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Dr. Tulus T.H.Tambunan
Director of the Center for Industry, SMEs and Business Competition (Trisakti University)
Prof Tulus T.H. Tambunan lectures at Trisakti University in Jakarta on Indonesian small and medium enterprises and cooperatives. He is also the director of the Center for Industry, SMEs and Business Competition studies in the same university.He has also been contributing to the Global Competitiveness Report from the World Economic Forum (WEF) representing Indonesia.
His main area of research is on micro, small and medium enterprises (MSMEs), including women entrepreneurship in Indonesia and other Asian countries. He has published some of his works on this area in a number of international journal and also as several books. They include Trade Liberalisation and SMEs in ASEAN (New York: Nova Science Publishers, Inc., 2010), SME in Asian Developing Countries (London: Palgrave Macmillan Publisher, 2009), Development of Small and Medium Enterprises in ASEAN Countries (New Delhi: Readworthy Publications, Ltd, New Delhi, 2009), Entrepreneurship Development in Developing Countries (New Delhi: Academic Excellence, New Delhi, 2007), and many more others.
Tuesday, 08 September 2015 16:28
The readiness of Indonesian SMEs for the AEC 2015
The day of the implementation of the ASEAN Economic Community (AEC) 2015 is only left four months from now. There is little doubt that regional trade and investment liberalisation in the context of AEC 2015 will generate immense competitive challenges for individual member states. Although, the real impacts of the AEC 2015 on the economy of member states, especially on their small and medium enterprises (SMEs) remain a much debated and controversial subject. At least, theoretically, at an aggregate level, the broad benefits that are generated from the AEC 2015 include: improved resource allocation not only between sectors or industries within the member states but also between them; access to new and better technologies, inputs and intermediate goods; economies of scale and scope; greater domestic competition; and the availability of favourable growth externalities, such as the transfer of know. These factors, in turn, influence the level and composition of exports and imports. The change of relative price induced by free trade between member states causes a more efficient reallocation of resources. And more importantly, it also enables the expansion of economic opportunities by enlarging the market size.
Now the question, how is the readiness of SMEs in individual member states? This is particularly an important question for Indonesian SMEs. One way to assess the readiness of local SMEs in Indonesia (as in other member states) is to face the AEC 2015 or their capability to compete not only in regional but also in domestic markets against imported goods, is by examining their export performance. At the regional level, the estimated percentage of exports by SMEs in total exports of individual member states, unfortunately it varies by authors or reports. Official data on SMEs exports in some member states are either not available or difficult to verify. All member states have databases on their SMEs, but mostly on total number of units, total employment created and total output generated; not on total volume or value of exports. So, it is not easy to examine how important these enterprises are for national exports. However, based on limited information sources, mainly research papers and official estimates/assessments, direct contribution made by SMEs to total export earnings in the region is between 20 and 30%. By member states, SMEs in Thailand seem to be the more export-oriented ones, with average share between 30 and 40%, followed by the Philippines and Viet Nam ranging from 20 to 29%, Malaysia 15 to 19% and Singapore around 16%.
Indonesia, as the largest economy with the largest number of SMEs in the region, just started to collect data on export of the enterprises recently, by the State Ministry for Cooperative and SME (Menegkop). From 2001 to 2013 (the latest year that data are available), the growth annual rates of SMEs' total export show an increasing trend. However, these enterprises are still much weaker than large enterprises (LEs) in doing export: in 2013, total exports of SMEs were not more than IDR 90t (approximately US$6.3b) compared to almost IDR 980t (approximately US$68.6b) from LEs, while total number of the first group of enterprises is around 56 million units compared to only 4968 LEs. Within the SMEs, there is variation between sub-categories, which suggests that small enterprises (SEs) may have the least chance to gain the expected benefit of broader market opportunities from the implementation of the AEC 2015, as their export contribution in 2013 are around IDR48t (approximately US$3.3b) compared to medium enterprises (MEs) with IDR 134t (approximately US$9.3b).
There are at least two important features of SMEs in Indonesia which are involved in export activities. First, not all of them sold all of their products abroad; most of them are still very dependent on domestic markets. In other words, if only SMEs with 100% export are counted for, the number of exporting SMEs in Indonesia can be much smaller than they are now. Second, most of exporting SMEs started to service also foreign markets were in fact not self-motivated, but encouraged by e.g. exporting companies or trading houses. These SMEs are better to be considered as indirect-export oriented SMEs. Traders or trading companies usually collect products from or give orders to, regularly or irregularly, SMEs. Many SMEs also do export indirectly via subcontracting systems with LEs in which SMEs manufactured semi products and then finalised by LEs. This system of production link between SMEs and export oriented LEs in Indonesia is common in rattan, furniture and garments.
There are at least two main reasons that many export-oriented SMEs in Indonesia could not conduct export activities directly. First, there are institutional and business constraints where SMEs cannot solve, namely (i) they do not have direct access to export market or no access to information on export market opportunities and requirements; (ii) they are not able to adjust to rapid changes in export market; (iii) high risk in payment and shipment; (iii) time lag in the payment, while the small exporters/producers need daily cash flow very badly; and (iv) high cost for direct export activity. Second, financial problem due to (i) capital owned by SMEs is limited, especially investment capital; and (ii) lack of support from financing and guarantee institution.
Another way to assess the readiness of Indonesian SMEs in facing the AEC 2015 is by examining the utilisation rate of existing free trade agreements (FTAs) by the enterprises. Theoretically, a firm utilising existing FTAs shows its seriousness or is highly motivated to do export, and it can be said that this firm is more ready to face the AEC 2015 than firms which do not use existing FTAs.
As of 2013, the ASEAN and its member states were involved in over 90 FTAs. While many of these FTAs are already in full effect (e.g. those with China, Japan, South Korea, Australia and New Zealand, and India), others are either still under negotiations or in the early stages of discussion with trading partners. In addition to an internal FTA among the member states (ASEAN Free Trade Area, or AFTA), which was upgraded to the ASEAN Trade in Goods Agreement (ATIGA) in 2010, ASEAN and its member states are also party to numerous bilateral and regional FTAs, as well as participating in other regional trade arrangements beyond that of ASEAN, such as, inter alia, the Regional Comprehensive Economic Partnership (RCEP) and the Trans-Pacific Partnership (TPP).
FTAs are usually designed, among other things, to facilitate and improve trade and investment flows between the participating countries. However, the extent to which an FTA could increase trade and investment flows would depend largely on the utilisation of this FTA by businesses in the participating countries. All exporters, large and small, are required to follow certain procedures to benefit preferential benefits of such a commercial pact. More specifically, SMEs must be able to meet the so-called Rules of Origin (RoO) requirement, or the terms set out in trade agreements that define how a product's country of origin should be defined, acquire the CoO from relevant agencies and/or business associations, and, subsequently, submit the CoO to the custom agencies in the importing countries. Economists usually assess the level of usefulness and attractiveness of an FTA by observing the so-called utilisation rate of an FTA, which could be measured through the use of Certificate of Origin (COO) data collected by customs authorities or business association databases.
Although official data on the utilisation of FTAs by businesses, particularly the SMEs, in the region, are scarce, available studies and commentaries made in some member states suggest that these enterprises have not generally taken the advantage from these trade pacts. As in other member states, export-oriented SMEs in Indonesia face a number of barriers and perceived disincentives to trading under FTAs. Despite the active stance of the Indonesian government to encourage local firms, including SMEs, to make use of the country's existing FTAs, most export-oriented SMEs felt intimidated by the complicated rules and procedures associated with the use of FTAs. In addition, misconceptions about FTAs, complicated trade procedures in the partner countries, unharmonised codes within the ASEAN region, and the difficulty to access the most up-to-date information concerning the regulations dealing with FTAs have become the major disincentives for SMEs in Indonesia to fully participate in these FTAs. The common complaint expressed by many SMEs or even also LEs in Indonesia, about FTAs is the complex bureaucracy and additional costs associated with acquiring the Certificate of Origin (CoO) and the associated Rules of Origin (RoO).
One study (Friawan, 2012) shows that although the total number of CoO issued under the AFTA, Indonesia-Japan Economic Partnership Agreement (EPA), ASEAN-China FTA, ASEAN-Korea FTA, and the ASEAN-India FTA had been on the rise from 26,085 certificates in 2007 to 205,775 certificates in 2010, only 16-17% of Indonesian-based firms were using FTAs pursued by the country and/or ASEAN. The percentage rate for Indonesia was somewhat lower compared to those of Malaysia (24% in 2012), Vietnam (31% in 2011), and Thailand (the above-mentioned 47.3% for 2012).
In overall, there are at least three reasons why the utilisation rates of FTAs are generally low in Indonesia (as also in other member states): (1) the lack of information on FTAs amongst ASEAN-based firms; (2) low margins of preference; and (3) delays and administrative costs associated with documenting and complying with the Rules of Origin (RoO). Other factors contributing to the low use of FTAs includes the existence of other trade-related initiatives, such as the export processing zones and Information Technology Agreements, which provide alternative incentives for exporters, and the non-tariff measures in partner countries that inhibit import, and, accordingly, inhibit the use of FTA preferences.
To conclude, based on limited indicators, i.e. export share of SMEs in total export and utilisation rate of FTAs by local SMEs, Indonesian SMEs in general is still not ready to face the AEC 2015. Even in the past few decades, Indonesian market has been increasingly invaded by imports for all kinds of goods, including goods that Indonesian SMEs traditionally used to have comparative advantages such as furniture, food and beverages, leather products and textile and garments. Many traditional market places in big cities like Jakarta, Surabaya and Bandung which used to sell only local-made products such as cloths and footwear, now already occupied more than 50% by imported similar products. Yet to be seen, may be one year after the implementation of the AEC 2015, whether Indonesian SMEs are benefited from it.
Tuesday, 02 June 2015 15:56
Does the ASEAN SME Policy Index Matter for AMS?
In all ASEAN member states (AMSs), as in developing countries in general, small and medium enterprises (SMEs) are considered very crucial, as they have been the greatest employment generator (especially for low educated workforce and women), and they have a great potential as suppliers of processed raw materials, components, spare parts, and other manufactured inputs through subcontracting arrangements to large enterprises/LEs, and as exporters of manufactured goods. For this reason, governments in AMSs have been providing a wide variety of programmes to assist the enterprises. Even, ASEAN as a regional organisation has a lot of regional activities or programmes to promote the enterprises in the region.
