of PTSP
13
5 DISCUSSION
17
The Effect of Regulation Reform on Procedures, Costs and Time
17
Effects of Regulation Reform on Starting-a-Business Ranking
18
Improving the Quality Of Local Business Regulation
24
OSS and Starting-a-Business Indicators
27
Streamlining Effect on the Business Environment
30
Good Practise of Starting a Business in Regional Level
32
6 CONCLUSION
34
REFERENCES
35
BIOGRAPHY
40
LIST OF FIGURES
Figure 2.1 Comparison of country ranks in starting a business in 2014
(DBR2015)
4
Figure 4.1 OSS licensing process
16
Figure 5.1 Trend in the starting-a-business index in indonesia and East Asia
and the Pacific Region
23
Figure 5.2 The Regulatory Impact Assessment (RIA) process
25
Figure 5.3 Three levels of OSS authority (units, offices, departments)
28
Figure 5.4 Cost and time required to establish a business in
selected Indonesian cities
29
LIST OF TABLES
Table 2.1 Indonesia‘s business establishment indicators, 2003–2014
4
Table 2.2 Large, micro, small and medium firms in Indonesia, 2009–2012
5
Table 2.3 GDP share of Indonesia‘s SMEs and large enterprises, 2005–2012
5
Table 3.1 Business trade licences (SIUP)
11
Table 3.2 Company registration certificates (TDP)
11
Table 4.1 Types of business trade and industrial licences required starting new
enterprises
15
Table 5.1 Comparison of burden of starting a business in DBR2015 and reform
regulation targets
20
Table 5.2 Comparison of Indonesia‘s starting-a-business indices with other
ASEAN countries in 2014
22
Table 5.3 Simulation using the doing business reform simulator 2015
24
Table 5.4 Benefits and costs of the first alternative (without policy changes)
26
Table 5.5 Benefits and costs of the second alternative
27
Table 5.6 Time and cost required to obtain legal business status
31
Table 5.7 Number of business licences issued in Yogyakarta
31
Table 5.8 Economic development indicators of Yogyakarta, based on business
trade licence issuance, 2006 to 2011
32
LIST OF ABBREVIATIONS
ADB:
Asian Development Bank
BKPM:
Badan Koordinasi Penanaman Modal
(Indonesian Investment Coordinating Board)
DB:
Doing Business
DBR:
Doing Business Report
DKI:
Daerah Khusus Ibukota (Special Capital Region)
DTF:
Distance to Frontier
FCO:
Foreign and Commonwealth Office
GDP:
Gross Domestic Product
IDR:
Indonesian Rupiahs
IT:
Information Technology
KPPOD:
Komite Pemantauan Pelaksanaan Otonomi Daerah (Regional
Autonomy Watch)
MSMEs:
Micro, Small and Medium Enterprises
NPPKP:
Nomor Pokok Pengusaha Kena Pajak (Tax Number)
NPWP:
Nomor Pokok Wajib Pajak (Tax Number)
OECD:
Organisation for Economic Cooperation and Development
OSS:
One-Stop Service
PERDA:
Peraturan Daerah (Indonesian Regional Regulation)
PTSP:
Pelayanan Terpadu Satu Pintu (One-Stop Service)
SIUP:
Surat Izin Usaha Perdagangan (Trade Business Permit)
SMEs:
Small and Medium-Sized Enterprises
SOP:
Standard Operating Procedure
TDP:
Tanda Daftar Perusahaan (Business Registration)
UNCTAD:
United Nations Conference on Trade and Development
USAID:
United States Agency for International Development
1
1 INTRODUCTION
Investment in the private sector has become a key driver for sustained and
rapid economic growth. More than 90 per cent of employment opportunities in
developing countries are provided by the private sector (World Bank 2004b). In
Indonesia, the private sector has become a significant driver of economic growth,
contributing 60 per cent to gross domestic product (GDP), and almost 70 per cent
of total employment in Indonesia (Asian Development Bank [ADB] 2012, p. 1).
Business environment regulations have a substantial effect on decisions
about the location of investment and resources. The success or failure of an
enterprise is affected by costs, risks and barriers to competition, which emerge
through the implementation of government policies (World Bank 2004b). An
excellent business environment will supply incentives and opportunities for the
private sector, and stimulate firms to be more productive and provide more
employment opportunities through new investment. Conversely, a deterrent
business environment hinders investment. Poor business conditions more likely
correspond to restricted business regulations, which hamper the growth of new
business.
