skha gpsm on approaches in overcoming decentralization complexities for business entities entering...

APPROACH IN OVERCOMING DECENTRALIZATION COMPLEXITIES FOR BUSINESS ENTITIES ENTERING OR EXPANDING IN INDONESIA

Presented at Institute of Southeast Asian Studies Conference 2015Singapore, May 2015

2

DISCUSSION AGENDA

1. Indonesia’s progress on democracy and decentralization and it’s impact for business

2. Investment issues in central and regional government administrative

3. Approach for business entities in overcoming complexities entering and expanding in Indonesia: industry best practices

Democracy and decentralization is a permanent reality in Indonesia, despite It’s been challenged from time to time

JURIDICAL FOUNDATION AUTONOMY PRINCIPLES

1903-1945Pre-Independence

• Decentralisatie Wet 1903• Local Radenordonantie No.181 Thn 1905• Osamu Sirei No.27 Thn 2602 (1942)

Centralized

1945-1959Old Order

• UU No.1/1945• UU No.22/1948• UU No.1/1957

Democratic, Autonomy and Decentralized

1959-1966Transition

• Penpres No.18/1959• UU No.18/1965

Authoritarian, Centralized, De-concentration

1966-1971New Order

• TAP MPRS No.21/1966 Democratic, Autonomy and Decentralized

1971-1998New Order

• TAP MPR No.IV/1973• UU No.5/1974• UU No.5/1979

Authoritarian, Centralized, De-concentration

1998-NowReformation Era

• UU No.22/1999• UU No.25/1999• UU No.32/2004• UU No.33/2004• UU No. 22/2014 -> UU No. 1/2015• UU No. 23/2014 -> UU No. 2/2015

Democratic, Autonomy and Decentralized

How the new leadership will impact Indonesia’s democracy & decentralization?

SOURCES: Hossein (2002); Skha Analysis

Indonesia’s Elected President, Jokowi and Parties Leaders have strong commitment on democracy and decentralization

JOKOWI –JK ON DECENTRALIZATION

1. Jokowi’s background as Surakarta Major and DKI Jakarta Governor will highly influence the administration

2. Decentralization and regional autonomy is already part of top 9 Jokowi-JK working priority agenda

3. Jokowi views decentralization as Asymmetric, every region have unique characteristics on issues/problems and capabilities to run their regional autonomy, not one size fits all.

COMMITMENT ON STRATEGIC ISSUES

REGIONALAUTONOMY

Decentralization as gov’t spearhead replacing the sectors & finances regime

REGIONALEXPANSION

• Restructure establishment of newautonomy region by changing policies in general allocation grant

• Push possibilities of consolidation or termination for failed autonomy region

VILLAGE ADMINS.

Ensure village grant (Dana Desa) and Village Grant Allocation (Alokasi Dana Desa) run effectively

REGIONAL FINANCE

Financial reform through overhead cost reduction and increase public service budget

GOVERNOR FUNCTION

Governor as connector of central & local gov’t. Control national resources that distributed to regions.

Jokowi committed to rebalance decentralization by redistributing authorities, reallocating budget & drive performance management in regional gov’t

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2

3

4

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SOURCES: Directorate General of Regional Autonomy , Ministry of Home Affairs Indonesia; Skha Analysis

Trends to watch: regional expansion, democratic consolidation and decentralization “power-shift” will continue

Business entities operating in regions should be more aware of local dynamics (e.g. administrative issues, political situation, regulation change. )

REGIONAL EXPANSION

234

398 415

59

9398

26

3334

1999 2010 2014

Regent City

Province

DEMOCRATICCONSOLIDATION

48

24

44

15

1999 2004 2009 2014

Political Parties

DECENTRALIZATION “POWER SHIFT”

LAW CHARACTERISTICS

• No.22/1999• No.25/1999• No.32/2004• No.33/2004

• Local gov’t have full autonomy and authorities in gov’t administration to develop their region (incl. strategic sectors)

• No. 22/2014• No. 23/2014

• “Rebalancing of power” through shifting local gov’t authority in strategic sectors such forestry, marine, mining , oil and gas to province and central gov’t

• Election was changed toIndirect by people’s repr. council (DPRD)

• No. 1/2015• No. 2/2015

• Revised previous UU back to direct election system for local gov’t leaders (Governor /Major/Regent)