However, the level of effectiveness of SMEs development policies on local SMEs in individual AMSs is still unknown, and until recently no efforts had been made to measure it. Then, in 2012, an effort to measure the effectiveness of SME policies in ASEAN was done by the Economic Research Institute for ASEAN and East Asia (ERIA) which developed the ASEAN SME Policy Index (ERIA, 2012). The index is based on the SME Policy Index methodology devised by the Organisation for Economic Co-operation and Development (OECD) and was developed with the support of the OECD. The ASEAN Policy Index has five objectives as follows (ERIA, 2012, p.5): (1) structured evaluation, namely to evaluate progress in SME policy reform on a comparative basis and to assess AMSs' performance, corresponding to the various dimensions of reform; (2) targeted support for improvement, namely to prioritise regional and country level policy priorities and support need; (3) regional collaboration and peer review, namely to encourage more effective peer review through a common evaluation framework; (4) public and private sector involvement, namely to offer a simple and transparent communication tool for potential entrepreneurs or investors and to establish a measurement process that encourages public/private consultation; and (5) Planning and resource allocation, namely to facilitate medium-term planning, particularly for dimensions that require multi-year programmes and to provide a tool for resource mobilisation and allocation, following the identification of strong points and areas for improvement.
The ASEAN SME policy index is composed of 8 policy dimensions (ERIA, 2012, p.6), i.e. (1) institutional framework; (2) access to support services; (3) cheaper and faster start-up and better legislation and regulation for SMEs; (4) access to finance; (5) technology and technology transfer; (6) international market expansion; (7) promotion of entrepreneurial education; and (8) more effective representation of SMEs' interests. Each of policy dimensions is subdivided into a number of sub-dimensions. Each sub-dimension in turn is composed of a number of indicators, with each indicator having a number of levels of policy reform or a set of policy reforms. Each of policy dimensions are particular important for certain stages of SMEs' life-cycle: policy dimensions 1 and 2 are very important for pre-startup (stage 0); policy dimension 3 is crucial for start-up (stage 1); policy dimensions 4 to 5 are necessary for growth (stage 2); policy dimensions 6 and 7 for maturity (stage 3); and policy dimension 8 is particular important for revival (stage 4).
The ASEAN SME Policy Index has useful functions for the AMSs, which include: (i) an analytical and dynamic tool to review SME policy developments on a number of policy dimension and across AMS; (ii) a process by which a group of AMS sharing common policy goals agree on to develop a joint framework for monitoring and comparing SME policy developments; and (iii) a framework to exchange experiences and good practices, and foster policy dialogue (ERIA, 2012, p4).
The results from the Index published by ERIA in 2012 suggest uneven levels of performance in the implementation of SME development policy at the national level between the two different groups of the AMSs, namely, (a) the less developed members, i.e. Cambodia, Lao PDR, Myanmar, and Viet Nam, and (b) the more advanced members or the ASEAN-6 which include Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore, and Thailand. An exception should be mentioned in the case of Brunei Darussalam, which has a relatively lower score in comparison with Viet Nam. The index scores of these ASEAN-5 are above the ASEAN average index score of 3.7, namely Singapore 5.4, Malaysia 4.7, Indonesia 4.1, Thailand 4.1, and the Philippines 3.8.
Within the eight policy dimensions, Indonesia is not in the top order of the index score. With respect to policy dimension 1, the index score of Indonesia is 4.4, behind Malaysia (4.6) and Singapore (5.4). In fact, Indonesia until today is still struggle with intra-governmental cooperation in SME policy formulation and implementation, despite the fact that the coordinating work in SME policy formulation and implementation is under the State Ministry for Cooperative and SME (MoCSME).
For policy dimension 2, the score of Indonesia is 4.0, much lower than Malaysia 4.4 and Singapore 5.4. The fact shows that despite the fact that the policy framework for supporting services has been developed and implemented with moderate success in Indonesia, exemplified by a range of programmes, including business incubators, business development services (BDS) and centres for integrated commercial services, still majority of SMEs in the country do not have access to these programmes.
With respect to policy dimension 3, cheaper and faster start-up includes procedures and costs for business registration and complete process for SMEs' entry into operation, online access, one stop-shop for registration, and start-ups. Meanwhile better legislation and regulation has two components in the analysis; namely review and amendment of legislation and regulations and use of regulatory Impact Analysis (RIA). The assessment results of this policy dimension show that despite improvements since the end of the Asia financial crisis 1997/98, the business registration and start-up process in Indonesia still remains cumbersome and costly.
For policy dimension 4, the assessment results show that there is a big gap in the access to finance of the less advanced AMSs (i.e. Brunei, Cambodia, Lao PDR, and Myanmar) as compared with Singapore, Malaysia, Thailand, Indonesia, and the Philippines. Within these more advanced AMSs, Indonesia and Thailand have the lowest (4.3) after the Philippines (3.6). While Singapore has the highest score (5.6), followed by Malaysia (4.6).
With respect to policy dimension 5, the assessment results suggest that the biggest gap is in the policy to promote technology and technology transfer between the poorer AMSs such as Cambodia (1.9), Myanmar (2.4) and Lao PDR (2.0) and advanced AMSs especially Singapore which has the highest score (5.6). According to the report (ERIA, 2012), the gap is due to the lack of a strategic approach to innovation policy for SMEs, poor provision of information on innovation support services, limited access to standard certification services, lack of technology support in universities, R&D labs, incubators, and little linkages with SMEs. The score of Indonesia is 3.8, lower than Thailand (4.3) and Malaysia (4.9).
For policy dimension 6, Indonesia has the lowest score among the advanced AMSs, namely 4.2, compared to Singapore with the highest score 6.0, followed by Malaysia 5.0, Thailand 4.7 and Philippines 4.4. The results suggest that the gap in the capability to provide facilitation support for international market expansion is relatively wide between the two groups of AMSs. It is because export promotion programmes and provision of advice and high quality information are better structured in advanced AMS, especially in Singapore.
For policy dimension 7, among the 4 advanced AMSs, Indonesia is also has the lowest score, 3.9, after Philippines (3.7). The highest is again Singapore with 5.0, followed by Malaysia 4.2.
According to the report, the gap between the two groups of AMSs exist mainly because less advanced AMS have not clearly articulated entrepreneurial promotion policy nor integrated it into the national development plan with adequate budget, monitoring and evaluation system.
Finally with respect to policy dimension 8, the score of Indonesia reveals lower than the score of ASEAN as a whole, namely 3.4 versus 3.8. Singapore and Malaysia have the same highest score, i.e. 5. This finding suggests that Indonesia is still lacking behind Singapore or Malaysia in promoting an effective representation of SMEs' interest. In Indonesia, the role of industrial, business or SME associations in setting up a structured consultation mechanism with government agencies in the process of policy formulation and advocacy to represent SMEs' voice and interests domestically and internationally is still less active compared to these two most advanced AMSs.
So, with the above results and given its objectives and functions as, the ASEAN SME Policy Index does matter for governments in the AMS. But, to be useful, as a pre-condition, each individual government should consistently collect data for each of the eight policy dimension. For Indonesia, the MoCSME as the national coordinator of SME policy formulation and implementation should responsible of data collection activities. Whereas, many other ministries representing other sectors related to the eight policy dimensions, particularly the Ministry of Trade, the Ministry of Industry, the Ministry of Agriculture, the Ministry of Education, the Ministry of Science and Technology, and Bank of Indonesia, should be responsible for data collection in their own sectors.
Wednesday, 25 March 2015 09:29
Existing initiatives of ASEAN to promote SMEs development and taking advantage of the AEC 2015
In the past decade, ASEAN has been initiating many programmes including the implementation of the ASEAN Blueprint for SME Development. The aim is to accelerate the pace of development ASEAN small and medium enterprises (SMEs), enhance their competitiveness and dynamism, and resilience in adverse global and regional economic environments.
Specifically to increase SMEs participation in ASEAN intra-and extra-trade, including their participation in existing ASEAN-led free trade agreements (FTAs), and to make them ready to compete in the course of the ASEAN Economic Community 2015, which only few months yet to go, ASEAN SME Working Group (SMEWG), which is composed of the SME Ministries/agencies of all ASEAN member states (AMS), has formulated concrete action plans, including ASEAN Strategy Action (ASEAN-SA) Plan for SME Development for the period 2010-2015.
It outlines the framework for SME development in the region and it covers mandates stipulated in the AEC Blueprint, and the current and future work of the ASEAN SMEWG. In its mission and objective, it is stated that by 2015, ASEAN SMEs shall be world-class enterprises, capable of integration into the regional and global supply chains, able to take advantage of the benefits of AEC building, and operating in a policy environment that is conducive to SME development, exports and innovation.
The ASEAN-SA Plan has the following goals: (1) enhancing Internationalisation of SMEs and their marketing capabilities; (2) improving SME access to finance; (3) strengthening SME human resource development and capacity building; (4) incubator and local SME development; (5) establishing an SME Service Centre/ASEAN SME Service Desk; and (6) setting up an ASEAN SME Regional Development Fund.
To reach the above mentioned goals, as stated in the ASEAN-SA Plan, future policies and programmes of the ASEAN SMEWG should be to consider the specific needs and objectives of ASEAN SMEs, which include (a) SME entrepreneurship and human resource development; (b) SME capacity building in management, marketing, networking and supply chain formation, technology and financing; (c) level policy playing field for SMEs, including information dissemination on, and inter-agency coordination to enable SMEs take advantage of AEC 2015 and other existing ASEAN-led FTAs; and (d) public-private sector partnership for SME development and networking.
However, based on limited data from AMS, the real impact of such mentioned ASEAN initiatives on local SMEs seems to be very limited. Findings from a study conducted by the Centre for Industry, SME and Business Competition Studies, University of Trisakti in Jakarta (Indonesia) in 2014 suggest that majority of owners of SMEs in Indonesia are not familiar with the AEC 2015. Also other earlier study by the Centre in cooperation with the International Institute for Sustainable Development (IISD) in Canada on identification of challenges and opportunities confronted by ASEAN SMEs to utilise ASEAN-led FTA in 2013-2014 found that the use of ASEAN-led FTAs not only in Indonesia but also in other AMS remain relatively small amongst SMEs. The most likely reasons are the followings.
Firstly, all those ASEAN initiatives may have not reached all SMEs. In other words, their coverage has been relatively low. Only those located close to the centre of government (i.e. capital city and other big cities/developed urban areas) may have more opportunities to get access to all those government programmes/initiatives. That is why, the role of private sector/stakeholders such as local chamber of commerce, related business associations, universities, and other related non-government organisations (NGOs) are very crucial to disseminate those initiatives to all SMEs.
Secondly, many local SMEs may have heard or reached by those initiatives, but they lack of knowledge to apply for FTAs. Thirdly, majority of SMEs in AMS are domestic market oriented, and even those who also do export they are not fully dependent on export market (i.e. they only export a small percentage of their total production), so they may feel no need to apply for FTAs.