At present, the investment climate in developing countries is an important
factor in economic development. Among the fundamental characteristics of a
rapidly growing country is a good business environment for private enterprise
(Perkins et al. 2012; Xu 2011). A critical starting point for improving the business
environment is reducing the difficulty of firm registration. Many countries have
reformed the registration process by simplifying the business and licensing
process, to reduce costs, time and procedures associated with registering as a
formal enterprise. The World Bank introduced the ‗Doing Business‘ indicators in
its first Doing Business Report in 2004 (World Bank 2004). According to
Djankov (2009), since the publication of these indicators, the Report has led to
193 reforms that simplify business registration in 116 countries, between 2003
and 2008. Reforms have been dominated by improvements in entry regulation
areas, such as online business registration, business document standardisation,
reduction of minimum capital requirement and in-court and notary registration as
an option. Many researchers believe that cumbersome entry regulations may
hinder the establishment of new businesses (Bruhn 2008; Djankov et al. 2002;
Kaplan, Piedra & Seira 2011; Klapper, Laeven & Rajan 2006), which is important
for fostering the establishment of new firms and increasing entrepreneurial
activity.
In the last decade, the Indonesian Government has enforced several
policies to improve the procedures for establishing a business, by deregulating,
simplifying and streamlining business registration and licensing processes, to
reduce costs, days and number of procedures required to establish an enterprise.
However, the progress of business registration and licensing reform in Indonesia
has been slower than in neighbouring countries. The objective of this study is to
examine business registration and licensing reform through deregulation and the
establishment of Pelayanan Terpadu Satu Pintu (PTSP), or One-Stop Service
(OSS), to improve the business environment and increase the participation of
small and medium-sized enterprises (SMEs) in the private sector.
2
The next chapter presents the background of the current condition of the
ease of starting a business in Indonesia, and its connection with SMEs operation
in the private sector. Chapter 3 reviews the literature on business-establishment
indicators, and their relationship with complex business registration and licensing.
Chapter 4 describes the Indonesian Government‘s reforms. Chapter 5 discusses
several improvement options for regulation and institutional reform, and their
effect on business registration and licensing. Chapter 6 concludes the thesis.
3
2 BACKGROUND
Indonesia is a country with rich natural resources and the fourth largest
population in the world. It is also the largest economy in Southeast Asia, with a
potential market of more than 240 million people, with robust domestic demand.
These factors make Indonesia an attractive investment destination for international
investors. According to the World Investment Prospects Report 2013-2015
(United Nations Conference on Trade and Development [UNCTAD] 2013),
Indonesia was ranked in the top five prospective investment destinations,
alongside other emerging economies such as Brazil, India and China.
Another indicator describing business climates around the world is the
Ease of Doing Business Index, issued by the World Bank Group and International
Finance Corporation since 2004. The Doing Business Report 2015 (DBR2015)
measured business establishment indicators—such as number of procedures, cost,
time and capital requirements—to identify the rank of starting a business in major
cities, such as Jakarta, in 2014. The Report studied the obstacles faced by local,
medium-scale enterprises in 189 countries, in formally registering. 1 Indonesia
actively conducts business regulation reforms, in order to enhance the efficiency
of the business environment. The DBR2015 reported that to start a business in
Jakarta (Indonesia‘s largest business city in this survey), an entrepreneur took 52.5
days to complete 10 procedures, at a cost of 20.1 per cent of income per capita, in
2014. As shown in Table 2.1, the ease of starting a business has significantly
improved in Indonesia since the DBR was published in 2004. In 2014, the time
needed to start a business had been reduced by 31 per cent from 2003. The cost
only decreased by 15 per cent, and the minimum capital requirement was around
44 per cent less than in earlier years.
As Table 2.1 demonstrates, Indonesia ranked 155 of 189 countries in the
ease of starting a business. The number of procedures has been reduced (but not
dramatically), and the minimum capital needed has changed less as a percentage
of per capita income than other Southeast Asian countries. Among ASEAN
countries, the efficiency of starting a business in Indonesia is far below Singapore
and Malaysia, but is higher than Cambodia, and of a similar ranking to Laos (See
Figure 2.1). Laos is far less developed than Indonesia.
1 Formal Business is a Limited Liability Company (Doing Business 2015)
4
Table 2.1 Indonesia‘s business establishment indicators, 2003–2014
DB
2004
Indicators
DB
2005
DB
2006
Rank
(sub-index indicator)
DB DB DB DB DB DB DB
2007 2008 2009 2010 2011 2012 2013
DB DB
2014 2015
161
168
171
161
155
155
166
158
155
-Procedures (no.)
