How Barru cut corruption in business licences
By Medha Basu
A South Sulawesi district in Indonesia has reformed licensing to cut corruption and give more access to businesses run by women and families.
Image: Maks Karochkin - CC BY 2.0
Syamsir, the district’s Head of Investment and Licensing Service explains how the local government did this and the impact it made.
What was the problem before the implementation of the initiative?
The difficulty of starting a business in Indonesia is a major concern. Indonesia’s rank on this indicator is the worst among ten Doing Business 2014 indicators, ranked 175th – lower than the previous year of 171st. In particular, two aspects, the number of procedures and time, are significantly worse than East Asia Pacific (EAP) and OECD economies. To establish a new business in Indonesia, a firm needs to go through ten procedures (EAP average: seven; OECD: five) and needs 48 days (averages in EAP: 38, OECD: 11).
Starting in 2006, the Government of Indonesia began promoting the establishment of one-stop shops (OSS) for business licensing at all levels of government to simplify licensing processes. However, by Rustiani, et. al identifies that almost 69% of OSS have limited or no authority to issue the more than 100 types of licences at the subnational level and, hence, offer little benefit to private firms. The quality of service is also still poor. Most sub-national governments are just “ticking the box” by establishing an OSS without substantially improving licensing services.
The local government (LG) of Barru, a rural district in South Sulawesi with 165,900 inhabitants (2010), was one such district. In 2008, it issued a local regulation to establish an OSS, but it took another two years to appoint an office head and to make it operational. In 2010-2011, the OSS was only authorised to issue seven types of licences, while 122 others were still issued by 14 technical departments. The OSS lacked standard operating procedures (SOPs) to process licence applications or to handle complaints.
These shortcomings contributed to poor performance in licensing services. It still took around 20 working days to issue a licence and applicants were charged 15-20% more than official rates. It is estimated that only 26% of 2,781 businesses possessed valid permits in 2011. The average annual private investment was around IDR 67.8 billion annually (USD 6.8 million) in 2010-11, around 4% of the real gross domestic product of the district. Businesses owners, particularly those involved in various business associations, complained about the licensing situation on numerous occasions.
The LG of Barru realised that poor performance in business licensing had hurt its competitiveness in promoting private sector investment, lowered private sector support for the government, and reflected bad governance in public service provision.
What approach did Barru use to tackle these challenges?
To address these problems, the LG of Barru adopted five strategic approaches:
1. Increase the authority of the OSS.
To effectively provide business licensing services, the OSS needs to be “a real one stop shop” whereby applicants do not need to visit other offices to obtain various types of licenses. Hence, transferring the authority for all 122 types of licences away from 14 local technical departments to the OSS became the main strategy.
It became apparent that doing so came with important political implications and that doing so in one fell swoop might lead to low service quality given the OSS office’s limited capacity. Hence, an incremental and opportunistic approach was adopted.
The OSS office identified licences that were relatively simple to process and which technical departments were willing to hand over, and began transferring those licences. By proving that the OSS could provide better services other technical departments were encouraged to cede control of licensing authority as well.
2. Improving the quality of licensing services.
First, standard operating procedures (SOPs) and service standards for each type of licences were developed and established, whereby national-level service standards (time, costs, and requirements to obtain a licence) were met.
Second, since the OSS might not have all the technical capacity to review licence applications, representatives of the technical departments were to be selected for secondment as members of “technical teams” to help the OSS.
Third, various types of capacity building – on technical aspects and service culture -- were conducted for the OSS staff and members of the technical teams.
3. Improving the governance of licensing services.
Three activities were envisaged: (i) clear and transparent information about the time, costs, requirements and procedures of obtaining each type of licences would be provided to the private sector, particularly licence applicants; (ii) complaint handling mechanisms would be established to ensure that dissatisfied customers of the OSS could easily raise issues for follow-up; and (iii) periodic implementation of customer satisfaction surveys to guide overall improvements in the quality of services.
4. Reducing the overall types of licences required by the LG.
Integrating licensing services at the OSS would help private firms to obtain all the needed licences in one place. However, real improvement of the investment climate would require deregulation and a simplification of licensing requirements. Hence, it was planned to review the 122 types of licences required by the LG and identify those that could be merged or repealed.
5. Engaging with civil society organisations (CSOs) and the private sector to implement the four strategies above.
The LG of Barru realised that the process of improving licensing services would be more effective if CSOs, particularly the private sector, were engaged in the reform process. Hence, they would be intensively consulted in identifying the problems and discussing various reform alternatives.