Ironically, many initiatives have been made by ASEAN and many concrete actions have been conducted by the ASEAN SMEWG, but they never evaluate the real impact of all these initiatives and actions. Questions like "how many local SMEs have heard or participated in their initiatives and actions" and "how many local SMEs have been transformed themselves into more competitive and viable enterprises because of the initiatives or actions" seem to be not so important for ASEAN or ASEAN SMEWG high officials.
At least in Indonesia, the majority of SMEs (especially small enterprises) are still hampered by many, including institutional, constraints to growth and to become global or regional competitive enterprises. The constraints may differ from region to region within the country, between rural and urban areas, between sectors and subsectors, or between individual enterprises within a sector or subsector or a region.
However, there are a few number of constraints common to all SMEs in the country, which include the lack of fund to finance their working as well as investment capitals, human resource with high skills, advanced technologies and up-date and comprehensive information; difficulties in procuring raw materials and other required inputs, marketing and distribution; high transportation costs; problems caused by cumbersome and costly bureaucratic procedures, especially in getting the required licenses; and policies and regulations that generate market distortions.
Therefore, in order to make local SMEs ready to compete in the implementation of the AEC 2015, from the government-side, at least two highly priority actions are needed, namely one short-term action and medium-to long-term action. The short-term action (from now on until Dec 2015) is fully socialisation of the AEC 2015, including the provision of information on all standard and other requirements, certifications (e.g. certificate of origin/CoO), programmes, events and initiatives related to the implementation of the AEC.
Local private sector has very important role to play namely as the local key channel of information to all local SMEs. The local private sector includes chamber of commerce, business associations, universities, and other NGOs. The medium-to long-term actions should include technical assistance to upgrade existing technology and hence to improve quality of local SMEs' products, trainings on various aspects which are important to improve competitiveness, financial supports, and simplification of bureaucratic procedures including the adoption of electronic custom (e-custom) to speed up and simplify procedures for such as CoO.
Friday, 06 March 2015 11:35
Jokowi's energy subsidy reduction policy and MSMEs' adjustment measures
For Indonesia, reforming fuel subsidies has been a persistent policy challenge. The size of fuel subsidies in the country has fluctuated considerably over time, reflecting changes in international fuel prices, the exchange rate, and the subsidy regime. The fiscal costs have been generally large, reaching 2.8% of gross domestic product (GDP) in 2008 when the international oil prices peaked and tends to increase every year. In 2011, fuel subsidies were around 2.2% of GDP and this ratio also tends to escalate.
Since the Asian financial crisis in 1997-98, the Indonesia government has attempted to tackle subsidy reform a number of times to improve the fiscal position and achieve other policy objectives such as improving energy efficiency, protecting the environment, and to alleviate poverty. In the aftermath of the 1997/98 crisis, the government agreed to cut energy subsidies that led the prices of kerosene to increase by 25%, diesel fuel by 60%, and gasoline (Premium) by 71%. In 2000, the prices of Premium, diesel, and kerosene went up again despite the violent demonstrations, and again in 2001, and this time was not only for households but also for industries.
Concerned over the increasing fiscal pressure from fuel subsidies, the government, once again reduced the subsidy on fuel which steered the price of diesel fuel to be doubled and kerosene nearly tripled in 2005. In 2008, with international fuel prices at its apex, petroleum product subsidies in Indonesia reached 2.8% of its GDP. In the same year, fuel prices were raised by 29%, on average, and were later reduced as international prices started to fall, though remaining above their pre-increase levels. The government also ceased paying subsidies to larger electricity industrial consumers. In Jun 2013, the government yet again marked up the price of gasoline and diesel with respectively from Rp 4,500 to Rp 6,500 [approximately US$0.34 to US$0.50] per liter (or a 44 increase; and diesel from Rp 4,500 to Rp 5,500 [approximately US$0.34 to US$0.42] per liter (or a 22% increase).
In the first week of Jan 2014, state petroleum company, PT Pertamina, raised the price of 12kg-cylinder Liquid Petroleum Gas (LPG) from Rp 5,850 to Rp 6,850 [approximately US$0.45 to US$0.52] per kg. In Sept 10, 2014, just about one month before Joko Widodo (known as Jokowi) became the new president, the government again announced the increase in price of LPG 12 kg by Rp 1,500 [US40.12] per kg and with that the selling price became Rp 7,569 [US$0.58] from Rp 6,069 [US$0.47] per kg. In Nov 2014, Jokowi decided to increase the price of Premium as his direct response to strict state budget 2015 made in 2014 by the previous government in which he can only make only a small adjustment if necessary.
More recently, in Jan 2015 the government announced the increase of electricity fare for 12 categories including households and industry. This decision was soon followed by another decision to increase the price of LPG 12 kg by Rp 1,500 [US40.12] per kg.
The continued increase of price in energy, not only gasoline, diesel and LPG, but also electricity in the past 10 years and the tendency of the Indonesian government to continue to reduce energy subsidy until zero subsidy has worried not only end consumers but also producers and business owners, including in micro, small and medium enterprises (MSMEs). Although, generally, these enterprises are less energy-intensive than large enterprises (LEs), but they are also more vulnerable. This means that while the direct financial impacts of energy price increases may not be as serious as those experienced by LEs, the capacity of MSMEs to cope with any negative impacts is likely to be much lower, and even small negative effects can be much more severe.
Theoretically, an increase in energy prices will have multiple effects on firms. An increase in energy prices could lead to two major effects, i.e. direct and indirect effects. Direct effects occur when an increase in energy prices directly affects firm's energy cost. The degree of an increase in energy cost will affect the firm's total operational cost which maybe vary by group of industry, according to the amount of energy and the type of energy used. For example, MSMEs that produces bread in Indonesia are very dependent on gas to use for the oven in which the energy costs represent seven to eight per cent of the total cost of bread production.
Every day the user consume three 12 kg cylinders of LPG. When the government decided to raise the price of 12 kg cylinders of LPG in early Mar 2013 from Rp 70,200 [US$5.41] to Rp 95,600 [US$7.36] —a total increase of Rp 25,400 [US$1.96] (35%), this has increased the cost of bread production by two per cent. The overall energy costs rose by 10%. Probably more importantly, the increase in energy cost also depends on adjustment measures taken by producers in response to the increase which will determine the efficiency in using energy (i.e. the size of their energy expenses compared to total production cost).
Indirect impacts occur through the knock-on effects that energy price rises have on other aspects of MSME businesses. For example, an increase in energy price could lead to an increase in public transportation fare which further increases pressures on MSMEs. Other example would be, when the government decided to increase fuel price in Jul 2013, transportation fares also went up. According to Organisation of Land Transportation, transportation fare could increase up to 35 but the government allowed it to increase only up to maximum 20%.
To examine the impact of the energy price increases on MSMEs, their adjustment/coping measures, and kinds of government supports they need, the Center for Industry, SME and Business Competition Studies in Jakarta in collaboration with the International Institute for Sustainable Development (IISD) in Canada have conducted a series of survey on more than 50 MSMEs in various groups of manufacturing industry (e.g. textile and garments, food and beverages), food stalls, and trade in three cities, i.e. Solo, Semarang and Jakarta from Nov 2014-Jan 2015. The respondents were given three key questions with respect to their past experiences with energy price increases: how was the impact on their businesses, how they coped with that or what were their adjustment/mitigating measures, and what kinds of government supports they wish to receive in the case of energy price increases?
The findings suggest the followings. First, firms are sensitive to the increase in the energy prices, although the extent of the impact may vary by firm, depending on many factors including type of goods they produce, current level of efficiency in using energy and type of machines they use or methods of production they adopt which in turn determine the extent of energy they consume, and, probably more importantly, their coping measures or their responsiveness to energy price increases.
Secondly, depending on what type of energy which its price increases (gasoline or LPG or electricity), some firms are not affected directly, but they may be impacted indirectly.
Thirdly, decision to make an adjustment measure varies by individual firm and the percentage of price increases of energy depending on a combination between 'internal' factors such as current financial condition of a firm, its energy consumed or the percentage of energy costs in its total production cost, and 'external' factors such as current level of market competition among producers (i.e. market structure), and availability of government compensation supports. However, raising the output price tends to be the popular measure, at least as a short-term coping measure by firms in facing price increases, not only with energy but also when it comes to raw materials. This strategy is easier than usingenergy more efficiently, as in order to be more efficient, many other things have to be reorganised such as current production processes which requires time
Fourth, not all firms have capability to take adjustment measure because lack of necessary resources especially capital and human resource. Finally, marketing support tends to be the most desired kind of government support in the case of energy price increases.
Therefore, the findings give at least two policy implications. First, many firms will be affected by an increase in energy price more indirectly than directly. The government should be in capacity to manage the transmission of the energy price increases to prices of other commodities or services. In other words, the transmission process should not be out of control. As often happened in Indonesia, if energy price increases by, say, two per cent, soon after that in the next one or two days, the prices of basic goods and transportation also goes up by an average more than two per cent.
For many business owners, the increase of energy prices is considered as something that they as entrepreneurs or citizen have to face. They are more concerned with its impacts on other prices. Next, to support firms in mitigating the impact of energy price increases, the government should focus more on polices which creates or maintains a conducive business environment that secures daily business activities (or market) of firms rather than providing special compensation supports for firms affected by the energy price increases.
Wednesday, 10 December 2014 16:33
Competition Law and MSMEs in Indonesia
In Indonesia, as in other developing countries, micro, small and medium enterprises (MSMEs) are considered very crucial, as they have great potentials to contributions to employment creation (especially for low educated workforce and women), development of domestic manufacturing industry (especially as suppliers of processed raw materials, components, spare parts, and other manufactured inputs through subcontracting arrangements to large enterprises/LEs), the improvement of income distribution, poverty reduction, development of rural/regional economy (linked strongly to the implementation of regional autonomy and fiscal decentralisation), export growth of non-primary commodities (especially manufactured products), and development of local entrepreneurship (including women entrepreneurs). In addition, since the past few years, the Indonesian government has been giving increasing attention to the development of so-called creative industry, and certainly MSMEs have also an important role to play here as businesses in this industry are mainly from the MSME category.
