The government is out to streamline its sprawling and infamously complicated regulations, as President Joko “Jokowi” Widodo looks to kick-start his second term with a bold reform agenda.
Jokowi has given his ministers a month to identify and revise ministerial regulations deemed harmful to the country’s chances of attracting foreign direct investment (FDI) amid fierce competition from neighboring nations.
Furthermore, he has also instructed his Cabinet members to resolve problems faced by multinational companies that have pledged to do business in the country, but are yet to realize their investments.
The former Jakarta governor said that, while the government had made great strides in terms of improving Indonesia’s investment climate, more could still be done to put the country in a more competitive position against its peers.
“I know that in the past five years, we’ve improved our Ease of Doing Business [ranking] and we also started simplifying [business] licensing through the OSS [Online Single Submission] system, but the fact is that it’s not enough,” said Jokowi in a recent Cabinet meeting in the Presidential Office.
Indonesia is ranked 73rd in the World Bank’s Ease of Doing Business Index for 2019, whereas neighboring Vietnam, Thailand, and Malaysia are ranked 69th, 27th and 15th respectively. Meanwhile, Singapore ranks second to New Zealand, which tops the index.
Jokowi went on to say that the government had sought to improve the overall ecosystem of investment, especially in areas related to regulations, licensing, taxation incentives, land acquisition, labor and security.
The government is pursuing such an agenda following the World Bank’s somewhat pessimistic assessment of Indonesia’s economic condition, which it considered susceptible to capital outflows and relatively cut off from global supply chains.
Investment Coordinating Board (BKPM) chairman Thomas Lembong said the government would simplify regulations previously deemed “unproductive” and “time-consuming”.
“Whether we like it or not, there will be massive cuts in terms of regulations, requirements or licenses that have burdened us all,” said Lembong following the Cabinet meeting.
He added that the government’s decision to follow through with further deregulation was also timely, considering that Jokowi would soon begin his second term in October.
“The reforms are expected to open doors for both domestic and foreign investment, which would also add jobs. Such positive momentum is what we hope for as we enter the second term [of Jokowi’s administration],” said Thomas.
Foreign and domestic investors had complained about the country’s malleable regulations, on which the government had often flip-flopped, Lembong said. Other issues such as taxation, land acquisition, labor and the dominance of State-Owned Enterprises (SOEs) in several major sectors of the Indonesian economy had also hampered the country’s efforts to attract investment, he added.
Indonesian Institute of Sciences (LIPI) economist Latif Adam told The Jakarta Post that it was never too late to compete against fellow Southeast Asian countries to lure FDI.
“The ongoing China-United States trade war is indeed a blessing in disguise – we can use the opportunity to woo international companies looking to relocate their production plants. One thing is for sure, though: we cannot replicate regulatory models that have worked in, say, Vietnam. Different countries, different needs,” Latif said over the phone on Sunday.
Although he conveyed his support for the imminent deregulation, Latif said such simplification would have little impact unless it was complemented by a policy that expedited customs clearance for foreign investors.
“Investment is a complex issue. Deregulation merely represents a single variable – it needs to be made robust by complementary policies, such as one that makes it easier for foreign investors to pass through customs,” he added.
Latif went on to say that the government’s 16th economic policy package, launched late last year, had proven to be quite effective in making the country slightly more attractive to foreign investors. However, he believed there was still ample room for improvement.
“We can start by amending the Labor Law, since foreign investors have found it to be among the main factors that make Indonesia less attractive than neighboring countries,” he said, adding that the government should increase the productivity of the nation’s workforce to lure more investors.
Coordinating Economic Minister Darmin Nasution said on the sidelines of last week’s Cabinet meeting that the government would focus on forgoing permits deemed obtrusive to foreign investors in the next two months – a move regarded as the extreme version of the government’s earlier attempts to merely simplify existing permits.
“We will no longer simplify problematic permits; we’ll discard them entirely. We’ll only keep regulations that still serve a function,” Darmin said.
Samuel Sekuritas economist Lana Soelistianingsih echoed Latif’s sentiment, saying that deregulation could only do so much if it was not supported by a “more aggressive” initiative.
“It is time we played the ball in our field. For instance, we can narrow down our aim by focusing on specific investments that will decrease our need for imports. Aiming for FDI in general is still a viable option, but specificity is key in this race against other Southeast Asian countries,” she told the Post.
She said the government should prioritize attracting investments that would make the country less reliant on imported goods. The country’s medicine industry, for example, still imported nearly 90 percent of its production components, Lana added.
“We could definitely use medicine factories here in Indonesia to substitute for our imports,” she said.
Center of Reform on Economics (CORE) Indonesia research director Piter Abdullah called on the government to pay special attention to issues related to land acquisition, since they were among the obstacles that companies faced as they were about to realize their investments in the country.
“Indonesia is already quite attractive to investors. However, bureaucratic snafus such as the lack of coordination between the central government and the rest of the country, convoluted land permits, and inconsistent policies have gotten in the way of their investments,” Piter said.
By: Marchio Irfan Gorbiano and Rizki Fachriansyah