12
12
12
12
12
12
11
11
10
10
9
10
-Time (days)
168
151
151
97
105
77
62
49
48
48
82
52.5
-Cost (per cent of income per
capita)
136.7 130.7 101.7 86.7
80
76.7
25
25.8
23.5
22.7
20.5 20.1
-Minimum capital (per cent of
income per capita)
69.1
62.8
DB rank
Number of countries surveyed
130
145
48.9
41.7
38.4
74.2
59.7
53.1
46.6
42
38.5 35.5
115
135
123
129
122
121
129
128
117
114
155
175
178
181
183
183
183
185
189
189
Source: Doing business (2015b)
In Indonesia, the private sector is characterised by a large number of
SMEs. These have dominated Indonesian economic activities for a long time, as
shown in Table 2.2, in 2012 more than 90 per cent of the 56.5 million business
units across all sectors were SMEs. Table 2.3 shows that SMEs make a significant
contribution to GDP, accounting for more than 57.48 per cent in 2012.
Singapore
Malaysia
Thailand
Vietnam
China
6
13
75
125
128
Lao PDR
154
Indonesia
155
Philippines
Brunei Darussalam
Cambodia
Myanmar
161
179
184
189
Source: World Bank (2014)
Figure 2.1 Comparison of country ranks in starting a business in 2014 (DBR2015)
Table 2.2 Large, micro, small and medium firms in Indonesia, 2009–2012
2009
Share (% )
2010
Share (% )
2011
Share (% )
2012
Share (% )
Large firms
4676
0.01
5150
0.01
4952
0.01
4968
0.01
Micro, small, medium
firms (total)
52764750
99.99
53823732
99.99
55206444
99.99
56534592
99.99
Micro firms
52176771
98.88
53504416
98.86
54559969
98.82
55856176
98.79
Small firms
546463
1.04
568397
1.05
602195
1.09
629418
1.11
Medium firms
41336
0.08
42008
0.08
44280
0.08
48997
0.09
Total firms
52769426
53828882
55211396
56539560
Source: Ministry of Cooperatives, Small and Medium Enterprises Republic of Indonesia (2015)
Table 2.3 GDP share of Indonesia‘s SMEs and large enterprises, 2005–2012
2005 (%)
2006 (%) 2007 (%) 2008 (%) 2009 (%)
2010 (%)
2011 (%)
2012 (%)
Large firms
44.05
41.51
41.56
41.65
41.95
42.17
42.52
42.52
Micro, small, medium firms
(total)
55.95
58.49
58.44
58.35
58.05
57.83
57.60
57.48
Micro firms
-
33.24
32.96
32.82
32.66
32.42
32.02
31.32
Small firms
39.31
10.71
10.85
10.87
10.4
10.78
10.99
11.65
Medium firms
16.64
14.54
14.62
14.66
14.65
14.63
14.59
14.51
Source: Ministry of Cooperatives, Small And Medium Enterprises Republic Of Indonesia (2015)
5
5
6
SMEs‘ importance as an engine of economic growth largely derives from
their large numbers, rather than their average productivity. According to
Tambunan (2011), the low productivity of Indonesian SMEs correlates to the low
quality of human capital, low technology content and poor access to financial
institutions. This common problem, which hinders the value added of SMEs, may
be due to the characteristic of Indonesian SMEs, whereby 70 per cent of them are
still active in the informal sector (ADB 2012, p.1). The Enterprise Survey (2009)
listed the informality problem as number two in the list of top 10 problems stifling
business expansion in Indonesia. The survey of 1400 firms in Indonesia in 2009
found that around 65 per cent of enterprises were unregistered when firms began
business. The firms with formality levels was less than 30 per cent in Indonesia
(Enterprise Survey 2009). Many new entrepreneurs delayed registration of their
company for almost 2.5 years after the commencement of business, much longer
than the average time in other countries, where less than one year was required.
The significant level of informality could be caused by several factors.
Tambunan (2011) stated that SMEs in Indonesia have to deal with complex
business regulations and restrictions, such as business registration and licensing
procedures. These might cause many SMEs to operate informally. Loayza (1997)
argued that the informal sector emerges when a government imposes taxes and
excessive regulations but is not able to enforce compliance. A business owner
must consider whether the benefits of obtaining a business licence exceed the cost
and time required to formally register.
By registering, new SMEs or informal SMEs can increase their economic
capacity. Formality helps firms access financial and business services from the
government or banks, and increases the opportunities to expand. Improvement of
business registration increases the creation of new firms, thus strengthening the
private sector (De Sa 2005). Therefore, business registration and licence reform
are strongly correlated to a friendly business environment.
7
3 LITERATURE REVIEW
Previous Studies
Significant effects of the business registration reform include a lower cost
of firm registration, smaller informal sector and increase in the creation of new
companies. Evidence exists from empirical studies investigating the correlation
between ease of business registration and the creation of a business in the formal
sector.