After the Asian financial crisis in 1997/98, MSMEs in Indonesia have received renewed and more serious attention, as majority of these enterprises turned out to be more resilient to the crisis than LEs, especially the highly indebted conglomerates. However, as in the era of New Order (before the crisis), in the post crisis era still many of these enterprises experienced constraints to grow or even to sustain their activities. The constraints included difficulties in marketing their products caused by a number of factors, including unfair domestic market competition environment (many domestic markets for various products were monopolised by LEs). In order to eliminate market monopoly and other unfair practices, soon after the crisis, the Indonesian government issued in a law known as Indonesia Competition Law No 5, 1999. The enactment of the Law was supported by the establishment of the Supervisory Commission for Business Competition, known as KPPU (the abbreviation for the Indonesian name), by Presidential Decree No 75 Year 1999, as the Indonesian Anti-monopoly Authority
The general purpose of the Law is similar to competition laws in other ASEAN member states. It prohibits/prevents monopolistic practices and restricts mergers or acquisitions that increase market concentration as well as prohibiting exploitation by firms with market control. More specifically, article 3 of the Law sets out its purposes as follows: (i) to guard the public interest and increase national economic efficiency as one method to increase the people's welfare; (ii) to realise a conducive business environment by regulating fair competition so that equal opportunity to do business between small scale, medium scale and large scale businesses can be guaranteed; (iii) to prevent monopolistic practices and unfair competition caused by business actors, and (iv) to achieve effectiveness and efficiency in doing business. The Law has two key features in policy.
First, although the Law is applicable to all economic sectors and companies from all sizes in Indonesia, it supports the priority in economic development through exemptions and exclusions. The exemptions are very broad and not limited to only MSMEs. Certain types of exemptions need to be granted for social, economic and political reasons. The granting of exemption does not necessarily imply the weakening of competition law enforcement. It may well be that such exemptions are necessary for furthering the objectives of competition law. Second, it protects micro and small enterprises (MSEs) through exemption.
According to Article 50 of Chapter IX (miscellaneous provisions), not included in the provision of this Law are including the followings business actors of MSEs (point h), or activities of co-operatives aimed specifically at serving their members (producers co-operatives are established mainly by those from MSE category). Thus, any agreements by MSEs are exempted by the Law to protect their development.
The expected role of this Law with respect to MSMEs is to (i) pursue that MSMEs has equitable opportunity to participate in economy, access development; (ii) ensure healthy business environment in the country; and (iii) protect MSMEs from unfair business practices. But now the key question is: how effective has been the implementation of the Law since its introduction in 1999, or more specifically, how has been its impact on MSMEs?
Theoretically, a competition law will impact local MSMEs through the following channels, i.e. cost differentials, the degree of market competition, market segmentation, as well as the degree of market distortion, and access to or availability of information plays the key role in influencing the impact. One key assumption adopted by the microeconomic theory is that to allocate resources efficiently all market participants including MSMEs must have the same relevant information, and although in the real world this assumption seldom holds, in developing countries including Indonesia lack of access to information is more serious for MSMEs, especially MSEs, than for LEs, which creates biases against MSMEs.
For example, the ability of local MSMEs to enter and compete effectively in markets in other regions or export markets is often discouraged by the high fixed cost of acquiring information on potential buyers, distribution channels, quality standards, and new technologies. In other word, the fixed cost of acquiring information can create a cost disadvantage for MSMEs. In Indonesia, as in other developing countries, MSMEs, especially MSEs, also face imperfect competition in credit market caused by lack of information that cause banks to focus more on LEs, which are considered as more profitable clients. This has a particularly negative impact on access to credit by MSMEs.
To answer the above question empirically is, however, not easy due to lack of evidence. Until now, no comprehensive studies have been taken to assess the importance of the Indonesia's Competition Law for MSMEs. But, until today, there were at least two cases which well-known publicly that have significant impacts on competition with MSMEs, namely the case of the expansion of a modern minimarket or the largest retailer in the country, i.e. P.T. Indomaret and the case of abuse of dominant position by Carrefour Indonesia (Carrefour) to its small suppliers. These two cases probably are the most important reflection or sign of current market competition environment between the modern market (e.g. Indomaret, Carrefour, Alfamart, Hero Supermarket, Ramayana, Seven Eleven, Mitra Adi Perkasa, Matahari, Lotte, and many others) versus the traditional market (known as pasar rakyat)in Indonesia.
Indeed, the uncontrolled rapid increase of modern retailers (minimarkets) and wholesalers in regions outside Jakarta in the past 10 years has made incomes of many local traditional retailers (mainly from the MSE category) to drop significantly. While the modern wholesalers are mainly located alongside main roads connecting provinces or districts, the modern retailers have expanded into villages not only in Java but also Sumatera, Kalimantan and other provinces in the eastern part of the country. Now in villages, more people visit such as Indomaret and Alfa (especially those two are very popular shops that can be found everywhere) than traditional markets. For instance, in Makassar (the capital city of the South Sulawesi province) alone, now there are around 150 franchising-based minimarkets located close to each other, and in Jakarta, the capital city of Indonesia, in 2011 there are 1,868 minimarkets compared to only 153 traditional markets; 191 supermarket, and 28 hypermarket.
The traditional market in Indonesia (currently there are 10,000 units) seems to lose the battle against the modern one. The modern minimarket in Indonesia has grown by around 400 percent in the past 10 years and as per January 2014 there are 16,000 units, compared to 750,000 units of traditional retail (or grew only around 42 percent in the past 10 years. According to survey conducted by AC Nielsen, in 2013 the modern market in Indonesia grew at around 31.4 percent compared to that of the traditional market at minus 8.1 percent. Figure 2 shows the diminishing number of traditional markets in the country.
Based on evidence of those two cases, it is not easy to say definitively about the real impact of the Indonesian Competition Law on MSMEs. There are many other factors that affect the capability of MSMEs to survive or to grow. So, to answer the above question, whether the Indonesia's Competition Law has an significant effect on the existence or growth of MSMEs in the country, conducting field surveys, i.e. interviewing directly owners or managers of MSMEs is the best (if not the only) approach. In doing this, MSMEs should be distinguished in three categories: (i) as suppliers of LEs; (ii) as distributors of LEs; and (iii) as independent units that compete with LEs in the same market. With respect to the first group, the potential unfair business practices that many MSMEs may face are the followings: abuse of dominant position, negative margin, listing fee, discrimination, trading term, and payment system. With respect to the second group, they are the followings: market allocation, price discrimination, tying and bundling, and vertical integration. With respect to the third one, the most likely are the followings: predatory pricing, artificial entry business, blocked production and or marketing, effect of vertical integration, and effect of small member cartel.
Tuesday, 04 November 2014 15:26
AEC 2015 and the future of ASEAN small and medium enterprises
With respect to ASEAN Economic Community 2015, there are three questions in relation to small and medium enterprises (SMEs) in the region. First, is the ASEAN initiated AEC 2015 good for businesses especially small and medium enterprises (SMEs) in the region? Second, are SMEs in the region ready for the AEC 2015? Third, what will be the role of SMEs in the region in the post 2015 landscape?
With respect to the first question, as stated in the Roadmap for ASEAN Community 2009-2015, "The AEC will establish ASEAN as a single market and production base by making ASEAN more dynamic and competitive with new mechanisms and measures to strengthen the implementation of its existing economic initiative; accelerating regional integration in the priority sectors; facilitating movement of business persons, skilled labour and talents; and strengthening the institutional mechanisms of ASEAN."(page 133)
In short, the AEC will transform ASEAN into a region with free movement of goods, services, investment, skilled labour, and freer flow of capital. For all owners or managers of SMEs in all member states, it is important to be aware that free movement of goods presents both market and production with opportunities and threats for them.
Some SMEs might face opportunities as well as threats directly, while others indirectly. Direct opportunity, for instance, a local SME has opportunity to sell its goods to other member states; if looked at the same situation for direct threats, they will face direct competition for its goods in local market from similar goods produced by SMEs from other member states.
Whereas for indirect opportunity, a local SME making certain components or half-finished products for a local assembling company gets more order because the company is expanding its market to other state members. While the indirect threats would be, the local SME receive less order from the assembler as the latter company reduce its production due to heavy competition from other member states in local market.
All local SMEs must also be alert that free flow of services, investment, skilled labour and capital represents fundamental shifts in the way that they will operate in the future. One obvious implication for all SMEs in member states is that they have more opportunities to improve their efficiency or productivity as well as to expand their production scale with lower costs as more workers and services with better quality and capital are available for them.
Whether the implementation of AEC 2015 will provide more opportunities or more threats to local SMEs, it depends on two main things, namely the readiness of the enterprises and the seriousness of governments in individual member states in supporting them. One thing for sure, SMEs in individual member states need to strengthen their resources and capabilities if they want to survive or, even more than that, to become the key players in the regional trade and production.
Capacity building should be the key priority in individual SMEs. Depending on current conditions of each SMEs which can vary by enterprise, the emphasis of capacity building can range from such as human resource development (not only improving skills of employees but also development of entrepreneurship), improvement in technology/technical capability, building or strengthening business networks, improvement in management, reorganisation, adopting better production methods, adopting better long-term business strategy, and expanding production capacity.
On their turn, governments in individual member states should fully support the capacity building in SMEs. The government supports should not necessary be direct, e.g. providing special subsidised financing, technical/vocational trainings, or technical assistances, but, can also be indirect, such as appropriate fiscal, monetary, industry, investment and trade policies which are in favour of SMEs.
Even, in many cases, these policies that create conducive environment for doing business are more important than direct supports for local SMEs. The World Bank in its annual report on Doing Business states again and again that policies or regulations that make doing business more easy and gives much help to local SMEs to grow.
May be it can be said that direct supports in combination with creating easy doing business environment is more important than government protection measures for local SMEs. The Indonesian long experience with protection measures for big national companies through the so-called import substitution policy during the Suharto (New Order) era (1966-1998) and government protection for local SMEs through e,g, 'negative list' of sectors (i.e. sectors closed for large/foreign companies or allowed for large/foreign direct investment but they should doing partnership with local SMEs) show that such way in promoting national industry and local SMEs did not create strong and competitive national industry and SMEs.
With respect to the third question, based on data from individual member states, currently SMEs account between the smallest 88.8% (Myanmar) and the highest 99.98% (Lao PDR) of all enterprises. The enterprises are the key generator of employment in all member states. The share as percentage of total employment ranges from the lowest about 51.7% in Viet Nam, 61.0% in Philippines, 81.4% in Lao PDR, and the largest 97.2% in Indonesia.
As a general feature of SMEs in developing countries, they are dominant only in number of enterprises and employment but not so much in gross domestic product (GDP) and export. In ASEAN, the highest share of SMEs in the formation of GDP is found in Indonesia at around 58%. In other member states, it ranges from the lowest 23.0% in Brunei Darussalam, 32.5% cent in Malaysia, 36.0% in Philippines, 37.0% in Thailand, 40.0% in Vietnam, and in Singapore 45.0%.