1 2 3

SOURCES: Asia-Pacific Research Center (APARC)

Implications of Decentralization for Business Entities: Impacts on management aspects

Business entities should comprehensively consider all these possibilities and trade-offs as leverage and to mitigate unnecessary risks

PRO’S CON’S

MARKET • Region uniqueness will open new market/product categories

• Local economic development boostmarket readiness for expansion

• Regulation limiting specific investment/expansion due to minimizing competition with local enterprises (Regional-Negative Investment List)

OPERATION • Faster procedure on permit/business approval (through better IT System, regulation and etc)

• Possibility gov’t non-fiscal support: regulatory and advocacy support.

• Dynamics of local politics• Complexities from dealing with multi

stakeholders (city/regency, province and central gov’t institution) esp. • Vertical: Strategic sectors• Horizontal: Business entities

operating in multi- region market

TALENT • Availability of local talents • Varieties of minimum regional wages in different regions

• Talent gaps for high-skilled worker

FINANCE • Better incentives on regional tax, retribution and permit fees

• Cost efficiency on logistics, infrastructures for developed region

• Possible gov’t fiscal support ( for PPP projects): land acquisition, budget allocation, etc.

• Difficulties in setting standard on pricing, cost and etc.

• Cost inefficiencies from operating in different environment, regulation and other factors

1

2

3

4

SOURCES: Skha Analysis

REGIONAL AUTONOMY IN INDONESIA

INDONESIASTATISTICS

Archipelago:• 30% land• 17.500+ Islands• 5 Main Islands

• Sumatera• Jawa• Sulawesi• Kalimantan• Papua

Reg. AutonomyRegions:• 34 Provinces • 425 Regencies• 98 Cities

Facts:Top 100 regions represent 75% GDP

Business entities could see complexities of decentralization from horizontal/regional perspectives...

Approval complexities will rise for business operating in multiple region

SOURCES: Directorate General of Regional Autonomy , Ministry of Home Affairs Indonesia; Skha Analysis

Riau Islands

Bangka-Belitung

Aceh

Banten

Riau

Jambi

SouthSumatera

Lampung

NorthSumatera

WestSumatera

Bengkulu

JakartaWestJava

CentralJava

Yogyakarta

EastJava Bali

NTT

NTB

Maluku

North MalukuNorthSulawesiGorontalo

CentralSulawesi

SouthSulawesiSoutheast

Sulawesi

SouthKalimantan

EastKalimantan

CentralKalimantan

WestKalimantan

Papua

Population (Mn) : 12.5Cities/Regencies : 41Provinces : 3

Bali, NTB & NTT

Population (Mn) :49.0Cities/Regencies : 154Provinces : 10

Sumatera


Java


Kalimantan


Sulawesi


Maluku & Papua

...and also from vertical/sectors perspectives

Business operating in strategic sectors will also deal with complexities as it require approval from more stakeholders at different level of government institutions

SOURCES: Indonesia Investment Coordinating Board (BKPM)

Phase Activities Institution

PreparationEstablish

Company (PMA)

• Obtaining Principal License• Establishing of Limited Liability Company• Researching about the sectors open for investment under

the Negative Investment List

• BKPM• Ministry of Law &

Human Rights (with the help of notary)

Pre-Operation

Obtain Facilities & Permits

• Obtain import identification number (API-P) for manufacturing companies (if needed)

• Submitting investment activities report (LKPM) every 3 mth• Obtaining facilities such as machinery import duty

exemption and approval of tax facilities• Obtaining licenses from local gov’t such building permit,

domicile certificate.• Obtaining permits from relevant sectoral ministries, such as

plantation permits.

• BKPM

• BKPM• DG Taxation &

Ministry of Finance• Local Gov’t

• Sectoral Ministries

Commercial operation

Securing Business License

• Obtaining business license (IU) before the start of commercial operation

• Obtaining general import identification (API-U) number and material import duty, if needed

• Submitting investment activities report (LKPM) every 6 months.

