Creative industry needed

Lin Che Wei ,  Jakarta   |  Mon, 10/06/2008 9:58 AM  |  Opinion

The government, through the Trade Ministry, is attempting to stimulate the economy and create jobs through an extremely comprehensive plan, "Development of Creative Economy Indonesia 2025". Such commendable efforts, however, cannot be successful without sufficient long-term funding solutions.

The current conventional funding through government funds, commercial banks and the Corporate Social Responsibility (CSR) program are not adequate. In the long run, only creative funding solutions that are tailored to the specific needs of the creative industry itself can fuel and sustain its growth.

It is the responsibility of the private sector and financial institutions to formulate such creative funding solutions. On the other hand, the government should provide a conducive legislative and regulatory environment to nurture the development of alternative funding solutions such as venture banks, venture capital, venture leasing, mezzanine financing and angel investors to develop the creative industry sectors.

Except for those sectors where market failure is likely to occur, the government should encourage the development of private sector funding to spearhead the growth of this industry. The solution to the development of financing can be achieved best through critical and reflective thought about the relationship between the nature of the risk and the return to creative industry sub-sectors, and the tangible/intangible base of the sub-sectors.

Why is it that the current reliance on government funding, commercial banks and the CSR program will not sustain the growth of this industry? From various focus group discussions conducted by this community, it is apparent that they have high expectations from these traditional financial institutions as funding sources.

Beginning with government funding -- I believe that should focus on providing market infrastructure and incentives. The government is not the best entity to vet out viable projects and sub-sectors. Private investors, on the other hand, tend to be more efficient in resource allocation due to its risk-taking and profit-oriented approach.

The investor's role is important as they consider the following: Is it a workable idea? Is there a market for it? Do those proposing it have a well-thought business plan and executive capability? Frequently, creative industry entrepreneurs stop at their great idea phase and hope for a miracle from the government or via CSR assistance without focusing on how they could execute and realize their creative idea.

This industry always looks to commercial banks for funding solutions. Unfortunately, these institutions are usually are not well equipped to fund start-ups or to support growth because these companies with their intangible assets are unable to fulfill the loan requirements, such as the inability to receive credit from its operating cash flow or from the value of its underlying assets.

The early and growth stages of this industry normally are the domain of equity financing. However, since rarely will any Indonesian institution provide equity financing for businesses with intangible assets, growth might face a serious challenge.

In my view, the current banking solutions such as non-collateral based loans and credit to small- and medium-sized businesses will not meet the needs of any start-up or growing intangible-based creative industry. This is because of high interest rates on non-collateral based bank loans, and a small or medium-sized loan might not be adequate for any business who wants to expand.

Funds through the CSR program are not the ideal funding vehicle either. Treating the creative industry as a charity is a mockery to the idea and to creativity itself. It is important to respect this industry and it is time for its members to be assertive and to not rely on the generosity of others for their survival. Simultaneously, the creative industry should not be classified as a cottage industry or just a small-scale business.

Creative funding for the creative industry consists of several essential components.

First, we need to acknowledge that the one-size-fits-all funding solution model will never work for the industry's entire 14 sub-sectors. Different sub-sectors require different financing models.

Second, it is important to distinguish between a tangible-based creative industry and an intangible-based creative industry. The former can easily gain access to commercial banks while the latter must have access to non-bank financial institutions such as venture capital, venture bank, venture leasing and seed or mezzanine financing.

Next, for its financing, the creative industry relies on two sources of capital; i.e., by selling its intellectual property rights or by selling its equity stake and obtaining an infusion of money. Last, it is important that each individual sub-sector develop a sound financial business model.

The writer is a Professional Writer from Independent Research & Advisory Indonesia. He can be reached at Lin_chewei@pacific.net.sg

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