In export, SMEs in the region seems much weaker. For instance, in Indonesia the share of local SMEs in the country's total export (without oil and gas) is about 16.4%; in Malaysia around 19.4%, Philippines 10.0%, Thailand 29.9% and 20.0% in Vietnam.
As current or long-term development of export share of an industry is often used as an indicator on the industry's ability to do export or its competitiveness or its capability to compete in domestic as well as global market, the fact showing low share of ASEAN SMEs in export may suggest the enterprises should deal first with their problems or shortages before they can become the key players in the post 2015 landscape.
Based on information from various sources, in general, SME's difficulties in the region range from lack of market access ability; difficult to access for finance; lack to modern technologies; lack of management skills; low skilled workers; lack of access to information on markets, technology and sources of raw materials; no link to export markets; limited entrepreneurship skill to identify market opportunity; low innovation capability; limited communication channels, and no or low linkage between SMEs and LE (large enterprises). Among these constraints, difficulties with access to financial facilities and export markets are the key bottlenecks to SME development in the region.
Thus, to be able to make use of greater market opportunities that will be generated by the implementation of AEC next year and hence to be the key players in the region, ASEAN SMEs face the following challenges: easy access to financing, easy access to markets (domestic as well as in other member states), easy access to advanced technology and to be able to do innovation, to have well-developed infrastructure, security in doing business/investment, human capital development, and to be supported by good legal and regulatory framework.
It is indeed very important that SMEs in all member states give their serious efforts to deal with those shortages and challenges with full supports from the government for one simple reason: with the implementation of AEC 2015, the business landscape will become more complex and SMEs have to operate in a highly competitive and rapidly-changing environment. Consequently, they have to perform consistently in an efficient and productive manner as they face a variety of issues to develop, grow and achieve sustainability in the market.
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Tuesday, 22 July 2014 10:27
Government regulations and programmes to Support MSMEs in Indonesia need to be harmonised
In April 2014 the Acting Governor of DKI Jakarta, Basuki Tjahaja Purnama, announced that the operation of all sub-district and urban village head offices in the city as One-Door Integrated Services (PTSP) would be effective beginning June this year.
Before, in December 2013, the government DKI Jakarta has passed the government regulation No.12/2013 on the implementation of PTSP for licensing as the follow-up to the National initiative for PTSP which commenced in 2006. One of the objectives of PTSP is to make it easy for business, including micro, small and medium enterprises (MSMEs), to start their operations.
The Indonesian government has strong reason to implement PTSP because although improvements have been made in certain areas, the business environment in Indonesia is still not so friendly compared to other countries. The costs and difficulties in getting licenses are still among current complaints of business owners of MSMEs in Indonesia.
So then, it is not surprising that the majority of MSMEs in the country are microenterprises and all of them are not registered or are operating in the informal sector.
The government has for a long time been concerned with the development of MSMEs, as they are the greatest employment generator and the main players in almost all sectors of the Indonesian economy. In 2013, the share of MSMEs in total enterprises was around 99%. The government has been trying to support MSMEs with regulations and programmes.
Overall however, those regulations and programmes have not been very successful. This is shown by the fact that, on one hand, the number of MSMEs keep rising, at least based on national data, while, on the other hand, the competitiveness level of the majority of these enterprises is low, and most of them are microenterprises servicing only local markets.
There is no evidence that the transformation process in size among microenterprises has taken place (i.e. microenterprises have grown in size, modernised and expanded their market outreach).
The unsuccessful government's MSME development programmes can be attributed to a number of factors and among them is the lack of coordination among ministries and government agencies in charge of all MSME development programmes.
With respect to MSMEs export promotion policy, at least three ministries (i.e. the Ministry for Cooperative and Small and Medium Enterprises (MCSME), the Ministry of Trade (MoT), and the Ministry of Industry (MoI) have their own export promotion programmes with sufficient funding that mainly comes from the national budget. But, when dealing with exporting MSMEs, the programmes are not well-coordinated among the three ministries. Although a coordination agency, i.e. the PEPI (National Team for Increasing Exports and Investments) under the MoT exists to coordinate all export promotion programmes in the country, it has not been able to prevent overlapping programmes.
In the area of technology and innovation policy for MSMEs, the strategy elements are included sporadically in some policy documents without a consistent approach. There are at least three ministries which are also concerned with technology development and innovation in MSMEs, namely the MCSME, the MoI, and the Ministry of Science and Technology (MoST), and each of them has its own plan.
There is neither synergy nor a system uniting all the strategy elements in promoting technology in MSMEs. The databases on information about innovation support service providers are also still fragmented in these three ministries, although they are available to MSMEs.
The problem of coordination among ministries or the unclear inter-ministerial division of responsibilities for MSME development in Indonesia is also obvious when dealing with training programmes to improve labour productivity in MSMEs in the manufacturing industry.
Of course as the MoI is responsible for activities involving MSMEs in the manufacturing industry, it is naturally the key provider of such training programmes. However, the Ministry of Manpower (MoMP) also provides similar training programmes in various aspects related to labour, including for MSMEs, as it is under the responsibility of this ministry.
Since the Suharto era (1966-1998) until now, there are two key government agencies which are directly concerned with MSME development, namely the MoI and the MCSME. The latter is not only responsible for the formulation and implementation of national policies for MSMEs, but is also the national coordinator of all MSME programmes and activities There has been little communication between these two ministries to delineate a clear division of their respective responsibilities.
In addition, there are no less than 34 ministries and government agencies that are also dealing with MSMEs (though not their key areas) at central level which often leads to duplication and overlapping in MSME development programmes or services.
The most important ones among them are the following: the MoT, the MoST, the MoMP, the Ministry of Agriculture, the Ministry of Fishery, the Ministry of Forestry, the Ministry of Tourism and Creative Economy, and the Ministry of Finance.
Since issues related to MSME development are mainly economic, policies for MSMEs (such as policies for industry, agriculture, trade and others) are under the coordination of Ministry for Economic Coordination.
While this can be productive and should lead to competition for providing good services, it is not happening in Indonesia. The duplication resulting in confusion is particularly pronounced in the MSME field and the problem with coordination has become worse since the implementation of regional autonomy.
Soon after the collapse of the New Order era in May 1998, under the Local Government Law No. 32 of 2004, Indonesia had started with regional autonomy accompanied by fiscal decentralisation.
Regional governments were established at the state level, and below that, at the district level, i.e. kabupaten and kota level, all of which were granted autonomy. This law sets out that autonomy under the law is the right and responsibility to independently administer regional governments for the benefit of the community. The central government is to determine the principles for creating norms, standards, and procedures, while the regional governments are to independently formulate policy based on these principles.
At the district level, measures and standards necessary to the effective implementation of policies for cooperatives and MSMEs are set out by the MCSME in the Ministerial Directive No. 20 of 2000. At this level, actual administration is carried out by the regional/local Cooperative and Small & Medium Enterprise Bureau (Dinas), and the Dinas Bureau Chief reports to the district head or Mayor. Dinas has a responsibility for administration and planning, licensing and approvals, regulation and implementation of government policy, certification, formulation of budgets, budget corrections and winding down cooperatives, among others.
As between ministries at the central level, in fact, the delegation of responsibilities between the central and regional governments is also not so clear. This is due to such factors as a lack of leadership and supervisory ability centrally, and excessive demands from regional governments for autonomy.
So, for Indonesian MSMEs to flourish and grow, the coordination of all MSME programmes from different ministries and government agencies, including the establishment of PTSP, is one necessary step that the government should take, and the MCSME should lead the process. Other steps that the government should take are as follows.
First, the implementation of MSME policies and programmes should be continuously monitored and evaluated to ensure continuous improvements in order to render them more effectively.
Second, MSME policies should be part of the country's long-term overall effort in economic development.
Third, the MCSME should make sure that the targets in MSME development plan are achieved; services are delivered; obstacles are overcome; and improvements are implemented. For this purpose, it should develop mechanisms of stakeholder interactions and the management cycle to ensure effective implementation and evaluation of MSME programmes.
Fourth, policies and programmes need to be integrated into the structure,organisation procedure and day-to-day service delivery to the public. Initiatives from different agencies should be incorporated into holistic national initiatives which are implemented synergistically.
Fifth, the MCSME should coordinate a portal that links all government initiatives in supporting MSMEs, including PTSP.
Sixth, the government should ensure that large companies and universities perform their roles in supporting MSMEs.
Seventh, communications and information about licenses should shift from using 'middlemen' into having MSMEs dealing with the bureaucracy themselves. Having involvement of community organisations such as LPBs (they are established by companies or universities to advise MSMEs at grass-root levels) will improve the successful implementation of PTSP in getting more MSMEs to register formally.
Eighth, the licensing procedures should be simple, clear, and universal in the requirements; certain clarity in cost and delivery is also very important.
Finally, government service delivery could be improved significantly; the government should have clear sequence of helping MSMEs from starting, operating, growing and exiting the business. A portal of MCSMEs can serve as an interface that links the services with other ministries, including PTSPs.
Thursday, 19 June 2014 14:22
AEC 2015 and the likely impacts on local MSMEs
In 2003, Association of Southeast Asian Nations (ASEAN) leaders agreed to establish by 2020, an ASEAN Community which comprises three pillars, namely the ASEAN Political-Security Community, ASEAN Economic Community (AEC) and ASEAN Socio-Cultural Community.
In 2007, they affirmed this commitment with the decision to accelerate the creation of an ASEAN Community by 2015. In particular, they agreed to hasten the process of regional economic integration with the adoption of the so-called AEC Blueprint in 2007 for the establishment of the AEC by 2015. The initial initiative of AEC 2015 is founded on a vision of a single market and production base for ASEAN member states (AMSs), i.e. Indonesia, Singapore, Malaysia, Thailand, Brunei Darussalam, the Philippines, Vietnam, Cambodia, Lao PDR, Myanmar and Timor Leste – to promote the free movement of goods, services, investment and skilled labor across the ASEAN region. The main aim of AEC 2015 is to foster equitable economic development across the region and the creation of a highly competitive economic region that will be fully integrated into the global economy.
It is expected that the implementation of AEC 2015 will transform ASEAN into a single market and production base like the European Union (EU), which will enhance ASEAN's competitiveness. All existing tariffs on exports and imports will be eliminated and non-tariff barriers (NTBs) will be gradually phased out. ASEAN investors will be free to invest in all economic sectors throughout the region. Simple, harmonised and standardised trade and customs requirements are expected to reduce transaction costs. The AEC 2015 will then boost the development of production networks and it will thus foster the regional integration of priority sectors and allow for the free movement of business persons, professionals, skilled labour and talents.