The cost of business registration is a crucial factor affecting micro, small
and medium enterprises (MSMEs) to register formally. MSMEs country
indicators show a solid, statistically substantial link between business registration
and formal MSMEs (Kushnir, Mirmulstein & Ramalho 2010). The study analyses
data on 125 million MSMEs, collected between 2007 and 2010 in 132 countries.
The database included 89 million MSMEs operating in emerging markets. After
controlling for the growth rate (gross national income per capita), it was found
that countries in which establishing a business is costly, and those that often
require unofficial payments, are negatively correlated with the participation of
MSMEs in the formal sector.
An important channel for fostering entrepreneurship in the formal sector is
reform of business registration and the simplification of legal procedures.
Investigating the effect of the business environment on entrepreneurship, Klapper,
Lewin and Delgado (2009) estimate the correlation between the indicator of
entrepreneurship from the World Bank Entrepreneurship Survey with business
environment factors that are good governance indicators, ease-of-starting-abusiness rankings, simplified business legal reform and implementation of
electronic registration. The study used World Bank Entrepreneurship Survey data
in 101 countries, from between 2000 and 2007. The researchers found significant
correlation between business-entry density rates (the number of new firms per
capita) and ease-of-starting-a-business rankings, the number of procedures, the
cost of starting a business and good governance indicators. A country that
provides an inexpensive, simple business establishment and efficient governance
experiences more rapid business entry and entrepreneurial activity.
Similar empirical research by Klapper and Love (2010), using crosscountry panel data from 92 countries from between 2004 and 2009, identified a
significant correlation between business environment reforms and the number of
new firm registrations. They used a sub-index of the starting-a-business indicator
in the DBR: costs, days, number of procedures and minimum capital requirement
for starting a business to measure the significance of registration reform on new
business entry density. The study found that small business registration reforms
(below 40 per cent) will not significantly change the number of new registered
firms.
Other country-level studies in Mexico and the Philippines found similar
benefits from the deregulation of starting a business. Bruhn (2008) examined the
effects of a substantial reduction in the number of registration procedures and the
establishment system for rapid business start-up on new business creation and
other economic outcomes in different municipalities in Mexico. The study used
household data from a Mexican employment survey from 2000 to 2004, in 34
8
districts. The author found that deregulation reduced registration procedures from,
on average, eight to less than three, increased the number of newly registered
firms by five per cent and employment by 2.8 per cent in eligible industries.
The municipality of San Jose de Buena Vista in the Philippines has also
experienced the positive effects of reforming business registration and permits
procedures. Gumasing (2013) studied the improvement of the business
environment through the streamlining of business licensing and permits to
develop formal MSMEs, between 2008 and 2011. Gumasing (2013) found that the
implementation of a one-stop business registration office substantially reduces the
number of procedures and costs, and optimises the time taken to process and
receive business permits. Consequently, the reforms increased the number of
formal MSMEs, and yielded additional revenue for the local government.
The Role of Business Registration and Licensing
To start a business, firms first have to legally register their business entity
and acquire a business licence with the business registration authority (a public
entity). According to the World Bank (2013a), the registration procedure consists
of all activities that a new business must complete, including gathering all
essential permits and licences, filling out forms and registration notices and being
verified by government authorities. Time and money must be spent in establishing
a new business.
Governments commonly implement a business registration and licensing
rule. Low-level entrepreneurs require legal business documents when making
legal business agreements or trading with private or public entities. According to
Pudyatmoko (2009), a licence has three functions: as the legal base of a company;
as an instrument that ensures legal certainty; and as an instrument that protects the
interests of enterprises, the government or society. The document serves as proof
that the business owner has met the requirements for operating a business. A
business licence corresponds to a prior permit from the government for business
people to conduct business operation (De Sa 2005). Permitting the operation of a
business or trade is intended to reduce disturbances and illegal conduct in business
operations. Additionally, other important argument for maintaining business entry
regulations is to maintenance compete business environment in private sector,
ensuring quality and safety of services and goods, and securing the rights of
workers in the company and consumers can be met (Keppel, Binh & Spatz 2006).
The business registration and licensing process plays an essential role as
the legitimate source of reliable business information, not only among business
entities in the private sector but also for the government. Business registration is
important as a reliable database of information for government legal officers and
other companies (Arrunada 2007). Dependable information is important, in order
to reduce transaction costs with all public and private business entities. Manh,
Tuan and Tas (2006) stated that company registration plays at least two very
important roles in the development of the private sector: it provides business
information to the private sector, and protects its interests. Moreover, the benefits
of business registration continue beyond the establishment process. Historical data
of companies, recorded during the registration process, will be required by many
entities (private or public institutions) as reliable information. For example, when
9
making decisions about investments or when seeking business partners. Business
registration is also a source of statistical information for government planning,
monitoring and business sector development. However, business registration and
licensing can be cumbersome when the process for acquiring such licences
deviates from regulatory purposes. The legal instrument can significantly increase
the barriers of entry into a market, the burden of time and expense in starting a
business, and ultimately reduce the freedom of companies to conduct business.