In addition, Barru partnered with the Justice and Welfare Foundation (YAS), an NGO based in provincial capital of Makassar that had a strong background in improving district-level licensing services in the province.
What were the most successful outputs?
1. Reduced types of business licences required by the LG of Barru.
Prior to the intervention, 129 types of licences were required by the LG. Through licence mapping and intensive discussions with technical departments and the private sector, there are now only 30 types of licences required after the intervention - 77% reduction. Significant deregulation has eased access to business formalisation and reduced opportunities for corruption.
2. Improved quality of licensing services.
All 30 types of business licences can now be issued by the OSS. In addition, processing times have been significantly reduced. Based on five basic licences1 as a proxy, the official time to process and issue licences was reduced by 30%, particularly due to the OSS’ ability to process various licences simultaneously.
It was estimated that the actual time to process a licence in many instances was reduced by 50%. Most of these resulted from local-level regulations issued, particularly on transfer of authority and SOPs, as well as improved capacity of the OSS staff and technical teams. The customer satisfaction surveys confirmed this improvement, rising from 77.3% in 2011 to 82% a year later.
3. Improved governance of licensing services.
Transparent and clear information about the requirements and procedures to obtain business licences, as well as introduction of complaint handling mechanism (channels include telephone, SMS, suggestion boxes, in person, and by email) have significantly reduced the opportunity for corruption.
The improvement of customer satisfaction index discussed above reflects this. The 2012 survey also found no complaint about extraneous costs. These resulted from the issuance of local-level regulations on SOPs for complaint handling as well as additional allowances for OSS staff. In addition, improved physical infrastructure and interactions with the CSOs, particularly the business associations, have contributed to these achievements.
What were the key areas of impact resulting from this initiative?
Licensing deregulation, improved quality of licensing services and governance of the OSS, and more intensive outreach to micro businesses and poor entrepreneurs led to four areas of quantifiable impact:
1. Increased volume of licences issued by the LG.
Prior to the intervention, the LG of Barru only issued 590 licenses in 2010 and 997 licenses in 2011. Improved quality of licensing services and governance of the OSS, together with specific efforts to reach the poor, micro and women- owned businesses (like through a mass-licensing event) increased the volume of licences by 391% in 2012 to 4,900. In 2013, without any specific outreach efforts, the volume of licences was estimated at around 3,100 licences.
2. Increased business formalisation.
The LG estimated that the level of business formalisation - where businesses formally registered and got licences to operate - was only 26% of 2,761 businesses in 2011, prior to the intervention. After the intervention, the level of business formalisation increased to 53% of 3,068 firms in 2012 and increased further to 70% of 3,221 firms in 2013 (as of end of November).
3. Better outreach to small and women-owned enterprises.
A mass-licensing day that provided free licences for micro enterprises significantly increased access to the formal economy for this group. In 2010, only 52 micro enterprises (those with less than $5,000 in capital) obtained business licences. That figure rose to 82 people in 2011, but jumped to 394 in 2012. Most of these business owners come from low-income families.
Meanwhile, more businesses owned by women obtained licences. For example, in 2010 only 24% of the private firms obtaining trading permit were owned by women, while in 2013, it rose to 45%.
4. Significant new investments.
As expected, the level of investment increased significantly, although not immediately after the intervention. In 2010 and 2011, based on local government records, the investment was only Rp 42.8 billion (around $4.3 million) and Rp 92.8 billion (around $9.3 million), respectively. This was increased by 59% to Rp 147.0 billion (around $14.7 million) in 2012.
The year after (up to December 5, 2013), private sector investment reached Rp 1,306.4 billion (around $130.6 million) or almost nine times the investment levels of 2012.
Several other districts within the province have replicated Barru’s initiative. The LGs of Soppeng and Sinjai learned from Barru’s OSS about how to reduce the types of licences, increase the authority of the OSS, improve service quality and strengthen governance of the OSS. In addition, the NGO partner, YAS, also brought this experience to two other districts in the South Sulawesi –Luwu Utara and Pinrang. YAS continues to work with the provincial government and a provincial OSS forum to apply lessons learned from the OSS of Barru.
Nationally, Barru has been recognised as a model district by the Ministry of Home Affairs for its licensing reform efforts and its design of relevant manuals. In November 2013, the LG of Barru shared its experience in simplifying and improving the governance of business licensing at a national event in Jakarta in front of 20 districts from four provinces in Indonesia. Other districts are now keen to visit Barru to learn from our experience.
This case study is published in partnership with TRANSFORMASI, a joint effort between GIZ, a German development agency, and the Ministry of Administrative and Bureaucratic Reform and the Ministry of Finance in Indonesia.