An ASEAN single market and production base comprises five core elements: free flow of all goods, free flow of all services, free flow of investment, free flow of capital and free flow of skilled labor. A single market for goods and services will enhance ASEAN's capacity to serve as a global production centre to better meet the demands of the global supply chain. According to the ASEAN Secretariat, sectors targeted to benefit from the single market and production base include the following priority integration sectors: agro-based products, air travel (air transport), automotive, e-ASEAN, electronics, fisheries, healthcare, rubber-based products, textiles and apparel, tourism, wood-based products, and logistic services. Many of these sectors are also the most important sectors for micro, small and medium enterprises (MSMEs) in all AMSs.
Now the question is, does the implementation of AEC 2015 matter for the individual AMSs? The answer is yes. There is little doubt that AEC 2015 generates immense competitive challenges for AMSs. However, the real impacts of it on the economy of individual AMSs remain a much debated and controversial subject. Theoretically speaking, at an aggregate level, the broad benefits that would be generated from the implementation of AEC 2015 would include: improved resource allocation, access to new and better technologies, inputs and intermediate goods, economies of scale and scope, greater domestic competition and the availability of favourable growth externalities, such as the transfer of know-how.
Then, the next question is, would the implementation of free regional trade and investment in the context of AEC 2015 have great effects on local MSMEs, and if yes, would they be positive or negative? This question is important because debates among policy-makers and researchers on this issue are still going on. Their real concern is about the ability of local MSMEs to survive or to sustain their existence amid growing pressure from trade liberalisation. Some contributors to the debate are skeptical, given the fact that most of the enterprises in many AMSs especially in the 'less developed' ones such like Cambodia, Lao PDR, Vietnam, Myanmar, Timor Leste or even Indonesia, are lacking the necessary resources, particularly technological advancement and skills, to remain competitive.
Theoretically, trade liberalisation affects individual local firms, including MSMEs, positively or negatively, in four major ways.
First, by increasing foreign competition: lower or elimination of existing import tariffs, quotas and other NTBs have the effect of increasing foreign competition in the domestic market as more and more imported goods and services enter the domestic market. This is expected to push inefficient, unproductive or uncompetitive local firms to improve their efficiency, productivity and competitiveness by eliminating unnecessary cost components, exploiting external economies of scale and scope, and adopting more innovative technologies and better management practices, or to shut down.
Therefore, the openness of an economy to international trade is also seen in the increasing plant size (e.g. scale of efficiency), particularly as local firms adopt more efficient technologies, management, organisation and methods of production. This argument is in line with general theory that suggests size capable of affecting export performance of firms positively. The new international trade theory posits a positive impact of market size in view of economies of scale. It argues that the scale economy provides costs advantages in production, research and development (R&D) activities and marketing efforts.
Export marketing literature, on the other hand, suggests that large enterprises (LEs) have greater resources to gather information on markets in foreign countries and to face up to the uncertainties that prevail in a foreign market. As a general hypothesis, therefore, it is more likely for LEs, instead of the MSMEs, to become export-oriented firms.
Second, by lowering production costs due to cheaper imported inputs: local firms benefit from lower input costs, thereby increasing their price competitiveness so they can compete more effectively in both domestic markets against imports and in export markets. Having said this, the validity of this hypothesis is relevant under two assumptions:
(1) Other competitiveness determinant factors, such as wage (labor costs) and transportation costs are constant;
(2) Many local firms are dependent on imported inputs because of the absence of domestic production for the inputs, or trade liberalisation pushes prices for inputs to go lower than those made at the domestic market.
Third, by increasing export opportunities: opening up to international competition will not only induce increased efficiency in domestic firms but it will also encourage them to exports or it will stimulate more exports from the existing domestic export-oriented firms. This view is generally supported by results from many econometric analyses. However, this theoretical view is acceptable with the assumption that other factors determining the ability of a firm to export, such as production capacity, labour and energy costs, and governmental regulations, do not change unfavorably against the MSMEs.
The fourth way is by reducing availability of local inputs: eliminating export restrictions on unprocessed raw materials will increase export of the materials at the cost of local firms. Theoretically, if domestic products can have better prices abroad than in domestic market, it encourages domestic suppliers of the items to sell more to abroad than to domestic consumptions.
Thus, the question of whether trade liberalisation will lead to more imported final goods instead of more local production is about the competitive effect of trade liberalisation. If goods and services produced by domestic firms are less competitive in comparison to those imported from other countries, domestic firms are likely to be pushed out of the domestic market.
Whereas, the question of whether trade liberalisation will lead to more imported inputs instead of local made inputs, is about the production cost reduction effect of trade liberalisation. As import tariffs and other NTBs are removed, resulting in cheaper imported inputs than those produced domestically, domestic production costs are likely to decline. In addition, trade liberalisation also generates other two effects, i.e. export opportunity effect and domestic input scarcity effect.
The first effect is greater export opportunities for local firms, while the second effect will occur as local producers of inputs prefer to export than to sell domestically due to better prices abroad. The production cost reduction effect and the domestic inputs scarcity effect can be put together as the overall supply-side effect, whereas the combination of the competition effect and the export-opportunities effect can be referred to as the overall demand-side effect of trade liberalisation. The overall supply-side effects can be negative if the second effect is greater than the first one; alternatively, it could be positive if the other way occur, or if one effect is fully compensated by the other effect.
The impacts of trade liberalisation or trade policy reforms on many countries, including in some AMSs, at the macro level have been examined extensively. However, academic and policy analyses on the impact of trade liberalisation on the continuance existence or growth of local MSMEs, especially in AMSs remain scant.
There is only a very few field studies or academic papers on the effect of trade liberalisation on MSMEs that can be identified so far, but not in AMSs. Some of the studies argued that trade liberalisation could have some adverse effects on local MSMEs development, at least in the short run. Rapid trade liberalisation could lead to loss of domestic market share of local MSMEs because their made products cannot compete in their own markets with imported products, which produced more efficiently and cheaper.
Indeed, many MSMEs in Indonesia (as also happening in other AMSs) are losing their domestic market against much cheaper China made products. In the export-side, many studies conclude that export opportunities of local MSMEs could disappear due to lack of global competitiveness of the enterprises and the economy as a whole. This conclusion also seems to be supported by condition in Indonesia that since the implementation of ASEAN-China free trade agreement until now no evidence on the increase of Indonesian MSMEs exports to China.
One way to assess the ability of local MSMEs in individual AMSs to export with the implementation of AEC 2015 is by looking at their export intensity and performance. Although data on export of these enterprises in individual AMS are very limited (official publications on the enterprises by governments in AMSs usually focus only on their generated employment and output, not export), from limited sources (e.g. research reports, seminar papers) it reveals that the export intensity of the enterprises is very low; though it varies by individual AMS.
In other words, most MSMEs in the individual AMS are domestic market oriented, and there are various reasons for that. Among them, the most important one is their lack of four key inputs, namely (i) technology and skilled workers (so they cannot make highly competitive products that meet world standards), (ii) information especially on market potentials (including current changes in market demand/taste),(iii) global business strategies, and (iv) capital for financing export activities. With respect to the latter, it is not uncommon that forMSMEs doing direct international marketing is too costly, as they have to deal with such as promotion, distribution, communications, export license, transportation and logistic.
Although the implementation of AEC 2015 has just less than a year to go, local MSMEs still have time to do at least three strategic actions to make them ready to compete, namely: (i) improving skills of the owners and their workers, not only 'hard' skills, i.e. technical know-how related to the nature of their production but also 'soft' skills especially in the areas of management and international marketing practices; (ii) improving business efficiency by e.g. reorganising production activities; and (iii) changing current or adopting new appropriate business strategy to cope with increasing competition pressures. But, MSMEs alone cannot do these minimum required actions.
Other parties such as the government, chamber of commerce, business associations and universities have crucial roles to play to support local MSMEs in doing their capacity building.
Wednesday, 04 June 2014 17:45
A brief review of the development of microfinance in Indonesia
Probably within the Association of Southeast Asian Nations (Asean), Indonesia had the longest experience with microfinance as it started here even before the country's independence in 1945. However, it was only when Suharto, the second president of Indonesia, came into power in 1966 and with the beginning of the 'new order' era (1966-1998), did the development of microfinance become an important element of policies to support micro, small and medium enterprises (MSMEs), with Bank Rakyat Indonesia (BRI) as the key engine.
Up till today, the government is been continuously improving the systems of existing micro-credit schemes, aiming to cover all MSMEs in the country, particularly micro and small enterprises (MSEs). These are the ones that generally have more difficulties than their medium-sized counterparts to gain access to commercial loans. More recently, the government has also launched two new regulations, namely UU No.17 2012 on cooperatives (as cooperatives in Indonesia were also entrusted by the government to act as microfinance institutions) and UU No.1 2013 on microfinance institutions.
During the Suharto era, there were many popular microfinance programmes. These included Bimbingan Massal (Bimas) or mass guidance, a rice intensification programme with a subsidised credit component for rice farmers allocated through Koperasi Unit Desa (KUD) or village-based cooperatives and BRI Unit Desa (a village-based BRI), which was succeeded later on by Kredit Usaha Tani, i.e. a subsidised farming credit for small-sized farmers.
There were also two special credit schemes for MSEs in agriculture, i.e. Kredit Investasi Kecil (KIK) or small investment credit and Kredit Modal Kerja Permanen (KMKP) or permanent working capital credit. Other popular special credit schemes for MSEs in other sectors were like the Kredit Mini, Kredit Midi, and Kupedes (i.e. a general-purpose rural loan scheme) which were allocated through BRI Unit Desa, and Kredit Candak Kulak (KCK) which was allocated through KUD.
Many other microfinance schemes were also implemented during that period at local levels such as Kredit Usaha Kecil (KURK) or business credit for small people including the poor in 1984 for East Java and Kredit Usaha Kecil (KUK) or small business credit, i.e. loans to MSEs and cooperatives to fulfill the banks' requirement of a credit quota of 20% of any applied loan portfolio (Martowijoyo, 2007).
Besides those microfinance schemes which were set up during the new order era, special village-based microfinance non-bank institutions were also established. They were like the Lembaga Dana Kredit Perdesaan (LDKP) or rural credit fund institution and the Badan Kredit Kecamatan (BKK) in the Central Java and South Kalimantan provinces, which were sub-district level microfinance institutions founded by the provincial government of Central Java in the 1970s. Others were the Lembaga Perkreditan Kecamatan (LPK) in the province of West Java, Lumbung Pitih Nagari (LPN) in the province of West Sumatera and Lembaga Perkreditan Desa (LPD) in the province of Bali (Baskara, 2013).