The burden of strict company registration regulations likely outweigh the benefits,
because they have an adverse effect on the businesses that were meant to be
protected.
Djankov et al. (2002) and McLeod (2006) have argued that politicians and
bureaucrats regulate the entry of firms with the aim of rent-seeking. Ruling
enterprises exploit complex business registration procedures to increase their
market power and profits (Djankov et al. 2002). As the ruling enterprises
benefited from the low cost of information and organisation, cumbersome entry
regulations may increase the cost to new firms, and prevent competition.
Resultantly, large corporations use their power to avoid complex entry
regulations, or may even protect them.
Brito-Bigott et al. (2008) found that there is a strong positive correlation
between complicated business registration rules and corruption. Their study found
that the number of procedures, the time required and fee paid to start a business
and conduct a contract and register a property correlated with the corruptioninduced effect. Business applicants may pay bribes to avoid strict procedures and
avoid costs. The more interactions between public officials with discretionary
power and entrepreneurs when arranging business registration, the greater the
level of corruption. Government officials can control the supply of public goods
and manipulate the rules of private economic activities with unclear definitions
(Rose-Ackerman 1996). They deviate from regulations for personal benefit by
manipulating registration processes, conducting additional procedures or receiving
or rejecting them for unclear reasons (Brito-Bigott et al. 2008).
SMEs are most affected by rigid business regulation. New businesses are
rarely registered formally, and operate in the informal sector to avoid government
monitoring, because of unclear information, prohibitively high costs and complex
procedures (Keppel, Binh & Spatz 2006). Consequently, firms do not receive
adequate services from the government to protect or develop their businesses
(Keppel, Binh & Spatz. 2006). Moreover, the government is expected not to
collect taxes or fees from business registration and licensing processes, as an
institution‘s financial resources are a tool to manage competition. The use of
business licensing to pursue these goals will reduce transparent regulation,
increase the exploitation of regulations for rent-seeking and lead to uncertainty
over the business registration and licensing process (Ho 2010). Therefore, the
major challenge for regulators is designing a procedure that balances ease of
starting a business with protecting public interest. It will remove bottlenecks that
restrict the growth of and investment in informal enterprises, and lead to
productive developments.
10
Decentralisation and Complexity of Business Registration and Licensing
Decentralisation and regional autonomy, implemented since 2001, has
given greater authority to local governments to determine local regulations,
including those relating to the authority to administer business licences and tax. In
an autonomous system, the central government only determines norms, standards,
principles and procedures, and local governments are given the freedom to
construct local regulations based on national guidelines. Since decentralisation
and the implementation of regional autonomy, Indonesia has transformed rapidly
from a highly centralised state to one of the most decentralised countries, with 34
provinces and 502 districts (Republic of Indonesia 2013, p.378).
The purpose of decentralisation in Indonesia was to improve public
services, facilitate the entry of investors and make investment a driver of local
economic growth. Regional autonomy enables local governments to decide the
best regional policies. In terms of the investment climate, regional governments
have more freedom to promote local and foreign investment through business
policies, providing simple, fast, inexpensive and transparent services. Good
business practices regarding local investment are essential to increasing national
investment performance. However, many local governments create business
licensing regulations on their own terms, and implement national regulations
differently. Rapid decentralisation has led to counterproductive, overlapping and
inconsistent regulations across the national economy. After decentralisation, there
was a proliferation of illegal local government taxes and fees that negatively
affected local investment and impeded the openness of the internal market
(Organisation for Economic Cooperation and Development [OECD] 2012). In a
2011 survey of approximately 1500 local regulations from 240 regencies/cities in
Indonesia, the Komite Pemantauan Pelaksanaan Otonomi Daerah (KPPOD,
regional autonomy watch) found that almost 81 per cent of Peraturan Daerah
(PERDA, Indonesian regional regulation) did not comply with appropriate higherorder (ministerial) regulations (KPPOD, United States Agency for International
Development [USAID] & The Asia Foundation 2011, p. 41). In terms of content
regulation, the problem (21 per cent) is that in business, licensing regulations are
related to clarity over procedures and standards of time and costs. Instead of
applying the authority of legislation on taxes and levies to create incentives,
eliminate distortions and market inefficiency, local governments use licensing
regulations to increase revenues. A regional survey conducted by the Ministry of
Trade found similar results. In 2010, they monitored and supervised the
implementation of Surat Izin Usaha Perdagangan (SIUP, business permits) and
Tanda Daftar Perusahaan (TDP,business registration) in 100 districts of Indonesia.