• Obtaining periodic operation permits, such as construction services permit

• BKPM

• BKPM

• BKPM

• Sectoral ministries

For example, on business approval process for setting-up integrated palm oil plantation and production in Indonesia

Adaptation is key, business entities should either build their capabilities or partner with local to operate in these environment

SOURCES: Ministry of Agriculture Regulation 26/2007; 11/2015

Regency Gov’t Province Gov’t Central Gov’t

Required legal and documents

Regents ApprovalGovernor Approval

Establish Company

Legal & Local Partnership

Land-use (Forest) Availability Check

Monitoring & Evaluation

BKPM & Ministry of Law

Ministry of Forestry

BKPM & Ministry of Agriculture

Province BPPTRegency BPPT/KPPT

ILLUSTRATIVE

RT/RW/Village/Districts

123

5 6 7

4

Main Assumptions:• Integrated Plantation with Production Facilities (Perkebunan Terintegrasi: Budidaya dan Pengolahan)• Land cover >1000 Ha and some area overlapping with forest• Foreign Investment Company is mandatory partnering with locals to form joint business entities

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DISCUSSION AGENDA




INDONESIA’S STRONG ECONOMIC POSITION IN ASIA PACIFIC REGION

Indonesia is now the 5th largest economy in Asia, with more than half of ASEAN GDP...

Indonesia have the potential and predicted to become the next economic powerhouse

SOURCES: IMF; Skha Analysis

1,877

1,561

1,305

868.3

489.2

387.3

312.4

297.9

274.0

272.0

182.6New Zealand

Philippines

Hong Kong

Singapore

Malaysia

Thailand

Taiwan

Indonesia

Korea

Australia

India

Japan

China 7,298

ASEAN member

GDP (USDb, 2013)

5,867

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5

INCREASINGLY A PRIORITYINVESTMENT TARGET

... and is Increasingly a Priority Investment Target due to better investment climate

Indonesia takes 1st place for the first time since 1992 for Promising

Countries/Regions for Overseas Business over the Med-term.

SOURCES: Bank Indonesia IMF, Japan Bank for International Cooperation (JBIC); Skha Analysis

Overseas Business Operations of Japanese Manufacturing Companies In Indonesia 2012-2013

BETTER INVESTMENT CLIMATEFROM TIME TO TIME

Sovereign Credit Rating Trends in Indonesia 2005-2011

Risky Speculative Non-InvestmentGrade

InvestmentGrade

Indonesia had achieved investment grade for the 1st time since 2011 from Fitch Ratings and

maintain the rating until today.

However, there are still some issues related to investment in central gov’t...

NOTE: * Analisis Mengenai Dampak Lingkungan (Environmental Impact Analysis) SOURCES: detikFinance ; Skha Analysis

Investment-friendly BKPM... ...but not for other ministries/dept.

“It will be easier for investor for applying business permit as there’s no need to going around Jakarta visiting various ministries/department one by one”

“Investor should only come to 3 place to apply business permit, Central PTSP, Province PTSP and City/Regency PTSP following the authorities given by regulation” – Head of BKPM

e.g. One-stop service (PTSP) policy for business permit

• “sector-centric issues: e.g. causing double permit for same issues: AMDAL* which is authorized by ministry of environment but also ministry of transport”

• “coordination & clarity issues on regulation: e.g. for electricity business expansion, if all mandatory permits have been complete the business logically can proceed to construction, no need to wait until all cross-sectors permits have been approved like now. – Head of BKPM

e.g. Electricity business, investment and expansion permit issues

At Regional gov’t (esp. cities) have been competing to attract investments by doing business-friendly initiatives...

SOURCES: World Bank, Ease of Doing Business Report Indonesia 2013; Skha Analysis

CITY

RANK IN EASE ON

STARTING BUSINESS

RANK IN EASE OF ACQUIRING

BUILDING PERMIT

RANK IN EASE OF

REGISTERING PROPERTIES

TOTAL SCORE

OVERALL RANK

Yogyakarta 1 5 6 12 1

Palembang 11 3 3 17 2

Balikpapan 7 1 12 20 3

Banda Aceh 5 4 12 21 4

Bandung 12 8 1 21 5

Mataram 10 12 4 26 6

Jambi 18 2 7 27 7

Jakarta 8 19 1 28 8

Pontianak 13 7 9 29 9

Semarang 4 8 19 31 10

Key success factors that drive these cities to perform: political will from leadership, strong support from society and gov’t capabilities in modern public management

