On Thursday 28th April 2016, the Indonesian government unveiled its 12th economic policy package aimed at improving the ease of doing business in the country. With specific focus on small and medium enterprises (SMEs), the new policy package was announced at the State Palace by President Joko Widodo and Coordinating Minister for Economic Affairs, Mr Darmin Nasution. The new package will simplify the procedures associated with setting up a business and reduce the fees involved. President Widodo has set the specific aim of improving Indonesia’s global standing in the Ease of Doing Business Index from its 2016 ranking of 109th worldwide (up from 120th in 2015). The aim of the latest package’s extensive deregulation is to improve the business climate for local SMEs in Indonesia which will of course benefit international investors as well.
To achieve this end, Mr Nasution announced that a special team involving himself and representatives from relevant ministries as well as the Indonesia Investment Coordinating Board (BKPM) has been assembled to address the central issues that have made Indonesia’s business climate one of the most difficult to operate in globally. The World Bank Group (who compiles the Ease of Doing Business Index) identifies ten core indicators for measuring the ease of doing business including establishing a business entity, obtaining a construction permit, paying taxes, securing credit, enforcing legal contracts, getting electricity, trading across borders, resolving insolvency and protecting minority investors. For Indonesia, the time to complete all of these processes was 1,566 days and involved 94 procedures and nine permits. This will now be reduced to 132 days and 49 procedures as well as six permits under the new policy package.
For SMEs in particular, Law No. 40/2007 on Limited Liability Companies has been replaced by Government Regulation No. 7/2016 which retains the minimum authorised capital at 50 million IDR but leaves open the amount of basic capital to the discretion of the founders. The costs involved for company establishment have also been reduced to 2.7 million IDR from 6.8-7.8 million IDR previously, with the process condensed into seven procedures to be completed in ten days.
The latest package is part of President Widodo’s nine-point development programme called ‘Nawacita’ aimed at promoting competitiveness and national self-reliance. However, this 12th economic policy package should also be seen as a direct reaction to the dampened business climate and perceived threat of the ASEAN Economic Community (See Indonesia and the ASEAN Economic Community – Ready for Regional Integration?) for Indonesia’s SMEs which make up close to 60% of the country’s GDP and absorb over 95% of the workforce (Ministry of Cooperatives and Small and Medium Enterprises).
For foreign investors, the sentiment of simplifying business procedures and streamlining bureaucratic procedures should be welcomed, even if many of the policies within the package are aimed squarely at domestic SMEs. A more transparent, efficient and vibrant business climate that encourages greater entrepreneurism should encourage investors in Indonesia and dispel concerns regarding the creeping complacency that appeared to take hold prior to the commodity down cycle beginning.
Global Business Guide Indonesia - 4th May 2016
Population: 255 million (estimated, 2015)
Currency: Indonesian Rupiah
Nominal GDP: $895 billion USD (IMF, 2015)
GDP per capita: $3,415 USD at Current Prices (IMF, 2015)
GDP Growth: 4.7% (2015)
External Debt: 34.77% of GDP (BI, Q3 2015)
Ease of Doing Business: 109/189 (WB, 2015)
Corruption Index: 107/175 (TI, 2014)