11
Table 3.1 Business trade licences (SIUP)
Description
The Ministry of Trade
Regulation no. 36/MDAG/PER/9/2007 on
the issuance of SIUP
and TDP
Local regulation
(PERDA)
Indicators
Comply
(% )
Do not
comply (%)
Cost
23
77
None
Charge
Days
53
47
3 working days
5-7 working days
Required
documents
10
90
Subscribe, NPWP, HO,
SITU
Source: Directorate of Business and Trade (2010)
There is disharmony between national and local government on trade
licence and business registry regulations, which inhibits the acceleration of
business trade licence services in regional areas and negatively affects the
development of a good business climate (Directorate of Business and Trade
2010). For example, more than 70 per cent of local regulations on issuing SIUP
and TDP charge fees, although according to the Ministry of Trade, they should be
free (see Tables 3.1 and 3.2).
Table 3.2 Company registration certificates (TDP)
Comply
(%)
The Ministry of Trade
Regulation No. 36/MDAG/PER/9/2007 on the Local regulation (PERDA)
Do not
issuance of SIUP and
comply (%) TDP
Cost
19.2
80.8
None
Charge
Days
48.5
51.5
3 working days
5-7 working days
Required
documents
33.3
66.6
Description
Indicators
Subscribe, company balance
sheet, HO, SITU, list of
shareholders document
Source: Directorate of Business and Trade (2010)
Overall, the action taken by local governments have not fully engendered a
friendly business climate. Local regulations impede the promotion of regional
investment and hinder long-term sustainable economic development.
12
4 GOVERNMENT EFFORTS TO IMPROVE THE BUSINESS
ENVIRONMENT
Regulation Reform
In 2006, the Indonesian Government published an investment policy
package, through Presidential Instruction No. 3 Year 2006, which was intended to
improve Indonesia‘s investment climate (Republic of Indonesia 2006). The policy
includes improvements in five areas:
1. General policy, with an emphasis on strengthening and improving
investment institutions, including accelerating business licensing activity
and capital investment, speeding up the establishment of companies from
150 to 30 days, and synchronising national and local government
regulations.
2. Customs sector reform.
3. Labour sector reform.
4. Promotion of the development of SMEs and cooperatives.
Overall, the investment package fulfilled the ADB‘s 2005
recommendation, which encouraged institutional improvement in order to manage
uncertainty in investment, informal costs frequently associated with bureaucratic
red tape and the streamlining of the national and local government investment
regulations (ADB 2005). Similar findings from investment monitoring of 500
companies in major Indonesian cities in 2006 also supported this
recommendation. A survey conducted by the Institute for Economic and Social
Research of the University of Indonesia and the World Bank recommended
streamlining and simplifying business registration licensing procedures, in order
to reduce rent-seeking actions, which were a major obstacle to investment in the
national and local government (LPEM-UI 2006). In supporting sustained business
reforms, the World Bank and International Finance Corporations periodically
publish the progress of business reforms in Indonesia. In 2010 and 2012, the
World Bank published two major reports about sub-nationals doing business in
major cities, to assist business reform by local governments.
Responding to the World Bank‘s DBRs, which state that starting-abusiness indicators were declining, and Indonesian performance was deteriorating
compared to neighbouring countries, the government enacted inter-ministerial
regulations in 2009, to accelerate start-up business registration (Ministry of Trade
Republic of Indonesia 2009). This was akin to a government task force, and
consisted of the Ministry of Home Affairs, the Ministry of Law and Human
Rights, the Ministry of Trade, the Ministry of Labour and Transmigration and the
Head of the Investment Coordinating Board. The regulation enacted a new legal
standard, which reduced the time and procedures necessary to establish a firm.
The main points were:
1. Use of the company name and legal status validation, registration and
announcement in the state gazette supplement of a Limited Liability
Company, and payment of non-tax revenue (Penerimaan Negara Bukan
Pajak, PNBP) must be completed in no less than eight working days.
13
2. The issuance of a tax number (Nomor Pokok Wajib Pajak [NPWP] and
Nomor Pokok Pengusaha Kena Pajak [NPPKP]) in no less than one
working day.
3. The issuance of a business licence (SIUP and TDP) at local governments
(provincial, district, city) can be finished simultaneously and must be done
in no less than three working days.