• Bandung One Stop Service (BOSS) • Online system for regional tax filling

and permit application• Bandung Investment acceleration

team providing support & advocacy

• Consistently maintain ISO 9001:2008 as standard on permit procedures

• Fastest in Indonesia (only 7 procedures) to setup new business

Kota Yogyakarta Kota Bandung

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2

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...for example: Business-friendly initiatives in Bandung

SOURCES: Bandung Government; WorldBank; Ombudsman; Skha Analysis

Bandung One Stop Service (BOSS)

Bandung Investment Acceleration Team

Regional Tax Service Reforms

Key Initiatives:• Refine standard operation

procedure (SOP) and organization and work structure (SOTK)

• Apply modern IT system for processing permits with tracking and notification features to ease applicants

• Online CCTV for transparency

Impact:• Improvement in national

ease of doing business rank (from below 10 to top 5 position)

Key Initiatives:• Modernization of tax

service building and implement ISO standard

• Mobile tax services through mobile vehicle unit to reach tax-payers

• Implement Regional Income Module (MPD)/ end-to-end IT system for regional income management

Impact:• From low performing

agency (red) to top performing (green) agencies in Indonesia

Key Initiatives:• Bandung Investment book

that comprehensively mapping IDR 84.5 Trillion potential investment

• Create tools & mechanism for investment in Bandung, to help agencies/investors understanding the projects

• Promotion and advocacy to potential investors

Impact:• Attract multi-billion dollar

investment commitment from local to international investors

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SLOWBUREAURCACY

But majority of regional gov’t may be not so easy to deal with, especially for resource-rich regencies

CORRUPTION FOR ISSUING LICENSE IS

STILL RAMPANT

1 LOCAL POLITICS INVOLVED

2 3

EXAMPLE CASES

POSSIBLE CAUSES

SOURCES: Online Literatures, Skha Analysis

• Corruption for fake-licensing iron-sand in West Pasaman, Sumatra;

• Alleged corruption granting concessions to mining companies in South Konowe, Sulawesi

• Allegations of corruption granting concessions to a company in Banyuwangi, Java

1. Regent/Mayor has tremendous authority/power

2. The lack of monitoring/ supervision from the central government

3. Opposition and civil society movement are not strong/vocal

• Regent was intervened to allow a particular business entity to violate the law related to zoning regulation, Nunukan, Kalimantan

• “Political dynasty” that affect certain entities that can do business in a region/city, Banten, Java

1. Rise of “political dynasty” in several regions

2. Major/Regent that was appointed represent political party or supported by groups/individual that already have vested interest

• Incoordination among department causing approval from regent for business license takes too long and unclear, Tangerang, Java;

• Too many approval needed for license extension, Lampung, Sumatera

1. Complexities of regulations

2. Non-standardized internal proceduresand lack of performance management

3. Conflict of interestamong department or management levels

17

DISCUSSION AGENDA




We recommend four approaches for business entities in overcoming complexities entering and expanding in Indonesia

MAPPING LOCAL

DYNAMICS

FINDING CREDIBLE

LOCAL PARTNER

DO CSR UPFRONTTO GAIN

SUPPORT

1 32

MANAGE PUBLIC

RELATION WELL

4


1. Mapping Local DynamicsComprehensive planning helps NRI enter local market effortlessly

1 2

3

Research & Planning

Talk with Local Experts

Visits/ObserveBest Practice: Nomura Research Institutes

[ Logo ]Overview:• NRI is Japanese largest consulting & IT

services firm• NRI is considering to enter consulting

market targeting Japanese companies operating in Indonesia

Actions taken:1. Intensive meetings and discussion with

locals experts, figures and stakeholders2. Joint-research for feasibility studies and

market research on key marketResults: Ease of operation (less than 1 year to

enter) by joint-operation with selected local firm instead of opening reps. office

Faster access to acquire new network, knowledge and secured multiple contracts

SOURCES: NRI Interviews, Skha Analysis

2. Finding Credible Local PartnerPartnership with local player ease Ocean Energy to invest in new market

New EntrantsSolving local needs by proposing new business

initiativesAdvantages:• Access to raw resources and

local talents• Local expertise (geographical,

culture, compliance)• Eligibility and ease of doing

business (permit, concession, regulatory, etc.)