Currently, the banks providing key microfinance in Indonesia are i) BRI, which is still considered as the leading micro finance institution, ii) Bank Syariah, iii) Bank Perkreditan Rakyat (BPR), known as the rural bank, i.e. people's credit bank, a second-tier bank to serve MSMEs and lower income groups, (iv) Bank Pembangunan Daerah (BPD), or regional/provincial development bank owned by provincial governments (it's legal form is now that of commercial banks) and (v) a number of commercial banks. BRI and BPR have the longest experience in microfinance. BPR was established in early 1970s in all the then 27 provinces. BRI itself was established in 1896 from the previous Algemene Volkerediet Bank (AVB).
In addition, there are many non-banking organisations also providing micro finance such as cooperatives and local community initiated non-government organisations (NGOs). The most important ones are firstly, the Badan Kredit Desa (BKD) or village credit institutions, which have the longest history as they were among the first established microfinance institutions even before the country became independent. These consist of Lumbung Desa (paddy banks) and Bank Desa (village banks), which are microfinance institutions originating from the Dutch colonial times and still operating in Java and Madura (and they have been awarded BPR licenses).
The second one is the Lembaga Dana Kredit Pedesaan (LDKP) or rural credit institution, established in 1980s by the then Suharto government with the main aim of grouping all the existing non-bank microfinance institutions operating all over the country, especially in Java since 1970s. The third non-banking organisations also providing micro finance are the BKK, LPK, LPN and LPD which were established in the 1970s and 1980s (Martowijoyo, 2007; Baskara, 2013).
However there are currently too many microfinance banks, non-banking institutions and microfinance services in Indonesia with overlapping regulations, coverage and responsibilities which do not make it easy for the monetary authority and the government to evaluate and control the development of microfinance in the country. For instance, Baskara (2013) found that in the province of Bali alone, there were more than five microfinance institutions and banks that targeted MSEs.
These included LPD, Koperasi Unit Desa (KUD) or village-based cooperatives i.e. multipurpose village cooperatives supported by the government, Koperasi Serba Usaha (KSU), Koperasi Simpan Pinjam (KSP) (like a credit union) established by the local community, BPR or BRI and the Danamon Simpan Pinjam (DSP), i.e. savings and loan units of Bank Danamon (a private commercial bank).
He also found many locally operating microfinance institutions which were not registered officially with the monetary authority, such as Badan Usaha Kredit Pedesaan (BUKP) in D.I. Yogyakarta, Lembaga Pembiayaan Usaha Kecil (LPUK) in the province of South Kalimantan, Lembaga Kredit Pedesaan (LKP) in the province of West Nusa Tenggara and Lembaga Kredit Kecamatan in Aceh. He also observed that many local-based microfinance non-bank institutions had stopped their operations because they had done them in an unhealthy non-professional manner.
Probably the most important or the most famous microfinance scheme in Indonesia after the Suharto era is the Kredit Usaha Rakyat (KUR) or people business credit, launched by the current President of Indonesia, Susilo Bambang Yudhoyono (SBY), in Nov 2007. Many people have assessed KUR as a successful microfinance program especially for MSEs. Even, President SBY was so highly appreciated by the International Micro Finance Community for his success in implementing KUR in particular and Indonesian microfinance in general that they awarded him a 'Letter of Recognition' in Oct 2012.
The success of KUR is indeed related with the internationally well recognised success of Indonesia, or particularly BRI, in implementing microfinance. Therefore, Indonesia has been mentioned as the potential world laboratory for microfinance.
Up till now, KUR's method is still being seen as the best way to compensate for the difficulties facing many MSEs in gaining credits from commercial banks and/or other formal non-bank financial institutions. Based on national statistics on MSEs, the lack of capital is the main constraint for the majority of MSEs in the manufacturing industry, followed by the lack or high prices for raw materials and other marketing difficulties.
The majority of them had fully financed their operations by themselves, although the ratio varied by the groups of industry. For those who had financed their businesses by themselves or through outside sources, only a very few of them had ever borrowed money from commercial banks. There were many reasons for so many MSEs not to borrow money from formal sources, including commercial banks. These included not have sufficient collateral, not having complete knowledge about the procedure, too complex application procedures and high interest rates.
The above conclusions were consistent with findings from the Financial Service Survey by International Monetary Fund (IMF) which showed that in 2011, total outstanding loans of commercial banks were 29.64% of Indonesia's total gross domestic product (GDP), while that of MSMEs in the same period were only 6.17%. In 2012, the ratio was 32.85% against 6.39% (Financial Services Survey, IMF 2012). They were also consistent with the 2009 Enterprise Survey by the World Bank and International Finance Corporation (IFC) in 2010, which showed that with respect to the percentage of firms with bank loans, MSEs were 16.5% compared to LEs (large enterprises) at 47.1%.
As reported by the Coordinator of the Ministry for Economics, from Nov 2007 up till Mar 2013 in an accumulative way, total receivers of KUR had reached 8.3 million persons with total outstanding credit of IDR108.4t (US$9.4b). Especially during the first quarter of 2013, the realisation of KUR was IDR10.7t (29.72%) covering 570.2 thousand persons (Muis and Sipayung, 2013).
From the banking scenario, while in the first phase of the implementation of the scheme only six banks had been involved, at the latest count there were 33 banks allocating KUR, which were seven commercial banks and 26 BPD's. So, that meant that since 2012, all BPD's in Indonesia had become important allocators of KUR. During the period January-March 2013, the total allocated KUR had reached IDR901.7b (17.18%) with total receivers of 10.2 thousand people, out of the IDR5.25t targeted KUR that all BPDs should allocate in 2013.
Proportional with total population and the total number of MSEs in each region, the data on the realisation of KUR allocation by province during the first quarter 2013 showed that Central Java was the largest province as it absorbed IDR911b KUR (8.5%), followed by the province of East Java with IDR832.9 billion (7.7%) and the province of West Java with IDR703.5b (6.5%). For regions outside Java, the province of South Sulawesi had the highest position with IDR715b (6.6%) while the province of North Sumatera was in the second position as it had absorbed IDR305b (2.8%).
With respect to the allocation of KUR by productive sector (as that was the main target of the scheme), trade (which was integrated with the upward sectors) proved to be the dominant sector in access to KUR with a proportion of 50.79%, whereas agriculture and fishery received 13.7%, and industrial manufacturing 2.6%. The accumulated amount of allocation of KUR to upward sectors covering agriculture, maritime, fishery, forestry and industry displayed a share of 31.4% of the total KUR allocated to all sectors (Muis and Sipayung, 2013).
Besides producers or owners of MSMEs, Indonesian migrant workers (TKI), considered as an important source of foreign currency for Indonesia, were also targeted by KUR. The above mentioned report shows that until March 2013, total credit extended to them reached IDR46b for 3,649 workers.
The target of KUR for the whole of 2013 was IDR36t, which meant an increase of IDR6t (20%) compared to the KUR target in 2012. The Indonesian government had taken many steps to increase the absorption rate of the determined annual target of KUD, especially by maintaining the quality of the scheme. One indicator used by the government to measure the quality of the KUR allocation (healthy or not) was the level of so-called non-performing loans (NPL) and fortunately, it has always remained low.
During the first quarter of 2013, the level of the NPL of KUR averaged 4.4%, which was still under the maximum limit of 5%, as determined by the monetary authority of Bank Indonesia (Muis and Sipayung, 2013).
During the last few years, the government has taken several steps In order to increase the coverage as well as to improve the efficiency of the KUR scheme. The initial one was improved coordination among the key or related ministries and other agencies, including the regional governments. The second step was to encourage all key stakeholders, especially regional or local governments, to be more active in supporting/promoting local MSMEs, particularly MSEs, to make them ready as potential receivers of KUR.
The third one was to be more aggressive in socialising or disseminating information about the scheme, including application procedures and potential benefits. Lastly the government was to facilitate coordination between the implementing banks and KUR concerning guarantees.
Looking at the annual increase in the amounts of KUR being allocated, the total number of receivers so far and the relatively low level of NPL, some may conclude that the scheme was very successful. However, the success of a special credit scheme or microfinance should not be measured by only those indicators. There was another important indicator that should also to be examined, namely the performance of the MSEs after they had received KUR.
The key question was, whether with the KUR they had received, had they expanded their production, exported more of their goods, or increased their size of activity (progressed into medium scale enterprises). Unfortunately, no data was available to indicate changes in the business performance of the KUR beneficiaries, as no KUR allocating banks had so far made evaluations on the issue.
Friday, 07 March 2014 09:56
The impacts of fossil-fueled subsidy reform on Indonesian SMEs and their possible* responses
In Indonesia, fossil-fuel subsidies had traditionally played an important role in determining the cost of living and also the cost of doing business. For the past decade, rising world oil prices and the growing demand for fuel had rendered these subsidies to be unaffordable, leading to several substantial reforms. As necessary as these might be for fiscal reasons, Indonesia has however had to cope with a very large population of low-income households. This has made the fuel subsidies more than just issues of economic importance, they lie at the heart of controversial social and political debates as well.
Indonesian SMEs (especially SEs) were often hampered by numerous constraints that limited their ability to sustain themselves or to grow. These constraints included those affected significantly by fuel costs, namely lack of funds to finance operations and capital investment, difficulties in procuring raw materials and other required input and high transportation costs.
A national survey made of SEs in the manufacturing industry has shown that energy prices and supply were reported to be their significant problems, although they varied amongst industrial groupings. These might be related to differences in how they operated, even the nature of their production processes. For instance, as a percentage of total manufacturing expenses, energy was most frequently the most serious problem for SEs in tobacco-processing, followed by those who manufactured reproductions of publishing and recording media, machinery and tools, food and paper and its products.
The variety might also be linked to issues such as geographical location, the condition of the local energy market and local transportation networks. It was obvious that the majority of SEs having this particular problem were located outside Java and Sumatera. More specifically, the five provinces where energy costs were the biggest issues were in West Kalimantan, Kepulauan Riau, West Nusa Tenggara, Gorontalo and Banten.
Based on many studies, it was generally known that although SMEs, particularly SEs, are much less energy intensive in comparison to large enterprises (LEs), energy costs were still significant; running from around 10 per cent to more than 65 per cent of the total cost of production (United States Agency for International Development [USAID], 2008).
The survey data from BI & PS-IUKMPU (2010) showed that operation costs were just a small component of total production costs for SEs in wood processing, food and beverage, textile and footwear industries in some regions in the country, including West Sumatra and, West and East Java. Operation costs included energy costs, though energy was not necessarily a dominant component of operation costs. For example in the wood processing industry, the share of energy costs of the total operation costs was about 13.55 per cent. In other industries the share was much higher, such as in the food and beverage industry, where fuel costs represented 42.4 per cent of operation costs. SMEs in the latter industry used boilers as the source of steam for their production processes. Coal, diesel and oil were the common fuel material used to operate boilers, which all resulted in higher production costs.
