EXPERT MEETING on
COMPARING BEST PRACTICES FOR CREATING AN
ENVIRONMENT CONDUCIVE TO MAXIMIZING
DEVELOPMENT BENEFITS, ECONOMIC GROWTH AND
INVESTMENT IN DEVELOPING COUNTRIES AND
COUNTRIES WITH ECONOMIES IN TRANSITION
Geneva, 24-25 September 2007
Best Practices for Creating an Environment Conducive to
Maximizing Development Benefits, Economic Growth and
Investment in Indonesia
By
Dr. Rizal Lukman
Assistant to the Deputy Minister, Coordinating Ministry for
Economic Affairs, Indonesia
The views expressed are those of the author and do not necessarily reflect the
views of the UNCTAD.
Best Practices for Creating an Environment
Conducive to Mazimizing Development Benefits,
Economic Growth and Investment in Indonesia
Rizal A. Lukman
Monitoring Team of Investment Policy Package
Coordinating Ministry for Economic Affairs, Indonesia
UNCTAD Expert Meeting on Comparing Best Practices for Creating an Environment
Conducive to Maximizing Development Benefits, Economic Growth and Investment in
Developing countries and Countries with Economies in Transition,
Geneva, 24-25 September 2007
The History of Economic Reforms in Indonesia
Phase
Period of Reforms
Trigger to do Reforms
Phase I
1983-late1980s
Post Oil Boom Æ shift away from oil
dependency on budget and export
A.
1998-2003
Under the IMF Program (LoI)
B,
2003-2004
Government owned program as an Exit
Policy from the IMF Program
Phase III
2006-2008
Higher economic growth under global
competition
Phase II
1
Key Achievements in Structural Reforms
♦ The most important development is the approval of the investment law in
March 2007 and the new negative lists
♦ Other key achievements include:
– Submission to parliament of revisions to the draft tax laws by the Ministry of Finance
incorporating proposals from the business community (June 2006). One important tax
administration law has been passed by the parliament,
– Creation of new tax incentives for investments in certain sectors and regions. Government
Regulation No. 1/2007 specifies three types of tax incentive: loss carry forward, accelerated
depreciation, and investment tax credits. For example, corporate income tax can be reduced
by 30 percent of realized investment spread over a six year period (i.e., 5 percent per year).
Establishment of a team to evaluate draft regional regulations (March 2006). As of December
the team had recommended the cancellation of 130 non-business friendly regional regulations,
of which 70 had already been cancelled by the Ministry of Home Affairs.
– Improvement of the electronic data interchange system at Customs to reduce customs
clearance time to 30 minutes in the green lane and 3 days in the red lane (August 2006).
– Cancellation of regional regulations imposing taxes and fees on the movement of goods,
telecommunication towers, and roadside weigh stations (October 2006)
– Elimination of VAT on certain primary agricultural commodities to increase competitiveness
(Government Regulation No. 7/2007)
– Expansion the modern tax offices and modernization of custom office in Tanjung Priok (June
07)
– Speeding up the process of tax restitution.
2
Key Items of New Investment Law
♦ The key items of the new law are:
♦ Equal legal status: Gives equal legal status and treatment to both domestic and foreign
investors.
♦ Investors’ protection: (i) Provides protection against nationalization and states that any
expropriation must be based on law and compensated at market prices, (ii) guarantees
the right to repatriate earnings in foreign currency, and (iii) omits the forced divestiture
and limited duration of foreign investment under the old law (1967 Foreign Investment
Law).
♦ Dispute resolution: Mandates binding international arbitration in the event of disputes
between the government and foreign investors.
♦ Negative list: Makes all business activities open to investment unless explicitly closed or
restricted and provides for a transparent investment negative list based on standard
industrial classifications to be issued as a single Presidential Regulation
♦ Property rights: Provides stronger property rights (e.g. land use rights for investors of up
to 95 years);
♦ Immigration procedures: Allows expatriate workers to be granted two year residence
permits and two year multiple entry visas, and allows the two year residence permit to be
turned into a permanent residence permit for expatriates living in Indonesia continuously
for more than two years;
♦ Tax incentives: Provides for special tax incentives for certain types of investment under
certain conditions, including tax holidays for pioneer industries, income tax reductions,
exemption or reduction of import duty and value added tax for capital goods and raw
3
materials, accelerated depreciation and reduced property tax
Triple Track Strategy to Increase FDI
Aim: to increase investment
Strategy 3: Government &
Strategy 1: Economic reforms
Strategy 2: Toward more
Private sector Projects
(behind the borders)
open economy
Bilateral
Investment Forum
(Korea, China,
Economic
Policy Package
Japan, USA,
Indonesia-Japan
Economic Partnership
Agreement
Australia, etc.)
