SMALL ENTERPRISE DEVELOPMENT POLICIES IN INDONESIA: AN OVERVIEW

By: The International Finance Corporation (IFC)-Indonesia Team Dyan Shinto Ekopuri Fararatri Widyadari Luqyan Tamani

Submitted for: The International Training Course on Creating an Enabling Environment for Small Enterprise Development: How to Formulate and Implement Policies to Improve and Reform the Business Environment for Small Enterprises ILO Training Centre Turin, 15-26 October 2007

SMALL ENTERPRISE DEVELOPMENT POLICIES IN INDONESIA: AN OVERVIEW

Introduction: Small Enterprises in Indonesia 1 Since the economic crisis struck Indonesia in 1998, small enterprises in Indonesia have received renewed attention from the government as they proved to be more resilient than the highly indebted conglomerates. In fact, if all forms of enterprises, formal and informal, are included in all sectors there were an estimated 48,9 million of small enterprises operating in Indonesia in 2006 or a total of 99,98% of the total enterprises in Indonesia 2 . Indonesias small enterprises are regionally dispersed, and are mostly located in the rural areas, and therefore have the potential to stimulate economic growth and enhance income distribution at the rural and regional level. Although the majority of these small enterprises operate in the agriculture (incl. forestry & animal husbandry) sector (53%), small enterprises are also the main players in the trading & hospitality (27%), production (6.5%), service (6%) and distribution (5.5%) sectors of the Indonesian economy. These SMEs employ approximately 85.4 million people (96.18% of the total national number of employment) and contribute to 53.3% of Indonesias GDP in 2006. The SMEs contribution of 3.1% to the national GDP growth of 5.5% in 2006 is also greater than the contribution from the large enterprises of 2.4 %.
Table 1. Statistics on the Number of Small Enterprises and Their Manpower Absorption in Indonesia Number of SMEs Sector Small Agriculture, animal husbandry, forestry and fishery Mining and excavation Processing industry Water, gas and electricity Construction Trade, restaurants and hotels Transport and communications Finance, rental and business services Services TOTAL Medium % of Growth from 2005 Number of Employees % of Growth Medium from 2005

Small

26,207,670 265,676 3,200,620 14,497 162,135 13,247,288 2,697,174 71,431 2,956,434 48,222,925

1,676 617 16,886 963 3,757 57,651 4,763 11,218 9,180 106,711

(0.20) 12.81 14.54 4.15 1.78 8.85 3.65 14.66 9.19 69.43%

37,965,878 559,811 7,517,088 78,205 627,595 21,401,446 3,355,709 531,427 8,896,225 80,933,384

805,531 29,972 1,827,073 38,970 89,897 784,589 150,065 246,978 510,034 4,483,109

(0.16) 4.50 5.18 3.05 0.07 4.03 2.51 2.05 9.22 30.45%

1 2

For the purpose of this paper, small enterprises shall refer to micro, small and medium enterprises (MSMEs) Statistics from the Ministry of SME and Cooperatives of the Republic of Indonesia

Small Enterprises in the Province of Aceh Registered small enterprises in the Province of Aceh as of June 2005
Sector Agriculture Trade, Hotel and Restaurant Manufacturing Industry Industry and Gas Mining and excavation Constructions Transportation & communication Financial sector Other Services Total # 580,137 189,276 90,301 276 2,733 9,112 23,710 794 30,202 926,541 % 62.61% 20.43% 9.75% 0.03% 0.29% 0.98% 2.56% 0.09% 3.26% 100%

Small manufacturers by districts (2005)

No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Adninistrative Areas Kota Banda Aceh Kab. Aceh Besar Kota Sabang Kab. Pidie Kab. Bireuen Kab. Bener Meriah Kab. Aceh Tengah Kota Lhokseumawe Kab. Aceh Utara Kota Langsa Kab. Aceh Timur Kab. Aceh Tamiang Kab. Aceh tenggara Kab. Gayo Lues Kab. Aceh Jaya Kab. Aceh Barat Kab. Nagan Raya Kab. Aceh Barat Daya Kab. Aceh Selatan Kab. Simeulu Kab. Aceh Singkil TOTAL # of SMEs 645 730 61 2,600 563 56 319 186 1,116 967 1,065 136 254 133 189 1,237 949 631 269 169 107 12,382 # of Employees 2,621 3,162 186 7,693 1,956 163 1,020 1,031 5,203 2,318 3,261 471 1,243 508 1,396 4,606 2,361 1,891 1,446 728 328 43,592 Current assets (Rp. 000) 9,365,000.00 7,757,761.00 552,225.00 6,513,933.00 6,070,000.00 573,050.00 7,220,191.00 3,971,465.00 8,557,077.00 5,554,201.50 10,026,326.00 2,192,000.00 8,570,150,000.00 3,031,900.00 1,801,000.00 18,236,070.92 3,679,250.00 11,558,285.00 5,158,350.00 1,750,300.00 2,480,500.00 8,686,198,885.42

