Transcript Policy Uncertainties in Indonesia: Trend and Policy Responses

Policy Uncertainties in Indonesia:
Trends and Policy Responses
Mohamad Ikhsan
Advisor to Coordinating Minister for Economic Affairs Republic of Indonesia and
Senior Research Associate at the Institute for Economic and Social Research
University of Indonesia
Presented at Regional Conference on Investment Climate and Competitiveness in
East Asia: From Diagnostics to Actions
Kuala Lumpur 21-23 November 2005
Organized by Bank Negara Malaysia
Outlines
• Overview on the state of Economy since the crisis time
• Policy Uncertainty Issues in Indonesia
– Macro Uncertainties
– Micro Uncertainties
• The Impact of Policy Uncertainties on Performances
– TFP
– Investment
– Employment
• Major Causes for Uncertainties
• Policy Responses
Overview of State of Economy
Grafik 2: GDP/Kapita
1400
1200
1000
800
600
400
200
0
2001
2002
2003
2004
2005 E)
Debt GDP Ratio for Several Emerging Countries
120
100
Percent
80
60
40
20
0
Korea
China
India
Taiwan
2000
M alaysia
2004(Est)
Thailand
2005(proj)
P hilippines
Indo nesia
• Indonesia’s economy has
steadily improved since the
crisis time.
• Per capita income has been
backed to pre crisis level since
2004 and growth rate now
accelerating to a 6 % p.a
• More balance and sustainable
sources of growth indicated by
picking up on investment and
export.
• Macroeconomic risks improved
significantly indicated by a
sharp reduction in public and
external debt ratio and short
term debt over international
reserve
But many (economic) problems
remain
Table 2.1: Growth accounting
Growth in Contribution to growth of:
output per
Physical
Human
worker
capital
capital
TFP
Indonesia
1961-03
2.9
1.7
1967-80
5.0
2.0
1981-97
3.8
2.5
1998-99
-8.8
0.9
2000-03
2.1
0.4
Comparator economies 1961-03*
East Asia (5)
3.6
1.9
Korea
4.7
2.7
Malaysia
3.6
2.2
Philippines
1.0
0.8
Thailand
4.1
2.3
2.4
1.0
OECD
1.4
0.8
All developing
0.5
0.5
0.5
0.5
0.4
0.6
2.4
0.8
-10.0
1.2
0.5
0.7
0.6
0.4
0.4
1.2
1.3
0.8
-0.2
1.4
0.4
0.3
1.0
0.3
Source: Bosworth and Collins (2003) and World Bank staff
estimates. * Simple averages for comparator groups. OECD
and All Developing are 1961-00.
• Our productivity remains
lagging behind pre crisis
period or other regional
competitors.
• Unemployment both open
and under employment
are still higher than pre
crisis.
• Poverty trends are
moving away of the
paths.
Firm and industry level data amplify
those fundamental problems
In short, mostly caused by policy
uncertainties
Macro Uncertainty
Pol & Reg Uncertainty
Corruption local
Corruption national
Tax rates
Costs of Finance
Legal system
Lab reg national
Tax admin
Lab reg local
Electricity
Crime
Business permits local
Skills and education
Access to Finance
Anticomp
Business permits national
Transport
Customs & trade national
Customs & trade local
Access to Land
Telecom
0
10
20
30
40
50
60
Percentage of firms reporting constraint
to be severe or very severe
70
80
Policy Uncertainties, Government Effectiveness,
Investment Climate and Firm Performances
•
From a firm’s perspective, three aspects of
government effectiveness are particularly
relevant:
–
–
–
•
•
•
the capacity of government to manage its
resources and provide public services
efficiently;
the quality of its policies and regulations; and
its ability to implement these policies in a
credible and consistent manner.
In contrast to new order regime, almost all
areas Indonesia falls short.
Both in term the quality of its policies and
regulations—in terms of their complexity,
which imposes a heavy administrative
burden on firms—and in the extent of policy
and regulatory predictability.