By the Establishment Joint
Committee/Forum on
Investment
Sub Committee on
Investment Climate and
promoting business
confidence
Initiative for 2007-2008
1.Revise and Upgrade Three Previous Policy Packages
–
–
–
–
Complete all remaining policy action of the 2006-07 policy package
Revise and upgrade new program for 2007-2008
Introduce a new policy package on SME development
Focuses on improving access to finance, market, human resources and regulation reform as well,
specifically for the SME
2.Mainstreaming the Government Budget
♦
♦
Reallocate the 2008 budget for infrastructure, human development and poverty
Increase the effectiveness of the spending both at the central government level and sub national
level as well
3.Upgrade the privatization program with a new orientation.
–
–
Privatization committee has release its plan for 2007 and now at the parliament for approval.
Most of proceed are intended to business expansion compared to the budget support in the previous
years.
4. Poverty Program
♦
♦
♦
Expand current community development program to cover 2000 sub-districts in 2007 to 3800 subdistricts in 2008
Increase the allocation per sub district from Rp 500 million to Rp 1.5 bn in 2007 and to Rp 2-3 billion in
2008
Introduce new conditional cash transfer program in education and health to encourage the poor
participation in education and health
5
Indonesia’s Reform Agenda in 2007-2008
Aim: to improve business environment in order to increase private
investment for employment creation and poverty reduction
1
Investment Law & Procedure
2
Custom and Port Logistic Reform
3
Tax Reform
4
Trade Licenses
Infrastructure
5
Cross Sector Strategic Policy Reform
Infrastructure
6
Sector Restructuring, Corporatisation and Policy Reform
7
Regulation on natural monopoly & investment protection
8
Clear separation on the role of policy maker, regulator, and operator
Financial
9
Coordination Monetary & Fiscal Authority
Financial
10
Financial Institution (Banking & Non Banking)
11
Capital Market and SOE Privatization
Investment
climate
Investment
improvement
climate
improvement
SME Promotion
and
Empowerment
contracting agency, and operator
12
Improving access to financing
13
Entrepreneurship development
14
Improving SME’s Access to Market
15
Regulatory Reform
6
Some Actions included in the 2007 Investment Policy
Package in Indonesia
♦ Prepare Investment Procedures and Implementation of Integrated
Investment Service
♦ Accelerate the process of establishing a limited liability company from
97 days to be a maximum of 25 days
♦ Formulate a clear division of tasks between the Central Government
and Regional Governments regarding investment affairs
♦ Simplify business licensing in the fields of investment and trade
♦ Establishment of a custom and cargo clearance system through an
Indonesian National Single Window (INSW)
♦ Accelerate the handling of tax refund requests by simplifying audit
method (i.e. all VAT refund requests submitted before August 2006
will be settled by July 2007 at the latest)
7
Fiscal Consolidation on track
Continued fiscal discipline
Debt to GDP
budget def icit % of GDP
0.0
-0.5
-0.5
-1.0
-1.5
-1.1
-1.3
-1.1
-1.1
2006 P
2007 F
-1.7
-2.0
-2.5
-3.0
%
90
76.66
80
67.35
70
61.08
56.92
60
48.11
50
42.09
39.0
35.30
40
31.90
28.90
24.10
30
22.30
20
10
0
2001
2002
2003
2004
2005
2002
Tot al debt
2003
2004
2005
2006*
Tot al domest ic debt issued by Cent ral Government
Key highlights
•
•
•
•
•
Improvement on revenue side (Tax and customs reforms)
Preparations under way for medium term budget and
treasury reforms, including performance and multi year
budget, treasury single account, accrual basis
Discipline approach to contingent liabilities including infrastructure projects
Consolidation of fiscal decentralization
– Improved fiscal balance
– Regional borrowing and municipal bonds, subject to
Minister of Finance approval
Reduced debt to GDP
8
Fiscal Policy to Support Investment
Tax ratio on upward trend
Tax policy and Administration
♦ Amendment of Tax Law
%
13.50
13.3
♦ Establishment of Policy Unit MOF (FPO)
♦ Modernize DGT: Expansion of LTO, MTO and HQ
13.00
12.7
♦ Tax Incentives for Investment
Tariff and Customs
•
•
•
Improve Tariff Setting (Import Duty)
Modernize Customs Office
Implement EPA and FTAs
12.4
12.50
12.00
11.8
11.50
11.3
Infrastructure (PPP)
•
•
•
•
Establishment of Risk Management Unit
Risk Sharing Schemes
Infrastructure and Land Fund
Support Model Project (Infrastructure
Summit II)
11.00
10.50
10.00
2002
2003
2004
2005
2006
Tax Rat io w it h GDP base 2000
Note: * preliminary
Source: Ministry of Finance
9
Tariff and Trade Measures toward more
open economy
♦ The government announced in February 2006, a medium term tariff
harmonization program. The program aims at moving toward a ‘low’ and ‘uniform’
tariff rate and specifies a tariff reduction schedule between 2006 and 2010.
– According to the schedule, 94 percent of all tariff lines would have rates at or
below 10 percent. The remaining 6 percent of tariff lines (sensitive sectors) would
have their rates reduced to 10 percent by 2020.
