Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Policy Uncertainties in Indonesia: Trends and Policy Responses Mohamad Ikhsan Advisor to Coordinating Minister for Economic Affairs Republic of Indonesia and Senior Research Associate at the Institute for Economic and Social Research University of Indonesia Presented at Regional Conference on Investment Climate and Competitiveness in East Asia: From Diagnostics to Actions Kuala Lumpur 21-23 November 2005 Organized by Bank Negara Malaysia Outlines • Overview on the state of Economy since the crisis time • Policy Uncertainty Issues in Indonesia – Macro Uncertainties – Micro Uncertainties • The Impact of Policy Uncertainties on Performances – TFP – Investment – Employment • Major Causes for Uncertainties • Policy Responses Overview of State of Economy Grafik 2: GDP/Kapita 1400 1200 1000 800 600 400 200 0 2001 2002 2003 2004 2005 E) Debt GDP Ratio for Several Emerging Countries 120 100 Percent 80 60 40 20 0 Korea China India Taiwan 2000 M alaysia 2004(Est) Thailand 2005(proj) P hilippines Indo nesia • Indonesia’s economy has steadily improved since the crisis time. • Per capita income has been backed to pre crisis level since 2004 and growth rate now accelerating to a 6 % p.a • More balance and sustainable sources of growth indicated by picking up on investment and export. • Macroeconomic risks improved significantly indicated by a sharp reduction in public and external debt ratio and short term debt over international reserve But many (economic) problems remain Table 2.1: Growth accounting Growth in Contribution to growth of: output per Physical Human worker capital capital TFP Indonesia 1961-03 2.9 1.7 1967-80 5.0 2.0 1981-97 3.8 2.5 1998-99 -8.8 0.9 2000-03 2.1 0.4 Comparator economies 1961-03* East Asia (5) 3.6 1.9 Korea 4.7 2.7 Malaysia 3.6 2.2 Philippines 1.0 0.8 Thailand 4.1 2.3 2.4 1.0 OECD 1.4 0.8 All developing 0.5 0.5 0.5 0.5 0.4 0.6 2.4 0.8 -10.0 1.2 0.5 0.7 0.6 0.4 0.4 1.2 1.3 0.8 -0.2 1.4 0.4 0.3 1.0 0.3 Source: Bosworth and Collins (2003) and World Bank staff estimates. * Simple averages for comparator groups. OECD and All Developing are 1961-00. • Our productivity remains lagging behind pre crisis period or other regional competitors. • Unemployment both open and under employment are still higher than pre crisis. • Poverty trends are moving away of the paths. Firm and industry level data amplify those fundamental problems In short, mostly caused by policy uncertainties Macro Uncertainty Pol & Reg Uncertainty Corruption local Corruption national Tax rates Costs of Finance Legal system Lab reg national Tax admin Lab reg local Electricity Crime Business permits local Skills and education Access to Finance Anticomp Business permits national Transport Customs & trade national Customs & trade local Access to Land Telecom 0 10 20 30 40 50 60 Percentage of firms reporting constraint to be severe or very severe 70 80 Policy Uncertainties, Government Effectiveness, Investment Climate and Firm Performances • From a firm’s perspective, three aspects of government effectiveness are particularly relevant: – – – • • • the capacity of government to manage its resources and provide public services efficiently; the quality of its policies and regulations; and its ability to implement these policies in a credible and consistent manner. In contrast to new order regime, almost all areas Indonesia falls short. Both in term the quality of its policies and regulations—in terms of their complexity, which imposes a heavy administrative burden on firms—and in the extent of policy and regulatory predictability. As shown by a quantitative analysis, Pol Table 5.10. Impact of investment climate on firms’ performance (all variables combined) TFP Employment Probability of Investment climate element Coefficient Elasticity Coefficient Elasticity Investing Logit coefficient a) Quality of regulations measured by: Regulatory burden Entry, exit and competition -0.0044 0.074 -5.6** 21.9* 0.0007 -0.007 1.0 -2.1 -0.001 0.052 b) Lack of policy predictability -0.667 -21.5* -0.002 -0.7 0.051 a) Poor functioning of legal and judiciary -0.009 -3.4 -0.194 -7.3** -0.109* b) Lack of Security/ Law and order -0.0119 -1.6 0.0007 1.0 -0.053* Disruptions (incl. absenteeism, strikes and civil unrest) Financial Markets -0.2078 -20.8* -0.073 -7.3** 0.804** Cost and lack of access -0.0022 -1.65 -0.001 -0.8** -0.011** Power outages -0.007 -3.0* -0.001 -0.7* 0.001 Low road density -0.0939 -9.4** -0.020 -2.0 0.020 Government effectiveness Governance Labor Markets Infrastructure Control variables (including) Manager’s education Percentage of foreign ownership ** Significant at 5%,* significant at 10%, Implications of unfavorable investment climate Decline in export ratio Drop in profit Margin Percentage of output exported Average profit margins Machinery 1993-96 Machinery 1999-2001 Basic metal Basic metal Pottery Pottery Chemicals Chemicals Paper & printing Paper & printing Wood 1999-2001 Textiles and leather 1993-96 Wood Textiles and leather Food processing Food processing 0 10 20 30 40 10 12 14 percent 16 18 20 Sources of Uncertainties • Political transition to democratic regime • – No clear majority and expected to continue up to the next 10 year • – Debt intolerance in Indonesia is about 35% of GDP. It implies focusing on reducing debt burden still the agenda over 1-2 years ahead. – Vulnerability in financial sector have forced the government to take another burden on contingent liability. Bigbang decentralization. – Authority vis a vis responsibility • Financial crisis has limited the central government power. – Crisis increases government debt services cost and limit the power of central government • Most of regions rely on central government transfers. – Inducing regional government to take progressive and in many cases unnecessary new tax and retribution. High debt also rises the country’s risks and degree of vulnerability. • The crisis also reduced the ability of the state to up grade infrastructures. – Government spending on infrastructures reduced to only 3-4 % of GDP compared to 7% during the pre crisis time Trend on Policy Uncertainty: Monitoring Results from LPEM-WB Survey Table 5 • Number of days for setting up a business in Indonesia is about 80 days not 151 days as reported in Doing Business Survey 2006. • But that survey found a huge variation faced the companies when dealing with BKPM. Average Days* to Establish a PT. Company No Activities Notary Survey LPEM (2005) Law Firms Interview (World Bank 2005) 1 Obtain clearance for the company name from the Ministry of Law (MoL); obtain the standard form of the company deed from MoL 2 7 Ministry of Law 2 Founders draw up the deed of establishment (articles of association) and sign it in front of a notary. 2 7 Notary 3 Obtain a certificate of domicile from the local municipality 4 10 Local submunicipality office (kelurahan) 4 Obtain a taxpayer registration number (NPWP) and taxable entrepreneur identification number (NPPKP) 6 14 Local Tax Office 5 Open a bank account and deposit the initial issued capital in the name of the proposed company 4 4 Bank 1 1 Ministry of Law 1 2 Notary office 6 7 8 9 Pay to the State Treasury the non-tax state revenue (PNBP) fees for legal services pursuant to the Decree of the Minister of Law No. M.OI-UM.01.06/1993 Arrange for the notary to apply for the publication of the articles of association of the company in the supplement to the State Gazette from the State Printing Press, get payment receipt Submit physical documents to the Ministry of Law Issuance of the SK approving the deed of establishment by the Minister of Law 1 Ministry of Law 75 14 Ministry of Law 10 Register with the Company Register at the Local Trade Office and obtain the Company Registration Certificate (TDP) 9 15 11 Apply for the business trading license (Surat Izin Usaha Perdagangan or SIUP) 11 14 12 Register with Ministry of Manpower 1 1 13 Apply for workers social security (Jamsostek) program 1 1 Total Time in Working Days Institution/ Entity Local Trade Office (Dinas Perdagangan) Local Trade Office (Dinas Perdagangan) Ministry of Manpower PT. Jamsostek 57 Total Time in Calendar Days 80 151 *Notes: The notaries are answering in terms of working days, whereas the law firms are answering to in terms of calendar days …but 80 days to start a business is still too long Table 4 BKPM Approval Process: Time Required (Working Days) and Frequency of Not Acceptance Application (Times) No 1 2 3 4 5 BKPM Approval Process How much time to collect all of the information and documents required for first submission of an application to BKPM? Average Min Max Median Indonesia 151 Vietnam 56 Philippines 24 days 1 day 120 days 50 5 days China If first application is not accepted, how much time to gather any additional information or documents to satisfy BKPM? 12 days 1 day 60 days 5 days How many times was the application not accepted by BKPM on the grounds that it was not complete and correct? 