How Indonesia is slowly cutting its nightmare red tape

Solid growth and an encouraging economic outlook make Indonesia attractive. But one key facet is still dragging on the economy, former finance minister Muhamad Chatib Basri says.

Ahead of a general election scheduled for Aril 2019, Indonesia’s economy under President Joko Widodo continues to have a positive, though more measured, outlook according to a World Bank report in June.

Reforms introduced by Widodo’s economic team headed by award-winning Finance Minister Sri Mulyani Indrawati have helped reduced the country’s debt by 50% over the last five years, while Indonesia's foreign exchange reserves have hit $120 billion, according to the the central bank.  

But one critical element that has been a thorn in the government’s side remains, despite the best efforts of the government: getting deals approved by both central and local governments efficiently.

“The biggest problem is communicating with the local government. The central government does not have control of the local government,” Dr Muhamad Chatib Basri, a former Indonesian finance minister, told FinanceAsia in a telephone interview.

Dr Muhamad Chatib Basri

Basri was minister of finance between 2013 and 2014, and prior to that he was special adviser to Indrawati in her first spell as minister of finance from 2006 to 2010. He has been the chairman of the Indonesia Infrastructure Finance, a private non-bank financial institution set up under the Ministry of Finance, since 2014. 

“I have to say that Indonesia is a disappointing country. Disappointing in the sense that it disappoints the optimists who keep expecting this country may grow by 9% or 10%. We are currently growing at around 5%, which is good when compared to other countries in the region,” said Basri.

“But the problem is 5% is not enough. If we keep growing at only 5% annually, by 2050 Indonesia will be the fourth largest economy in the world, but our income per capita will only be around $30,000 at that time. So, we will grow old without growing rich as a nation” Basri said.

And the disconnect between the central and local governments is hindering progress towards eight or nine percent growth, according to Basri.

As an investor, this disconnect can manifest itself in many ways. One of the most common problems, according to the Coordinating Minister for the Economy, is land acquisition for infrastructure projects.

Even though the central government may have approved the permits for a project to start, contractors then have to negotiate with the local government to get a permit for the land needed for the project.

And this is where the problems really start.

Darmin Nasution, the coordinating minister for the economy, estiimated in a 2016 government report that 44% of problems surrounding infrastructure projects focus on the land acquisition process. 

“Even though the government has streamlined regulations there is no guarantee that the local government will follow the guidelines, so the result is not as good as what we should expect” Basri said.

Widodo’s government has taken measures to cut red tape to attract more foreign direct investment.

On July 9 the long-awaited online single submission (OSS) licensing system, a fully-fledged electronic licensing model, became operational after several months of delays.

Under the online system, businesses can obtain several key permits — the location permit, environmental permit and building permit — within one hour of submitting all required data.

Once the applications are completed, the business permit as well as the operational or commercial permit will be activated. This allows investors to immediately start preparations to run their business in Indonesia while awaiting formal documentation.

However, the system has some obvious flaws.

For now, it is only available in the local language, which is an obvious drawback for most foreign investors unless they are using local consultancies.

Secondly, not all licences can be granted through the online system. The financial sector and mining sector, for example, are not covered by the OSS.

And, according to global law firm Allen & Overy, the OSS has experienced down time which has delayed businesses filing licensing applications.

There are no guidelines on how to apply and process licences manually in the case of the OSS server going down or any other technical issues affecting the OSS.

To be sure, the new system will take some time to bed in and iron out any teething problems.

It is definitely a step in the right direction.

But as Basri puts it: “In Indonesia there is no link between central and local government, unlike in China where they are all members of the Communist Party.”

For now, it seems the battle against red tape is only just beginning.

¬ Haymarket Media Limited. All rights reserved.
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