– There are very few non tariff measures, confined mostly to agriculture products
Distribution of Tariff Lines by Tariff Band
Tarif
Band
0%
5%
8%
10%
13%
15%
20%
25%
30%
>=35%
2004
Tariff
% in
lines
total
2,334
21
4,344
39
0
0
1,709
15
0
0
1,562
14
305
3
340
3
11
0
541
5
2006
Tariff
% in
lines
total
2,454
22
4,134
37
74
1
1,703
15
42
0
1,562
14
590
5
31
0
43
0
523
5
2008
Tariff
% in
lines
total
2,320
23
3,839
38
17
0
1,663
16
88
1
1,603
16
122
1
44
0
13
0
469
5
2010
Tariff
% in
lines
total
557
5
6,008
59
119
1
2,835
28
0
0
163
2
21
0
6
0
14
0
455
4
11,146
11,156
10,178
10,178
100
100
100
100
10
Results ……
♦As a result of investment climate has improved substantially in Indonesia,
the investment has been turning back with promising increasing
confidence among investors as indicated by the following figures.
♦Actual domestic and foreign direct investments (FDI) in Indonesia during
the first eight months of this year rose 123% from a year earlier to US$
11.7 billion.
♦Actual FDI in the January to August period rose 106.9% from last year to
US$ 8.13 billion, while domestic investment surged 171.9% to US$ 3.57
billion.
♦The paper and printing industries were the most popular sectors for
foreign investment, with approved proposals worth US4 13.81 billion
during the first 8 months. The chemical and pharmaceutical industry
came in second with approved proposals worth US$ 6.9 billion. The
figures do not include investments in oil and gas or the finance sector.
10 years Indonesian Economy after crises: Has
turning back ……. (1)
Laju Pertumbuhan Ekonomi Indonesia: 1998-2006
Indonesian
economic growth during 1998-2007
8
6.5
6
4.9 5.1
4.9
5.2
4.4
4.9
5.1
5.6
6.5
6.1
6.6
5.6
3.8
4
P e rs e n
6
5.7
2
0.9
1.2
0
-13.8
1998-14.1
1999
2000
2001
2002
2003
2004
2005
2006
2007 S1
-2
PDB PDB Non Migas
12
10 years Indonesian Economy after crises: Has
turning back ……. (2)
Pendapatan
Kapita
(1997=100)
IndonesianPer
Income
perIndonesia
capita (1997=100)
120
115
110
105
100
95
90
85
80
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
13
10 years Indonesian Economy after crises: Has
turning back ……. (3)
Poverty rate also declining (%), 1996-2007
26
23.43
Persen
22
18.2
18
17.55
17.7
17.4
16.7
16.6
16
14
1996
1999
2002
2003
2004
2005
2006
2007
14
10 years Indonesian Economy after crises: Has
turning back ……. (4)
Indonesia:
Tingkat
Inflasi,
2001-2007
Macro stability has been
restored:
Low
Inflation
Rate (%), 2001-2007,
except in 2005 due to hike in fuel price
18
17.1
16
14
persen p.a
12
12.5
10
10
8
6.6
6.4
6
5.1
5.8
4
2
0
2001
2002
2003
2004
2005
2006
2007
15
Reforms are also Implemented in the local
governments of Indonesia ….. (1)
♦One Stop Shops (OSS) to streamline business licensing
and regulatory business licensing and regulatory processes
♦In 2006 as part of Investment Policy Package, government
decree passed to authorize OSS establishment in all
districts
♦At present, more than 25% districts have established OSS
♦At present, more than 20 districts are experimenting with
Regulatory Impact Assessment (RIA) under the assistance
of the Asia Foundation which aiming to reduce number of
licenses.
16
Reforms are also Implemented in the local
governments of Indonesia ….. (2)
™Based on independent survey done
by the World Bank and LPEM FEUI,
time spent by the private sector to
meet local public officials reduced
from 12.8% to 4.9% due to
improvement in bureaucratic
efficiency.
™Illegal cost collected by local public
servant also decreasing from 10,8%
(2001) to 1,8% (2005).
™Based on the World Bank and LPEM
FEUI analysis, the improvements are
due to increase in competition among
regions in creating conducive for
investment.
Illegal Pungutan
cost as
%Resmi
of total
Tidak
(% thdpproduction
Biaya Produksi) cost
12
10.8
10
8
6
4
3.40
2
1.8
0
2001
2003
2005
17
Lessons Learned
¾ Indonesia’s growing economy provides opportunity for Indonesia to
push through more economic reforms.
¾ Indonesia is adopting triple track strategy in inviting FDI: (i)
Economic reforms (mainly behind the borders); (ii) Investment and
trade liberalization, and (iii) Promoting Investment Forum as a
jointly efforts between the government and private sectors.
¾ Reforms must be carried out continuously and consistently by the
Government in central as well as in regional level.
¾ Performance criteria could be established and monitored in order to
achieve effective implementation.
¾ Competition among regions is a trigger to do reforms in each
region.
♦Thank you
19