I

ndonesia is a notoriously difficult place to do business, according to the World Bank, which placed it in the 114th place out of 189 countries surveyed for ease of doing business in 2014.

Bureaucratic red tape as well as highly complex and time-consuming business licensing procedures have been often cited as some of the main barriers to investment in the country.

A case study developed by the Center of Public Policy Transformation illustrated the complicated licensing process that foreign investors had to undertake when they plan to establish a business in Indonesia.

In 2011, a multinational furniture manufacturer had to spend up to three years to obtain all the necessary permits and licenses '€” 80 in total '€” in order to legally operate in the country.

The excessive number of licenses and permits required is a longstanding issue associated with business licensing in Indonesia. In addition to basic licenses, such as investment certificate, company registration license and building permit, the company was also requested to obtain items such as a lightning rod permit and a lavatory permit.

Furthermore, the decentralization of licensing authorities meant that the company had to constantly go back and forth between institutions at the national and sub-national government levels to settle their licenses and permits.

Other major issues that constantly plagued the company'€™s licensing process in Indonesia was the practice of bribery and a lack of clarity in document requirements, which led to arbitrary decision-making by licensing authorities.

To illustrate, in its application for an expatriate license, for instance, the company was asked to reapply on the grounds that the passport photocopy they provided was not a color photocopy.

In contrast, in 2002 the same company only needed to apply for 20 licenses prior to the start of its operations in Vietnam. The entire process took the company six months, merely 16.5 percent of the total time it took in Indonesia.
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Business licensing reforms in Indonesia has taken on a much slower pace than Vietnam.

A key feature of its positive experience in Vietnam was the level of assistance that the company received. In addition to an automatic renewal facility for licenses, investors also have the added option of assigning a '€œOne-door department'€ '€” an office similar to the One Stop Service (OSS) in Indonesia '€” to handle the entire licensing process on their behalf.

Vietnam'€™s relatively streamlined licensing procedures may be attributed to systematic reforms that were entrenched in law, as well as government commitment.

After a 2000 campaign targeted at eliminating '€œbaby permits'€ '€” unnecessary licenses that allowed bureaucrats to use their discretionary powers to manipulate investors '€” in 2007 Vietnam took the reforms one step further and launched a full-scale deregulation plan.

Aptly dubbed '€œProject 30'€, the 2007-2010 reforms aimed to achieve administrative procedure simplification by 30 percent and involved hundreds of governmental staff, citizens, lawyers, non-governmental organizations and business associations.

Among the project'€™s many achievements were the development of a national database for administrative procedures on the Internet '€” providing the business community with access to transparent licensing processes '€” and the revision of almost 5,000 administrative procedures.

Further supporting Vietnam'€™s administrative reforms was the presence of '€œOne-door departments'€ since 1994, where the public can submit all kinds of applications to government departments without being in direct contact with the government agencies themselves.

Vietnam'€™s success in attracting investment was reflected in the change in world market share for manufacturers, where according to data sourced from Papanek, Pardede and Nazara (2014) Vietnam'€™s had increased by 1,397 percent between 1995 and 2013. On the other hand, Indonesia'€™s remain unchanged, suggesting that investments in the sector had stalled since then.

Moreover, the gap between the two countries can also be seen in the amount of time that the company spent on the procedures '€” where the process in Indonesia had taken three years as opposed to the six months spent in Vietnam. The stark difference suggests that business licensing reforms in Indonesia has taken on a much slower pace than Vietnam.

Licensing reforms in Indonesia have been inconsistent at best. Although the sub-national OSS system started to undergo nationalization in 2003, business licensing at the national level had not implemented any major reform until January 2015, when newly inaugurated President Joko '€œJokowi'€ Widodo centralized national-level licenses at the Investment Coordinating Board (BKPM).

The move did little to boost the economy, however. As global commodity prices continued to slump and the manufacturing sector contracted, Indonesia'€™s economic growth in the first quarter of 2015 was recorded at 4.71 percent year-on-year, which slowed to 4.67 percent in the second quarter.

Pressed for action, earlier this month the Indonesian government announced a new economic policy package formulated around the main goal of revitalizing the real sector. The first phase of this package includes a wide range of administrative reforms, such as boosting Indonesia'€™s industrial competitiveness through deregulation, cutting red tape and enhancing law enforcement as well as business certainty.

Data from that State Secretariat and hukumonline.com reveals that the Indonesian government issued 12,471 regulations at the national level between 2000 and 2015. Out of these, the government is planning to streamline 89 regulations to remove duplicity in business licensing processes.

However, looking at lessons learned from other countries'€™ experiences, the government has to enter the process of deregulation with a comprehensive, long-term master plan that incorporates not only an institutional framework but also a detailed inventory of all regulations that are currently active; a thorough and sweeping review of the entire database; and post-implementation action plan.

Post-implementation, continuous efforts will still need to be made to review the current inventory of regulations and control the flow of new ones.

As such, while it is important to remain optimistic, it is even more important to remember that at the end of the day that these reforms will absorb a significant amount of time and resources from all parties involved, requiring a strong political commitment by the government for an undetermined, extended period of time.
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The writer is a senior researcher at the Center for Public Policy Transformation, Jakarta.