As shown by a quantitative analysis, Pol
Table 5.10. Impact of investment climate on firms’ performance
(all variables combined)
TFP
Employment
Probability of
Investment climate element
Coefficient
Elasticity
Coefficient
Elasticity
Investing
Logit coefficient
a) Quality of regulations measured
by:
Regulatory burden
Entry, exit and competition
-0.0044
0.074
-5.6**
21.9*
0.0007
-0.007
1.0
-2.1
-0.001
0.052
b) Lack of policy predictability
-0.667
-21.5*
-0.002
-0.7
0.051
a) Poor functioning of legal and
judiciary
-0.009
-3.4
-0.194
-7.3**
-0.109*
b) Lack of Security/ Law and order
-0.0119
-1.6
0.0007
1.0
-0.053*
Disruptions (incl. absenteeism,
strikes and civil unrest)
Financial Markets
-0.2078
-20.8*
-0.073
-7.3**
0.804**
Cost and lack of access
-0.0022
-1.65
-0.001
-0.8**
-0.011**
Power outages
-0.007
-3.0*
-0.001
-0.7*
0.001
Low road density
-0.0939
-9.4**
-0.020
-2.0
0.020
Government effectiveness
Governance
Labor Markets
Infrastructure
Control variables (including)
Manager’s education
Percentage of foreign ownership
** Significant at 5%,* significant at 10%,
Implications of unfavorable investment
climate
Decline in export ratio
Drop in profit Margin
Percentage of output exported
Average profit margins
Machinery
1993-96
Machinery
1999-2001
Basic metal
Basic metal
Pottery
Pottery
Chemicals
Chemicals
Paper & printing
Paper & printing
Wood
1999-2001
Textiles and leather
1993-96
Wood
Textiles and leather
Food processing
Food processing
0
10
20
30
40
10
12
14
percent
16
18
20
Sources of Uncertainties
•
Political transition to democratic
regime
•
– No clear majority and expected to
continue up to the next 10 year
•
– Debt intolerance in Indonesia is
about 35% of GDP. It implies
focusing on reducing debt burden
still the agenda over 1-2 years
ahead.
– Vulnerability in financial sector
have forced the government to
take another burden on contingent
liability.
Bigbang decentralization.
– Authority vis a vis responsibility
•
Financial crisis has limited the
central government power.
– Crisis increases government debt
services cost and limit the power
of central government
•
Most of regions rely on central
government transfers.
– Inducing regional government to
take progressive and in many
cases unnecessary new tax and
retribution.
High debt also rises the country’s
risks and degree of vulnerability.
•
The crisis also reduced the ability
of the state to up grade
infrastructures.
– Government spending on
infrastructures reduced to only 3-4
% of GDP compared to 7% during
the pre crisis time
Trend on Policy Uncertainty:
Monitoring Results from LPEM-WB Survey
Table 5
• Number of days for
setting up a business in
Indonesia is about 80
days not 151 days as
reported in Doing
Business Survey 2006.
• But that survey found a
huge variation faced the
companies when dealing
with BKPM.
Average Days* to Establish a PT. Company
No
Activities
Notary
Survey
LPEM
(2005)
Law Firms
Interview
(World
Bank 2005)
1
Obtain clearance for the company name from the
Ministry of Law (MoL); obtain the standard form of the
company deed from MoL
2
7
Ministry of Law
2
Founders draw up the deed of establishment
(articles of association) and sign it in front of a notary.
2
7
Notary
3
Obtain a certificate of domicile from
the local municipality
4
10
Local submunicipality office
(kelurahan)
4
Obtain a taxpayer registration number (NPWP)
and taxable entrepreneur identification number
(NPPKP)
6
14
Local Tax Office
5
Open a bank account and deposit the initial issued
capital in the name of the proposed company
4
4
Bank
1
1
Ministry of Law
1
2
Notary office
6
7
Pay to the State Treasury the non-tax state revenue
(PNBP) fees for legal services pursuant to the Decree of
the Minister of Law No. M.OI-UM.01.06/1993
Arrange for the notary to apply for the publication of
the articles of association of the company in the
supplement to the State Gazette from the State
Printing Press, get payment receipt
8
Submit physical documents to the Ministry of Law
9
Issuance of the SK approving the deed of
establishment by the Minister of Law
1
Ministry of Law
75
14
Ministry of Law
10
Register with the Company Register at the Local Trade
Office and obtain the Company Registration Certificate
(TDP)
9
15
11
Apply for the business trading license (Surat Izin Usaha
Perdagangan or SIUP)
11
14
12
Register with Ministry of Manpower
1
1
13
Apply for workers social security (Jamsostek) program
1
1
Total Time in Working Days
Institution/
Entity
Local Trade Office
(Dinas
Perdagangan)
Local Trade Office
(Dinas
Perdagangan)
Ministry of
Manpower
PT. Jamsostek
57
Total Time in Calendar Days
80
151
*Notes: The notaries are answering in terms of working days, whereas the law firms are answering to in
terms of calendar days
…but 80 days to start a business is still
too long
Table 4
BKPM Approval Process: Time Required (Working Days) and Frequency of Not
Acceptance Application (Times)
No
1
2
3
4
5
BKPM Approval Process
How much time to collect all of the information and
documents required for first submission of an
application to BKPM?