4. The issuance of the letter on the company‘s worker registration at the local
government (provincial government, district, city) and social insurance
membership must be completed in no less than five working days.
Sustaining business reforms, in February 2013 the government launched
17 policy packages to improve the business environment. Half of the initiatives
were related to simplifying and reducing the time required to start a new business
(Badan Pengawasan Pasar Modal [BKPM, Indonesian Investment Coordinating
Board] 2013). The reforms related to starting a business were:
1. The simplification of government regulations concerning company labour
registration and social security membership, so that the process of
obtaining worker registration can be completed in one and seven days,
respectively, by the Ministry of Law and Human Rights.
2. The issuance of SIUPs and TDPs in three working days at the PTSP
(OSS), by the Ministry of Trade.
3. The issuance of regional government regulations at PTSPs (OSSs), and
hand-over of licence authority from the Governor of the Daerah Khusus
Ibukota (DKI, Special Capital Region) Jakarta to the Head of the PTSP
(OSS) Office, DKI Jakarta by the Provincial Government of DKI Jakarta.
4. The revision of Limited Liability Company Law, in order to remove the
minimum capital and paid-in minimum capital requirement by the
Ministry of Law and Human Rights.
5. The issuance of tax regulations regarding online service tax reports by the
Ministry of Finance.
6. The simplification of payment methods of social insurance programs (e.g.,
working accident insurance, health insurance) by PT Jamsostek.
The World Bank (2014) stated that sustained reform actions with
substantial effects on time and cost efficiency are the use of electronic registration
systems (Sistim Administrasi Badan Hukum), for Limited Liability Company
registration in the Ministry of Law and Human Rights. Another important
development is the Ministry of Trade‘s Regulation No. 36/2007, which relates to
business trade licences, and stipulates a new TDP and SIUP filing process with no
cost, that can be issued simultaneously in three working days.
Institutional Reform and the Establishment of PTSP
To deal with inefficiencies in the licensing administration, and to reduce
the burden on business registration, the Indonesian Government reformed
institutions and regulations. They made the Ministry of Home Affairs Regulation
No. 24 Year 2006, and the Head of the Indonesian Investment Coordinating Board
Regulation No. 6 Year 2011 the legal bases and guides for establishing PTSP
14
(OSS) in local government (KPPOD & FCO 2014). The national government
encourages all provinces and districts/cities to ease investment and business
regulations by simplifying procedures, developing and enhancing integrated OSS,
eliminating non-official licence fees and implementing an electronic registration
system (Republic of Indonesia 2013).
New firms wanting to operate fully must complete various steps through
the registration and licensing department at local and national government levels.
This process generally occurs as follows (Asia Foundation 2007). The first steps
are related to fulfilling all requirements of the formal business or company act, by
obtaining a legal deed from the public notary, a tax registration number from the
Ministry of Finance, and getting permission from the Ministry of Law and Human
Rights. Approval from the national government is limited only for a Limited
Liability Company, while other legal business institutions—such as sole
proprietorship or limited partnership—do not need legalisation from the Ministry
of Law and Human Rights. The second step includes obtaining physical permits,
such as construction or building permits and nuisance and location permits, which
are mainly administered at the local level. New firms must obtain sectoral permits
to be allowed to operate in the trade or industrial sectors. For example, business
trade licences and industrial business licences. After all of these requirements
have been filled, a new firm can obtain business trade registration or industrial
business registration at the local government. The majority of small and medium
companies acquire licences and registration permits at the local level.
Table 4.1 illustrates the complexity of establishing a new business. New
enterprises must deal with different local departments, each of which have their
own processes of issuing licences, and requirements for documents that must be
supplied before applying for a business, trade or industrial licence.