3 times 1 time 10 times 2 times 41 Thailand 33 Malaysia 30 Singapore How much time to collect all of the information and documents required for final submission of an application to BKPM (documents accepted as complete and correct by BKPM) 24 days 2 days 60 days 16 days How much time to issue the approval letter (SP) after documents accepted as complete and correct by BKPM 34 days 1 day 120 days 20 days 58 days 3 days 180 days 36 days Total Time required to have SP (Approval Letter of BKPM) = row 4+ row 5 Note: 1 week = 5 working days, 1 month = 20 working days Days to Establish and Register a Limited Liability Company 8 Australia 2 0 25 50 75 100 CALENDAR DAYS 125 150 175 … new investment law is not enough • to a certain sector, other regulations are required. • Regulatory reforms can be done and needed in both central and local governments Need to focus on micro sector reforms Regional Regulations are still problems and sources of policy uncertainties and distortions Tax administration problems: new draft of tax packages are far from satisfactory and tend to be counterproductive. Infrastructure: lack of supply and quality Time to start a business is very long and variance is large. Small and medium businesses are the losers Tax refund still takes long time and in practices require “informal payment” to disburse it. Labor regulations become less flexible make entry and exit cost increased significantly. No clear vision over the future state owned enterprises SME Development action plan need to be elaborated further . … survey results also reveal a lot of effort are needed to improve investment climate in all fronts Table 16 Port Clearance Times for Import Containers (days) JICA August 2004 survey Average Time to Obtain Utility Connection (in days) Singapore 1.0 Types of Utilities 2005 LPEM/WB Survey 2003 ICA Survey (WB/ADB) Electricity (PLN) 24 15 Telephone (Telkom) 16 27 Water (PDAM) 17 13 USA 2.0 Germany 2.0 Japan 3.1 Days from vessel berthing to release by customs 5.5 Tanjung Priok Days from vessel berthing to container exit from terminal 0.0 1.0 2.0 3.0 4.0 7.0 5.0 6.0 7.0 DAYS Average Days Needed to Fill in Monthly Tax Document Table 11 Respondents Reporting VAT Return Negotiation and Extra Payments According to Firm Size 9 PPN: Added Value Tax for consumers PPh article 25 5 PPh article 22 5 Firm Size (workers) 8 PPh article 22 (prepaid) 6 PPh article 4 clause 2 6 PPh article 23/26 7 PPh article 21/26 0.0 2.0 4.0 Total time: 45 man-days 6.0 8.0 10.0 Yes No N <100 6 50.0% 6 50.0% 6 100 to <500 58 55.8% 46 44.2% 104 500 to 1000 23 60.5% 15 39.5% 38 >1000 30 57.7% 22 42.3% 52 All Firms 114 57.0% 86 43.0% 200 Improving investment climate Structural and institutional reforms Increase competition Raise efficiency Lower risk Low costs Better risk x return Lower taxes and cost of capital Macro adjustment Greater demand and output More investment Quality of public spending Policy Responses: Focusing more on executable actions while handling regulatory issues • Political constraints hinder the ability for GOI to eliminate political uncertainties except for the areas where all parties and/or interest groups relative have common ground. – • Lack of trusts and lack of responsibility – – – • Regional government regulation Tax Reform initiatives Central Bank Independence Some dilemmas: – – – • Improving one areas may open the other Pandora. Need to focus on the process rather than outcomes (but at the cost of relative slow of implementing and results) High expectation ( partly due to the past memories) also increases the demand for quick outcomes. Inherent dilemmas: look example in fiscal trilemmas. PR Problem – – – “Take it for granted” behavior on the government side. Intermediary problem Asymmetric problems of reform: cost of reform always up front while benefit usually appear in the medium term. Benefit per capita in many cases always less than cost per capita. A reform agenda • Macro reform: – Fiscal Policy trilemma – Stabilization policy • Micro Reform: – Financial Sector – Trade Liberalization – Tax Reform including regional tax – Reform in business regulation – Combating corruption