Average
Min
Max
Median
Indonesia
151
Vietnam
56
Philippines
24 days
1 day
120 days
50
5 days
China
If first application is not accepted, how much time to
gather any additional information or documents to
satisfy BKPM?
12 days
1 day
60 days
5 days
How many times was the application not accepted by
BKPM on the grounds that it was not complete and
correct?
3 times
1 time
10 times
2 times
41
Thailand
33
Malaysia
30
Singapore
How much time to collect all of the information and
documents required for final submission of an
application to BKPM (documents accepted as complete
and correct by BKPM)
24 days
2 days
60 days
16 days
How much time to issue the approval letter (SP) after
documents accepted as complete and correct by BKPM
34 days
1 day
120 days
20 days
58 days
3 days
180 days
36 days
Total Time required to have SP (Approval Letter
of BKPM) = row 4+ row 5
Note: 1 week = 5 working days, 1 month = 20 working days
Days to Establish and Register a Limited Liability Company
8
Australia 2
0
25
50
75
100
CALENDAR DAYS
125
150
175
… new investment law is not
enough
• to a certain sector,
other regulations are
required.
• Regulatory reforms
can be done and
needed in both
central and local
governments
Need to focus on micro sector reforms
 Regional Regulations are still problems and sources of policy
uncertainties and distortions
 Tax administration problems: new draft of tax packages are far
from satisfactory and tend to be counterproductive.
 Infrastructure: lack of supply and quality
 Time to start a business is very long and variance is large.
 Small and medium businesses are the losers
 Tax refund still takes long time and in practices require “informal
payment” to disburse it.
 Labor regulations become less flexible make entry and exit cost
increased significantly.
 No clear vision over the future state owned enterprises
 SME Development action plan need to be elaborated further .
… survey results also reveal a lot of effort are
needed to improve investment climate in all fronts
Table 16
Port Clearance Times for Import Containers (days)
JICA August 2004 survey
Average Time to Obtain Utility Connection (in days)
Singapore
1.0
Types of Utilities
2005 LPEM/WB Survey
2003 ICA Survey (WB/ADB)
Electricity (PLN)
24
15
Telephone (Telkom)
16
27
Water (PDAM)
17
13
USA
2.0
Germany
2.0
Japan
3.1
Days from vessel berthing to release by customs
5.5
Tanjung Priok
Days from vessel berthing to container exit from terminal
0.0
1.0
2.0
3.0
4.0
7.0
5.0
6.0
7.0
DAYS
Average Days Needed to Fill in Monthly Tax Document
Table 11
Respondents Reporting VAT Return Negotiation and Extra Payments
According to Firm Size
9
PPN: Added Value Tax for consumers
PPh article 25
5
PPh article 22
5
Firm Size (workers)
8
PPh article 22 (prepaid)
6
PPh article 4 clause 2
6
PPh article 23/26
7
PPh article 21/26
0.0
2.0
4.0
Total time: 45 man-days
6.0
8.0
10.0
Yes
No
N
<100
6
50.0%
6
50.0%
6
100 to <500
58
55.8%
46
44.2%
104
500 to 1000
23
60.5%
15
39.5%
38
>1000
30
57.7%
22
42.3%
52
All Firms
114
57.0%
86
43.0%
200
Improving investment climate
Structural and
institutional
reforms
Increase
competition
Raise
efficiency
Lower risk
Low
costs
Better risk
x return
Lower taxes
and cost of
capital
Macro
adjustment
Greater
demand
and output
More
investment
Quality of public
spending
Policy Responses: Focusing more on
executable actions while handling regulatory
issues
•
Political constraints hinder the ability for GOI to eliminate political uncertainties except
for the areas where all parties and/or interest groups relative have common ground.
–
•
Lack of trusts and lack of responsibility
–
–
–
•
Regional government regulation
Tax Reform initiatives
Central Bank Independence
Some dilemmas:
–
–
–
•
Improving one areas may open the other Pandora.
Need to focus on the process rather than outcomes (but at the cost of relative slow of
implementing and results)
High expectation ( partly due to the past memories) also increases the demand for quick
outcomes.
Inherent dilemmas: look example in fiscal trilemmas.
PR Problem
–
–
–
“Take it for granted” behavior on the government side.