15
Table 4.1 Types of business trade and industrial licences required starting new
enterprises
Stage in Licensing
Process
Name of License/Permit
Name of Institution in Charge
Company Formation
Personal Identification (KTP)
Sub District Office
Deed of Establishment
Notary
Domicile Letter (Surat Domisili)
Kelurahan (sub District Office)
Tax ID (NPWP)
Tax Office of Ministry of Finance
(Central Government)
Approval
of
Deed
of
Establishment (SK Pendirian PT)
Ministry of Law and Human Right
(central government)
Approval Letter (SP)
Investment Coordinating Board
(Central Government)
Principal Permit
Dinas
Perindustrian
dan
Perdagangan (Local Office of
Industry and Trade)
Land Usage Permit (SIPPT)
Dinas Tata Kota (City Planning
Office)
Enviromental
(ANDAL/UKL/UPL/SPPL)
Badan Pengelola Lingkungan
Hidup
Daerah
(Local
Enviromental Body)
Building
(IMB)
Dinas Penataan dan Pengawasan
Bangunan (Local Office for
Building Permit and Control)
Initial Approvals
Land and
License
Building
Construction
Permit
Nuisance Permit (UUG)
Final Operating License
Business Registration
Permanent
(IUT)
Operating
Dinas Penataan dan Pengawasan
Bangunan (Local Office for
Building Permit and Control)
Licence
Investment Coordinating Board
(Central
Government,
BPMPKUD)
Industrial Permit (TDI or IUI)
Dinas /Sudin Perindustrian dan
Perdagangan (Local Office of
Industry and Trade)
Trade Licence (SIUP)
Dinas /Sudin Perindustrian dan
Perdagangan (Local Office of
Industry and Trade)
Business Registration (TDP)
Dinas /Sudin Perindustrian dan
Perdagangan (Local Office of
Industry and Trade)
Source : OECD ( 2012, p.147)
16
OSS were established to amalgamate the management of business
licensing—usually scattered across different technical departments—into a single
office or department. The OSS receives the delegation of authority from the
technical department, which has a licensing authority. The OSS process starts
with registering an application, and ends with issuance of the licence, and is all
done in the one place (KPPOD & Foreign and Commonwealth Office [FCO]
2014). In theory, a new company wanting to obtain a trade licence only needs to
deal with the licensing office (OSS), instead of many government offices (see
Figure 4.1).
Economic
Section
HO/SITU
Location Permit
Planning
Office
Industry
& Trade
office
Other
Office
IMB
SIUP,TDI,TDP
Other Sectoral
Permits
Business People
OSS
HO/SITU, Location
Permit, IMB,
SIUP,TDI,TDP,
Other sectoral permit
Source: Asia foundation (2010, p.3)
Figure 4.1 OSS licensing process
OSS reduce the time required to arrange licences, as administrative
proceedings are based on Information Technology (IT), data input is done once
and administration can be performed simultaneously (Asia Foundation 2007). In
Indonesia, the implementation of OSS was designed to eradicate corruption and
eliminate red tape (Wahid 2013).
17
5 DISCUSSION
The Effect of Regulation Reform on Procedures, Costs and Time
In the past decade, the Indonesian government has worked hard to create
new standards for business registration and licensing, to increase the participation
of the private sector in economic development. Not all reforms can be
implemented or have immediate effects on the ease of conducting business in
Indonesia, but there have been continued efforts to improve public services.
The Ease of Doing Business Survey, conducted by the World Bank in
Jakarta in 2014, can be used to measure the extent of the changes achieved for
establishing a business in Indonesia. There are several requirements for starting a
new business (see Table 5.1). First, in terms of establishing a Limited Liability
Company, founders can obtain approval for the deed of establishment of a
company in around six days. This exceeds the target of the reform (eight working
days). The use of an electronic registration system and the simplification of
procedures by the Ministry of Law and Human Rights have substantially reduced
the time and number of procedures that must be gone through. In 2013, four
procedures were required (World Bank 2013b). Now, only two procedures are
necessary, in order to obtain company name clearance, sign company documents,
pay non-tax revenue for legal services and receive the deed of company
establishment. Nevertheless, processes could be more efficient if the owner could
directly apply for the establishment of a company without having to go through a
notary service. The recently implemented online registration system could be
more open if the founder had the same authority as a notary to access the system.
An open-access method of business registration is used by most countries with
high rankings regarding starting a business (Davis & Hygate 2011). Additionally,
to accelerate the establishment of a new company, Davis and Hygate (2011)
recommended that procedures one, two and 10 be consolidated with an integrated
electronic system between the Ministry of Law and the Ministry of Tax. This is
reasonable, because every new business must have a tax number immediately, and
the Ministry of Law already has the company profile.
However, the paid minimum capital requirement for establishing PT is still
a major obstacle, and has not been abolished, which is not in accordance with
previous reform targets. New start-up businesses must pay a direct-cost deposit of
1.25 million Indonesian Rupiahs (IDR), equivalent to 35.5 per cent of income per
capita, before starting business. In contrast, most Asia-Pacific Economic
Cooperation countries (World Bank 2012) and neighbouring countries (such as
Singapore, Malaysia, Thailand, Vietnam and Laos) have abolished this cost
(World Bank 2010). The minimum capital is considered the main barrier for new
entrepreneurs in Indonesia to expand their companies. Consequently, SMEs
choose sole proprietorship, as there is no needed for formal registration, and they
generally operate in the informal sector.
Table 5.1 shows that business owners can obtain both business trade
licences and company registration documents simultaneously, at OSSs. The
regulation for obtaining these w