Challenges:• Innovation and technology

readiness

Advantages:• Better capabilities in research and

development and technology application

• Abundant sources of capital• Products innovation and innovative

business scheme

Challenges:• Access to raw resources and talents• Local understandings

Strategic options:1. Strategic alliances

(Highly preferred, esp. with GOC/ BUMN)

2. Merger3. Acquisition

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2

3

Local Player

OverviewIndonesia is seeking to boost the value of metal shipments by promoting domestic processing.Key Actions Taken:• PT ANTAM (Persero) Tbk and Ocean Energy Pte. Ltd. entered into cooperative relationship

through the signing of an Investment Heads of AgreementResult Ocean Energy will provide financing for NPI & stainless-steel plant (~US$280 million) TaizhouYongXing Alloy Material Tech. Co., Ltd. will provide technology support. ANTAM will provide key essential contributions in the form of mining expertise, land

development, facilities and infrastructure development

Best Practice: Ocean Energy & PT. Aneka Tambang, Tbk & Yon Xing Alloy Tech.

SOURCES: Bloomberg, Interviews, Skha Analysis

Impact of CSR in Antam Case

3. Do CSR Upfront to Gain SupportEffective CSR help Antam win local’s heart to maintain and expand their operation

Possibility to engage local residents immediately

Invest and build stronger relationships with key stakeholders

Affect corporate images and society perceptions, including how good a corporation is doing outside of the workplace

Relevance of CSR Activities Best Practice: PT. Aneka Tambang, Tbk.

Overview:PT Aneka Tambang Tbk operates as a diversified mining and metals company. It holds interests in various mines located in North Maluku.

Actions taken:

1. Planned and allocate IDR >4Bio budget for community development & stewardship (PKBL)

2. Maintain program and impact monitoring with 94% CSR effectiveness rate

Results: Strong support from locals & key gov’t

figures for regional and future projects Public acknowledgement: CSR Award 2014

in human rights, environment and community development

SOURCES: AntaraNews, Rakyat Sultra, Antam Annual Report, Interviews, Skha Analysis

4. Manage Public Relation WellGood PR ensure Carrefour continue to expand, even after “image-crisis”

Best Practice: PT. PT Trans Retail Indonesia

Overview:In 2006, PT Carrefour Indonesia (before PT Trans Retail Indonesia) is widely viewed as competitor against traditional market in several region in Indonesia. There are pro’s and cons among people’s reps. council to regulate hypermarket.

Actions taken:

1. Comprehensively plan their PR strategy, explaining Carrefour targeting different customer segments on multiple media-channel

2. Gain support by working collaboratively with local experts and academician supporting their arguments on news

Results: Carrefour maintain its existence, hypermarket

regulation is postponed and to be reviewed in several region

Proactive PhaseMonitoring media for emerging issues, Includes activities and thought processes that can prevent conflicts. Environmental scanning issues tracking which lead to Issues management and a crisis plan.

Strategic Phasean issue is identified as needing concerted action, Includes Risk Communication, Conflict positioning strategies, and Development of a crisis management plan.

Reactive Phaseemploying strategies either to bolster or repair its reputation in the eyes of the Key Public by reacting to events as they unfold in the external communication environment.

Recovery PhaseEvaluate strategies and rebuild connection

4 PR Phases in Managing Conflict

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2

3

4

SOURCES: Suara Merdeka, Carrefour Interviews, Skha Analysis

How well does your company applied this approaches to manage complexities entering and expanding in Indonesia?

MAPPING LOCAL

DYNAMICS

FINDING CREDIBLE

LOCAL PARTNER

DO CSR UPFRONTTO GAIN

SUPPORT

1 32

MANAGE PUBLIC

RELATION WELL

4


Our Contacts

Authors of This Study

Herianto Pribadi

Managing Partner

herianto.pribadi@

skhaconsulting.com

Sayed Musaddiq

Director

sayed.musaddiq@

skhaconsulting.com

Mohammad Iqbal

Consultant

mohammad.iqbal@

skhaconsulting.com

END OF DOCS

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Contact UsPlaza Semanggi Office Building, 15th FloorJl. Jend. Sudirman Kav. 50Jakarta, 12930Phone +62 21 2553 6447Fax +62 21 2553 6643http://www.skhagroup.com

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skha gpsm on approaches in overcoming decentralization complexities for business entities entering...

Government & Nonprofit

iv1973 uu

regional govt

decentralization jokowi

old order uu

jokowi views decentralization

reformation era uu

decentralization powershift

business entities