Definition of SME in Indonesia The following is the existing definitions of small enterprises in Indonesia:
Criteria Ownership Ministry of SME and Cooperatives (Law 9 of 1995) Owned by Indonesian Citizens Independent and unaffiliated with medium or large enterprises Small enterprise Rp 200.000.000 Medium enterprise > Rp 200.000.000 Small enterprise Rp 1.000.000.000 Medium enterprise < Rp 10.000.000.000 Individual businesses in the form of registered (formal) or unregistered business entities, including cooperatives Bank of Indonesia The same as Law 9 of 1995

Net Assets (excl. land and building)

The same as Law 9 of 1995

Annual Sales

The same as Law 9 of 1995

Form of Entity

The same as Law 9 of 1995 Micro enterprise Rp 50.000.000.000 Small enterprise Rp 50.000.000.000 Rp 500.000.000.000 Medium enterprise Rp 50.000.000.000 Rp 5.000.000.000.000

Loan Received

Reform Agenda/Action Plan to Support Small Enterprises The Indonesian government has issued policy packages (Presidential Instruction No. 3 of 2006, succeeded and expanded by Presidential Instruction No. 6 of 2007) intended to improve the investment climate. The development of these policy packages were done by taking into considerations the survey on business climate in rural areas and in active consultation with the Indonesian Chamber of Commerce & Industry (KADIN) as well as other business players. Among the reform agendas and action plan contained in both policy packages were those aimed to empower the small enterprises. These deliberate policies on small enterprises were intended to enhance the productivity of small enterprises and improve the effective implementation of small enterprise empowerment programs and activities. The policy packages covered 4 key elements, namely:
No. 1. Area Access to Finance Policy Increasing institutional capacity and MSMEs access to financing source; Strengthening loan guarantee system; Optimizing the use of non-banking fund for the empowerment of MSMEs Increasing the mobility and quality of Human Resources; Promoting the growth of technology-based entrepreneurship. Promoting the development of promotional institution and MSMEs product creation; Promoting the development of traditional market and trade relation system among partnership-based market players; Developing sea transportation information system for MSMEs; Developing market synergy. Granting tax incentives for MSMEs; Preparing policy for the small enterprise sector.

2. 3.

Entrepreneurship promotion and Human Resources Development Access to Market

4.

Ease of Doing Business

Improving the business enabling environment in Indonesia through policies Among the achievements of the Indonesian government in implementing the reform agenda/action plan set forth under the policy package of 2006 was: Enactment of the Investment Law Key highlights of the New Investment Law: - General policy on strengthening investment service institutions and synchronizing regional and national regulations; - Equal Treatment between foreign and domestic investors - Allowance of fund repatriation - One stop service for investment licensing process - Tax incentives - Provision on small enterprises and cooperatives Issuance of the Guidelines for One Door Integrated Service in the form of the Minister of Home Affairs Regulation Number 24 Year 2006 The basic idea of this regulation is to request regional government to simplify process of issuing licensing and non-licensing associated with business through development of one door integrated service management system. The rationale of the Regulation of the Minister of Home Affairs is the desire to integrate all public service processes, both licensing and nonlicensing, into a one door integrated service management system. The objective is for the licensing and non licensing service bureaucracy to become simpler, transparent and certain without losing any supervisory function attached therein. High poverty and unemployment level constitutes major problems being currently faced by Indonesia. Meanwhile, relatively low economic growth cannot solve the problem aforesaid. The Regency of Sragen was one of the regions also facing the problems mentioned above and after further studies it has found that poor public service to be the cause of the problems faced in Sragen. Relatively long permit licensing time due to complicated process and concerning many technical institutions, high costs due to lengthy and non transparent process hence opening chance for illegal levy and Cost and time of completion are unclear are conditions that has significant impacts upon development of the business world, in this matter causing entrepreneurs (especially small and medium enterprises) to be reluctant in processing licenses and permits which in-turn causing the investment activities to not develop. The Regency of Sragen has conducted efforts that have elevated it to become one of the most advanced Regency in the development of social, economy, politics and cultural sectors. Those efforts among others are: a. The development and utilization of the four pillars of regional development namely: the Government, the Public, the Business World and the Academic Community greatly boost the regional potential in all aspects of development. b. Maximizing the utilization of government potential by way of delegating authority of the government to the sub district level in order to implement a responsible and effective, transparent, accountable service to create a more conducive business climate; c. Creating ease for the public and for the business world in obtaining prime public service by way of the establishment of Integrated Service Offices (One Stop Service) by delegating full authority from the Regent to the Head of the Integrated Service Office so that all licenses and non- licenses are completed in one place; d. The development and implementation of good quality and affordable information technology that speeds up the service process;

e. Support for the development of large, small and medium enterprises that generates employment also increases the public economic prosperity; and The development of the recovery fund which is the granting of business credit to micro, small and medium enterprises with low interest rate, with no collateral and daily installment system causes the economic lives of the general community.