Fiscal policy trilema Reduce public debt/GDP Lower taxes Increase public investment Fiscal reform • Reduce public debt / GDP ratio: – Sustain a high primary surplus – Lower the cost of debt • Restructure public spending to accommodate rise in public sector investment • Reduce tax burden • Develop a medium-term fiscal framework that lowers political risk. • Gradually reduce contingent liability – Abolish the financial sector blanket system while introducing new deposit insurance companies – State Owned Companies Restructuring including initiating new law on Regional State Owned Companies • Diversifying financial sector and including giving more access to SMEs • Most of them have been achieved and further reforms are underway. Action Program Solving regional regulation problems Central government exercises the power to abolish contra productive local government regulation: From 2001-Oct 05 : 469 Perdas have been cancelled and about 170 of them abolished between Okt 04-05 Amendment Law No.34/2000: Changing the concept from open list to closed list Exercise General Allocation Fund as tool to impose discipline to regional government if : They do not report new Perda to Central Government Still exercise a Perda that has been cancelled by central government. Implement a perda without central government approval. Improving Perda Monitoring System by Ministry of Finance and Ministry of Home Affair This can be done because we have some fiscal space. Progress on Anti Corruption Effort Two indicators of corruption dropped sharply. Bribes to government officials as share of production costs fell from 10.8% in 2001 to just 1.8% in the current survey (3.4% in the 2003 ICA). At the same time, percent of senior management time spent dealing with government officials dropped from 12.8% in the 2001 survey to just 4.9%. Pungutan Tidak Resmi (% thdp Biaya Produksi) 12 10.8 10 8 6 4 3.40 2 1.8 0 2001 2003 Two possible explainations : 1. 2. Improvement in anti-corruption efforts including establishing new and powerful anti corruption agency A more competitive environment among regions to provide a better environment and efficient in public sector 2005 Launching a new packages of investment law and regulation • • • • Investment Law Objectives: 1. Increasing the quality and number of Investment 2. Reducing cost of doing business in Indonesia. Several Highlights of the Investment Law Draft: – Equal treatment for Domestic and Foreign Investors. – Simplifying Procedure for Registration & Licensing – Repositioning the role of Investment Board (BKPM) as an investment promotion and facilitation agency. – Clear and Transparent Negative List. Target of 30 days for setting up business in Indonesia can be achieved through other improvement in government regulation. As part investment packages, GOI also will prepare a serial package of deregulation. We try to use all opportunities to lunch new package of deregulation – The 1st October 2005 packet was initiated along with domestic fuel price adjustments. Fiscal Incentives: Tax and Custom • Tax Reduction: • Company tax rate reduction from 30% to 28% in 2007. Beyond 2007 there would be a reduction of 1 % annually to achieve the new tax rate of 25% in 2010. • Individual tax rate reduction from the maximum of 35% to 33 % in 2007 and achieved a new maximum tax rate of 30% in 2010. – Simplifying Procedures of Tax & Custom, and also Tax refund – Equal Treatment for tax payer and officer – Government will discuss further improvements on tax law draft with the parliament to meet business sector demand Non-Fiscal Incentives • Improving Coordination Mechanism for Export and Investment by empowering National Committee on Export Promotion and Investment (PEPI) – President SBY will chair PEPI. • Empowering Domestic Industries and SMEs. – Action plan for SMEs Development is on the final stages Improving Communication • President try to use a more inclusive approach. – But it may cost the delay of reform. • Use the good and bad guy tactics when launching unpopular policies. – This is also used to test the water. Conclusion • Surveys shows some improvements in policy uncertainties during the SBY-JK administration. • But there are gaps between political will (for improvement in investment gap) and implementation. • Need “hands in” policy to improve investment climate in both central government and local government.