Intermediary problem
Asymmetric problems of reform: cost of reform always up front while benefit usually appear
in the medium term. Benefit per capita in many cases always less than cost per capita.
A reform agenda
• Macro reform:
– Fiscal Policy trilemma
– Stabilization policy
• Micro Reform:
– Financial Sector
– Trade Liberalization
– Tax Reform including regional tax
– Reform in business regulation
– Combating corruption
Fiscal policy trilema
Reduce public
debt/GDP
Lower
taxes
Increase public
investment
Fiscal reform
• Reduce public debt / GDP ratio:
– Sustain a high primary surplus
– Lower the cost of debt
• Restructure public spending to accommodate rise in public
sector investment
• Reduce tax burden
• Develop a medium-term fiscal framework that lowers political
risk.
• Gradually reduce contingent liability
– Abolish the financial sector blanket system while introducing new
deposit insurance companies
– State Owned Companies Restructuring including initiating new law
on Regional State Owned Companies
• Diversifying financial sector and including giving more access to
SMEs
• Most of them have been achieved and further reforms are
underway.
Action Program
Solving regional regulation problems
 Central government exercises the power to abolish contra
productive local government regulation:
 From 2001-Oct 05 : 469 Perdas have been cancelled and
about 170 of them abolished between Okt 04-05
 Amendment Law No.34/2000:
 Changing the concept from open list to closed list
 Exercise General Allocation Fund as tool to impose
discipline to regional government if :
 They do not report new Perda to Central Government
 Still exercise a Perda that has been cancelled by central
government.
 Implement a perda without central government approval.
 Improving Perda Monitoring System by Ministry of Finance and
Ministry of Home Affair
 This can be done because we have some fiscal space.
Progress on Anti Corruption Effort
 Two indicators of
corruption dropped
sharply.
 Bribes to government
officials as share of
production costs fell from
10.8% in 2001 to just 1.8%
in the current survey (3.4%
in the 2003 ICA).
 At the same time, percent
of senior management
time spent dealing with
government officials
dropped from 12.8% in the
2001 survey to just 4.9%.
Pungutan Tidak Resmi (% thdp Biaya Produksi)
12
10.8
10
8
6
4
3.40
2
1.8
0
2001
2003
Two possible explainations :
1.
2.
Improvement in anti-corruption efforts including establishing
new and powerful anti corruption agency
A more competitive environment among regions to provide a
better environment and efficient in public sector
2005
Launching a new packages of investment
law and regulation
•
•
•
•
Investment Law Objectives:
1. Increasing the quality and number of Investment
2. Reducing cost of doing business in Indonesia.
Several Highlights of the Investment Law Draft:
– Equal treatment for Domestic and Foreign Investors.
– Simplifying Procedure for Registration & Licensing
– Repositioning the role of Investment Board (BKPM) as an investment
promotion and facilitation agency.
– Clear and Transparent Negative List.
Target of 30 days for setting up business in Indonesia can be achieved
through other improvement in government regulation.
As part investment packages, GOI also will prepare a serial package of
deregulation.
We try to use all opportunities to lunch new package of deregulation
–
The 1st October 2005 packet was initiated along with domestic fuel price
adjustments.
Fiscal Incentives: Tax and Custom
• Tax Reduction:
• Company tax rate reduction from 30% to 28% in 2007.
Beyond 2007 there would be a reduction of 1 % annually to
achieve the new tax rate of 25% in 2010.
• Individual tax rate reduction from the maximum of 35% to
33 % in 2007 and achieved a new maximum tax rate of
30% in 2010.
– Simplifying Procedures of Tax & Custom, and also Tax
refund
– Equal Treatment for tax payer and officer
– Government will discuss further improvements on tax
law draft with the parliament to meet business sector
demand
Non-Fiscal Incentives
• Improving Coordination Mechanism for Export
and Investment by empowering National
Committee on Export Promotion and Investment
(PEPI)
– President SBY will chair PEPI.
• Empowering Domestic Industries and SMEs.
– Action plan for SMEs Development is on the final
stages
Improving Communication
• President try to use a more inclusive
approach.
– But it may cost the delay of reform.
• Use the good and bad guy tactics when
launching unpopular policies.
– This is also used to test the water.
Conclusion
• Surveys shows some improvements in
policy uncertainties during the SBY-JK
administration.
• But there are gaps between political will
(for improvement in investment gap) and
implementation.
• Need “hands in” policy to improve
investment climate in both central
government and local government.