Jokowi Backs Business Licensing Reform

November 5, 2014

By Hari Kusdaryanto

Indonesia’s new President Joko “Jokowi” Widodo sent a clear message last week that he intends to create a business-friendly bureaucracy by eliminating costly red tape for entrepreneurs and investors.

Despite Indonesia’s near-trillion dollar economy and market potential, lower middle-income entrepreneurs still find it difficult to start a business because of bureaucratic hurdles. Photo/Conor Ashleigh

He announced his intention during a surprise inspection of the One-Stop Shop Investment Service (PTSP) of the Investment Coordinating Board (BKPM) on Tuesday October 28, just one day after inaugurating his new cabinet. He instructed the PTSP to reform within three to six months by cutting the processing time for investment-related permits.

Jokowi’s move was reminiscent of his habit of making surprise visits to local government offices when he was governor of Jakarta. In October 2013, he performed a snap inspection of East Jakarta’s PTSP Agency, where he was dismayed by the blatant poor service: the key official was absent and no other staff knew the required computer password to process permits, while an online game filled another computer screen.

“It’s actually alright to play games, but they should be able to process [permit applications] in five minutes,” Jokowi said at the time. “But if they need two weeks to process [permits], how can they play games?”

Burdensome Licensing Process

Despite Indonesia’s near-trillion dollar economy and market potential, lower middle-income entrepreneurs still find it difficult to start a business because of bureaucratic hurdles. The World Bank’s 2015 “Doing Business” report ranked Indonesia at 155 out of 189 economies in terms of ease of starting a business, far below other Southeast Asian countries such as Singapore (6), Malaysia (13), Thailand (75), and even Vietnam (125).

The total number of procedures needed to start a business in Indonesia is 10 and the total time needed is 52.5 days. These figures are even gloomier when compared to countries grouped in the Organization for Economic and Cooperation and Development (OECD), where the average number of procedures is 4.8 and the average time is 9.2 days.

In Jakarta, applying for a business license has long been a burden. A recent study commissioned by the Regional Autonomy Implementation Monitoring Committee (KPPOD) found that to obtain a Trade Permit (SIUP), an entrepreneur must pay up to Rp 500,000 ($41) and wait for two weeks, whereas a national regulation stipulates that the SIUP is free of charge and must be processed within three working days.

Streamlining of the process for investors to obtain business permits was pioneered by the administration of former president Susilo Bambang Yudhoyono, when a law and regulations mandating that all districts and municipalities establish PTSP came into effect in 2006.

However, most of the PTSPs are purely cosmetic, lacking any genuine authority to process and sign business permits. Many function merely as a front office, receiving applications and checking whether they comply with requirements. Final signed approval for permits still lies with regents and mayors or is spread across local government technical departments. In other words, the one-stop service has become “another stop,” making processing times even longer. PTSPs are cynically referred to as Satu Pintu, Banyak Jendela (one door, many windows) in reference to the red tape and the illegal charges still requested by many parties.

Leadership commitment

Business license reform requires strong commitment from governors, regents, and mayors. They should set the example to their technical departments to transfer all remaining authority to the PTSP, even though this could mean losing illicit sources of income. This transfer of authority needs to be complemented by formulating service standards, simplification of procedures, and cutting waiting times.

A handful of regions/municipalities and provinces have reformed the licensing process. Among them are East Java province, Yogyakarta city, Cimahi city in West Java, and Barru district in South Sulawesi. The PTSPs in these regions have reduced the number of required licenses significantly – by merging or eliminating some permits – and by providing a parallel licensing process.

Jokowi, a former furniture exporter, is no different. He has consistently pushed for a business-friendly environment ever since he was elected mayor of Solo, Central Java, in 2005. During his tenure, Solo was one of the first cities to have a fully functioning PTSP. Licensing procedures were cut significantly, so the time needed to process five basic permits was reduced from around five months to only 26 days. Jokowi also issued free permits for hundreds of shop-owners in traditional markets and for street vendors.

Eight year ago, The Asia Foundation brought a group of representatives of non-government organizations to the Solo’s one-stop service office and visited Jokowi’s residence to ask how other mayors and regents could be encouraged to be as innovative and reform-minded as him.

“Integrity, innovation, and reform-mindedness cannot be gained instantly through leadership trainings,” Mayor Jokowi told us. “Rather, they have to be developed since birth, nurtured by our parents over years.”

As a leader in Solo, and later in Jakarta, Jokowi understands what it takes to push for reform. The country is waiting to see if beyond these impromptu visits he will continue to make, whether he will be able to gain the public support to translate that experience to the national arena.

Hari Kusdaryanto is a program officer for The Asia Foundation’s Local and Economic Governance Program in Indonesia. He can be reached at [email protected]. The views and opinions expressed here are those of the individual author and not necessarily those of The Asia Foundation.

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