Vincent Lingga, The Jakarta Post Jakarta, The Jakarta Post, | Fri, October 31 2014, 9:26 AM
President Joko “Jokowi” Widodo’s surprise inspection of the Investment Coordinating Board (BKPM) on Tuesday, only one day after he installed his Working Cabinet, will not immediately solve the business licensing problems that have been plaguing the country.
The impromptu visit is symbolic, providing the right, and a loud, signal to both government officials and the business community that cutting bureaucratic red tape and expediting business and investment licenses is at the top of Jokowi’s priority programs, as he promised in his election campaign.
But the new President must be fully aware that such reform is never easy because it will take away rents that have built up in the bureaucratic system for decades and therefore will trigger opposition from those who are at risk.
Surprise inspections of public offices and impromptu meetings with the common people, called blusukan in the Javanese dialect, were one of Jokowi’s main hallmarks when he was the mayor of Surakarta in Central Java and the governor of Jakarta. It was the consistent bureaucratic reform that built up Jokowi’s business-friendly credentials.
Jokowi has designed such inspections to keep civil servants on their toes and to enable him to have informal, straightforward communications with the people.
Reforming the business and investment licensing administration is the best thing he can immediately do to improve the business climate because Indonesia is notorious for arduous, overlapping, scattered, entangled and mammoth processes to get permits.
Jokowi does not need to navigate the political minefield of the House of Representatives, where his coalition of parties is the minority, to implement his bureaucratic reform. But simply reforming the licensing bureaucracy will go a long way to reducing business uncertainty, business risks and consequently lending costs.
Former acting chief economics minister Chairul Tanjung made a shocking revelation recently, pointing out that starting up a business in the upstream oil and gas sector alone required more than 70 types of permits from 17 different government offices, not including dozens of other licenses from regional governments.
The whole licensing process often takes up to two to four years before investors can start up operations, as Jokowi himself discovered.
Likewise, it takes almost three to four years to gain all the permits from the central and regional governments for investment projects in the manufacturing, plantation, transportation, construction and power generation sectors. This means, for example, that a major manufacturing plant could take up to six years (three years for licensing and three years for construction) to begin operations.
The problem, though, is that many of the permits imposed on business or investment projects often have nothing to do with ensuring compliance with the laws or regulations. The Corruption Eradication Commission (KPK), after a few months of research and survey in the mining sector, revealed in April massive tax evasion within the coal mining industry with potential state losses of US$2.2 billion annually as it found that almost 25 percent, or 725 of the 3,826 coal mining licenses issued by regional administrations (mostly in Kalimantan and Sumatra), did not have taxpayer registration numbers.
The business licensing red tape has been responsible for putting Indonesia in the ranks of the 30 lowest of almost 190 countries surveyed by the World Bank group for its annual ranking of the Ease of Doing Business. It is also the arduous licensing procedures and other bureaucratic red tape that have made the Indonesian economy among the least competitive, even in the ASEAN region.
As a common man, and formerly a small furniture businessman, Jokowi should have experienced the pains and frustration when dealing with government offices. He also is fully aware of the vital role of business, or private investment, in bolstering the economy as it is business enterprises, not the public administration, that generate jobs and tax receipts for the government.
It is jobs that generate wages and it is wages that generate purchasing power for the people to buy goods and services and propel the wheels of the economy.
Complicated licensing procedures also have been one of the biggest hurdles faced by micro and small enterprises (SMEs), which forces many of them to remain in the informal sector (unregistered), while the role of the estimated 25 to 35 million SMEs for employment is quite significant.
Cutting the licensing red tape will benefit the SME sector more than large businesses. Without special assistance or affirmation measures, micro and small enterprises will be unable to benefit from the business opportunities generated by economic development. Put briefly, these small players cannot, without special assistance, freely enter the market game.
Hence, if the Jokowi government is really serious about expediting business or investment licensing, it must first review the cumbersome procedures and reassess the real purpose or merit of the dozens of permits an entrepreneur is required to obtain before starting up a business.
Inter-ministerial coordination has always been the weakest point of the government, in spite of the creation of the coordinating economic minister in the Cabinet and the establishment of BKPM in the 1970s.
No wonder. Because within the perspective of the public administration, which has been perceived to be the most corrupt in East Asia, licensing authority means the power to collect rents. Hence, there will certainly be strong resistance from vested interests. Moreover, this reform also requires the streamlining of overlapping rules at various ministries.
But change is often disruptive and messy. And when it is made to run fast it may set off a backlash tearing the process apart. President Jokowi therefore should provide strong leadership to push through this bureaucratic reform.
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