* Summarized version of similar article 'How Have Indonesian SMEs Coped with the Latest Increases in Energy Prices'? written by the author for 'Briefing Note, November 2013, International Institute for Sustainable Development'.
A businessman's ability to fully or partially pass on costs to consumers would depend on the type of goods that he produced or the type of market that he served. SEs producing essential goods, such as street food that low-income groups depended on, should to be ready to face relatively inelastic consumer demand. SMEs that sold non-essential goods with elastic demand such as furniture, toys, or clothing, might have more difficulty passing on extra costs to consumers.
Some anecdotal reports from various newspapers have indicated that the impact of the increase of fuel price in 2013 seemed to be significant. For instance, the Republika newspaper has stated that many SMEs in the West Java city of Sukabumi might have to close down because of the fuel subsidy policy (Republika Online, 2013). Citing complaints that the rising costs of production had made it difficult to expand, Antara News (2013) has stated that the price changes had been felt by many SMEs in East Java, and have even threatened some businesses with bankruptcy. In the East Java city of Malang, at least 10,000 local SMEs were facing bankruptcy due to the sharp rise in operating costs (especially transportation costs) that followed the fuel price change (Antara News, 2013).
Meanwhile, according to Kompas newspaper, the State Ministry for Cooperatives, SMEs and BPS had estimated that the impact of the fuel price reform had generated financial problems for many SMEs in Indonesia. According to the study, although the resulting increase in production costs were not as bad as in 2005, when fuel prices were first increased, it had still created significant problems for many SMEs (Antaranews.com, 2013).
The impact of the increase of fuel price in 2013 on SMEs could be differentiated between it's direct and indirect impact. The direct impact increased the total operational costs of SMEs because they had to pay more for energy. The degree of the increase varied by industry group, according to the amount of energy and the type of energy that they consumed.
For example, SMEs making bread were very dependent on gas for use in ovens, such energy costs represented 7–8 per cent of the total cost of bread production. Every day, bakeries consumed an average of three 12-kg cylinders of LPG. When the government announced plans to raise the price of 12-kg cylinders of LPG in early March 2013 from IDR70,200 (US$6.15) to IDR95,60, a total increase of IDR25,400 (or 35 per cent), the Indonesian Bakery Employers Association claimed that this would increase the cost of bread production by 2 per cent.
With the inclusion of recent increases in the cost of electricity, this would have increased overall energy costs by 10 per cent (Citra Indonesia, 2013). The increase in total operational costs caused by increases in the price of fuel also depended on the type of machines used and, probably more importantly, adjustment measures taken by producers in response to price changes, which would determine the efficiency of fuel usage.
Indirect impact, on the other hand, occured through the knock-on effects that energy price rises had on other aspects of an SME's business, for example, by increasing the cost of other input or by reducing the consumers' real income, thereby reducing demand. Indirect effects on SMEs were generally expected to be more significant than direct effects. Indonesia's central bank (Bank Indonesia) had predicted that annual inflation in 2013 would surge as high as 7.9 per cent, exceeding the government`s estimate of 7.2 per cent, as a result of the increase in subsidized oil fuel prices.
The immediate direct and indirect inflationary impact of the June 2013 price reforms were estimated to be 2.45 per cent, made up of the following sub-components: the indirect effects on public transportation fares and commodities (food and other core items) contributing respectively, 0.82 per cent and 0.40 per cent and the direct impact contributing a further 1.23 per cent. According to Bank Indonesia, the impact would last for three months, notably in public transportational costs (Berita 2 Bahasa, 2013).
The indirect impact on credit would also have a serious impact. As a response to increased inflation and the continued depreciation of the rupiah, Indonesia's monetary authority decided to increase Bank Indonesia's interest rate from 5.75 per cent in May 2013 to 6.0 per cent in June and up again to 6.5 per cent in July (Bank Indonesia, 2013).
The rise in the cost of credit made it harder for SMEs that depended on bank loans, though that did not represent a large proportion of the SMEs in the country. More seriously, it affected the larger businesses that depended on credit and had a relationship with SMEs (e.g. trading companies and large-sized car producers). If those firms had financial problems caused by higher interest rates, and therefore had to reduce production or even go out of business, the subcontracted or business-related SMEs would suffer the consequences as well.
Potentially, the most serious indirect effect on SMEs was the expected decline in purchasing power among low-income groups. Although data on the number of buyers of SMEs' goods and services broken down by income groups were not available, the main customers for SMEs were from low-income households, as the majority of SMEs in Indonesia (as in developing countries in general) produced low-priced goods and services.
Even if these low-income households did not spend their income on fuel directly, they were expected to be seriously affected by subsidy reforms, as the prices of goods and services, including transportation fares, would rise as a result of the increased fuel prices. Following the price increases of gasoline and diesel in June 2013, the Ministry of Trade had estimated that the price of essential goods and services would increase by a minimum of 5 per cent to a maximum of 10 per cent, or on average around 8.2 per cent (Setiawan, et al., 2013).
In reality, it was possible that the real impact could be much worse. According to the Organization of Land Transportation, transportation fares could increase up to 35 per cent (Republika Online, 2013b), although the government would allow them to increase only up to a maximum of 20 per cent (Setiawan et al., 2013).
In general, SMEs were less energy-intensive than LEs but they were also the more vulnerable. That meant that the direct financial impact of energy price increases might not be as serious as those experienced by LEs, however the capacity of SMEs to cope with any negative impact were likely to be much lower and even small negative effects could have much more serious impact. The indirect impact of energy price increases were likely to have the more serious effect on SMEs, especially through the costs of transportation, raw materials and capital. That could be the case for three reasons.
Firstly, SMEs in general were much less energy-intensive (including fuel-intensive) than LEs, so the direct impact was relatively smaller. Secondly, all firms of all sizes were dependent on land transportation, which had always been the main focus of fossil-fuel subsidy reform in Indonesia. Thirdly, Indonesian SMEs and SEs, were heavily dependent on low-income households as they were their main consumers and that particular group had always been the most seriously affected by increases in the price of fuel and its related inflation, which reduced their available income and lead to a decline in market demand.
What should be done?
There was little value on further debate about why the government has decided to cut fuel subsidies. It was simply because the scale of subsidy expenditure was unsustainable and that the fuel subsidy (intended to help low-income groups) appeared to have been poorly targeted and thereby misallocated. Instead, the following actions should be taken by both the government and SMEs to compensate for the problems that could be caused by the fossil-fuel subsidy reform.
From the government side:
(i) increase access to bank financing for business-feasible SMEs, especially those that had greater potential to contribute to GDP and future exports; for example, that might include SMEs related to textiles and garments, foods and beverages, leather products, wood products (especially furniture), creative goods and handicrafts;
(ii) eliminate all unnecessary bureaucratic procedures to reduce time-consuming and costly steps related to SMEs getting the licenses that they needed, these might include licenses to import raw materials, export goods and services;
(iii) reallocate a proportion of the funds that had become available from subsidy reforms for the development of infrastructure and public transportation facilities, especially in rural areas where the majority of SMEs were located. Good infrastructure and public transport facilities would help SMEs in procuring raw materials and marketing. Funds could also be used to tackle SMEs' other priority problems, for example, to invest in education to increase the medium-term availability of skilled workers that SMEs needed to grow and expand. Funds could be reallocated more generally to help implement Indonesia's existing policies in support of SMEs, which included human resource development, entrepreneurship development and financing;
(iv) support SMEs to improve their efficiency in using energy. For example, SMEs could be provided with technical as well as financial assistance in identifying opportunities for efficiency improvements and modernizing their production systems; and
(v) help SMEs utilise alternative energies. Generally, SMEs need technologies that they do not have at present. It is therefore essential to support the transfer of technologies with various partners, such as universities, LEs, non-governmental organizations and government agencies. Many issues need to be addressed for the effective transfer and development of technology for developing alternative energies including institutional development, information, partnership and networking, collaborative research and development, intellectual property rights, financing and infrastructure.
SMEs also had a responsibility to take preparatory actions, of which at least the following two should be considered:
(i) take appropriate measures to adapt to higher energy prices by increasing energy efficiency. For example, using more efficient methods to heat or to process foods;
(ii) explore long-term solutions to rising energy costs. This might include using alternative energy or developing renewable energy. For the sake of efficiency and taking into account the capacities of many SMEs, this action should be taken in a cooperative way either among SMEs or with local community players such as universities or non-governmental organizations. As one feasible action, SMEs could develop electricity from small-scale or renewable power sources such as wind, solar, micro-hydro systems or sustainable biofuels. In many places, for instance, electrification from biomass energy has led to the development of SMEs in areas such as rice parboiling, roofing tiles and curing tobacco.
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20-12-2012 Hits:2965Read more
The Current Global Economic Crisis and I…
Indonesia now is very much more vulnerable to any regional/global economic shocks/crises than say, three decades ago, as the Indonesian economy has been increasingly integrated with the global economy. Within the past two decades Indonesia has made many bilateral as well as multilateral (e.g. in the context of ASEAN and...
19-11-2012 Hits:1878Read more
What makes Indonesian MSMEs?
Historically, Indonesian MSMEs have always been the main players in domestic economic activities, accounting for more than 99% of all existing firms across economic sectors and providing employment for over 90% of the country's total workforce, mostly women and the youth. The majority of MSMEs are micro and small enterprises,...
20-10-2012 Hits:12737Read more
SME Quotes
Opinions & Analysis
Time for 2016 US presidential candidates to focus on small business issues
Written by Dan DannerIowa voters on Monday defied the polls and scrambled, at least for a week, the race for president. With a…
Trade secrets in Vietnam
Written by Alex Bayntun-LeesVietnam and the EU: a background for SMEs Vietnam is the easternmost country on the Indochina Peninsula in south-east…
The readiness of Indonesian SMEs for the AEC 2015
Written by Dr. Tulus T.H.TambunanThe day of the implementation of the ASEAN Economic Community (AEC) 2015 is only left four months from now. There…
Measurements to ensure SME's growth in Pakistan
Written by Zulfikar ThaverAfter the death of my father Late Yousuf Thaver, I had to struggle to make both ends meet. I was…
The 2015-16 Budget of Hong Kong with Special Reference to Housing and SMEs
Written by Albert PK LauThe Financial Secretary of Hong Kong delivered his 2015-16 Budget on Feb 25, 2015. In the Budget, he made known…