Approaches in Overcoming Decentralization Complexities for Business Entities Entering and Expanding in Indonesia

1. APPROACH IN OVERCOMING
DECENTRALIZATION COMPLEXITIES FOR
BUSINESS ENTITIES ENTERING OR EXPANDING
IN INDONESIA
Presented at Institute of Southeast Asian Studies Conference 2015
Singapore, May 2015

2. 2
DISCUSSION AGENDA
1. Indonesia’s progress on democracy and decentralization and it’s
impact for business
2. Investment issues in central and regional government
administrative
3. Approach for business entities in overcoming complexities
entering and expanding in Indonesia: industry best practices

3. Democracy and decentralization is a permanent reality in
Indonesia, despite It’s been challenged from time to time
JURIDICAL FOUNDATION AUTONOMY PRINCIPLES
1903-1945
Pre-Independence
• DecentralisatieWet 1903
• Local Radenordonantie No.181Thn 1905
• Osamu Sirei No.27Thn 2602 (1942)
Centralized
1945-1959
Old Order
• UU No.1/1945
• UU No.22/1948
• UU No.1/1957
Democratic,Autonomy and
Decentralized
1959-1966
Transition
• Penpres No.18/1959
• UU No.18/1965
Authoritarian, Centralized,
De-concentration
1966-1971
New Order
• TAP MPRS No.21/1966 Democratic,Autonomy and
Decentralized
1971-1998
New Order
• TAP MPR No.IV/1973
• UU No.5/1974
• UU No.5/1979
Authoritarian, Centralized,
De-concentration
1998-Now
Reformation Era
• UU No.22/1999
• UU No.25/1999
• UU No.32/2004
• UU No.33/2004
• UU No. 22/2014 -> UU No. 1/2015
• UU No. 23/2014 -> UU No. 2/2015
Democratic,Autonomy and
Decentralized
How the new leadership will impact Indonesia’s democracy & decentralization?
SOURCES: Hossein (2002); Skha Analysis

4. Indonesia’s Elected President, Jokowi and Parties Leaders have
strong commitment on democracy and decentralization
JOKOWI –JK ON
DECENTRALIZATION
1. Jokowi’s background as Surakarta Major
and DKI Jakarta Governor will highly
influence the administration
2. Decentralization and regional autonomy
is already part of top 9 Jokowi-JK
working priority agenda
3. Jokowi views decentralization as
Asymmetric, every region have unique
characteristics on issues/problems and
capabilities to run their regional
autonomy, not one size fits all.
COMMITMENT ON
STRATEGIC ISSUES
REGIONAL
AUTONOMY
Decentralization as gov’t spearhead
replacing the sectors & finances
regime
REGIONAL
EXPANSION
• Restructure establishment of new
autonomy region by changing
policies in general allocation grant
• Push possibilities of consolidation
or termination for failed
autonomy region
VILLAGE
ADMINS.
Ensure village grant (Dana Desa) and
Village GrantAllocation (Alokasi Dana
Desa) run effectively
REGIONAL
FINANCE
Financial reform through overhead
cost reduction and increase public
service budget
GOVERNOR
FUNCTION
Governor as connector of central &
local gov’t. Control national resources
that distributed to regions.
Jokowi committed to rebalance decentralization by redistributing authorities,
reallocating budget & drive performance management in regional gov’t
1
2
3
4
5
SOURCES: Directorate General of Regional Autonomy , Ministry of Home Affairs Indonesia; Skha Analysis

5. Trends to watch: regional expansion, democratic consolidation
and decentralization “power-shift” will continue
Business entities operating in regions should be more aware of local dynamics
(e.g. administrative issues, political situation, regulation change. )
REGIONAL
EXPANSION
234
398 415
59
93
98
26
33
34
1999 2010 2014
Regent City
Province
DEMOCRATIC
CONSOLIDATION
48
24
44
15
1999 2004 2009 2014
Political Parties
DECENTRALIZATION “POWER SHIFT”
LAW CHARACTERISTICS
• No.22/1999
• No.25/1999
• No.32/2004
• No.33/2004
• Local gov’t have full
autonomy and authorities
in gov’t administration to
develop their region (incl.
strategic sectors)
• No. 22/2014
• No. 23/2014
• “Rebalancing of power”
through shifting local gov’t
authority in strategic
sectors such forestry,
marine, mining , oil and
gas to province and central
gov’t
• Election was changed to
Indirect by people’s repr.
council (DPRD)
• No. 1/2015
• No. 2/2015
• Revised previous UU back
to direct election system
for local gov’t leaders
(Governor /Major/Regent)
1 2 3
SOURCES: Asia-Pacific Research Center (APARC)

6. Implications of Decentralization for Business Entities: Impacts
on management aspects
Business entities should comprehensively consider all these possibilities
and trade-offs as leverage and to mitigate unnecessary risks
PRO’S CON’S
MARKET • Region uniqueness will open new
market/product categories
• Local economic development boost
market readiness for expansion
• Regulation limiting specific
investment/expansion due to minimizing
competition with local enterprises
(Regional-Negative Investment List)
OPERATION • Faster procedure on
permit/business approval (through
better IT System, regulation and
etc)
• Possibility gov’t non-fiscal
support: regulatory and advocacy
support.
• Dynamics of local politics
• Complexities from dealing with multi
stakeholders (city/regency, province and
central gov’t institution) esp.
• Vertical: Strategic sectors
• Horizontal: Business entities
operating in multi- region market
TALENT • Availability of local talents • Varieties of minimum regional wages in
different regions
• Talent gaps for high-skilled worker
FINANCE • Better incentives on regional tax,
retribution and permit fees
• Cost efficiency on logistics,
infrastructures for developed region
• Possible gov’t fiscal support ( for
PPP projects): land acquisition,
budget allocation, etc.
• Difficulties in setting standard on pricing,
cost and etc.
• Cost inefficiencies from operating in
different environment, regulation and
other factors
1
2
3
4
SOURCES: Skha Analysis

7. REGIONAL AUTONOMY
IN INDONESIA
INDONESIA
STATISTICS
Archipelago:
• 30% land
• 17.500+ Islands
• 5 Main Islands
• Sumatera
• Jawa
• Sulawesi
• Kalimantan
• Papua
Reg. Autonomy
Regions:
• 34 Provinces
• 425 Regencies
• 98 Cities
Facts:
Top 100 regions
represent 75% GDP
Business entities could see complexities of decentralization
from horizontal/regional perspectives...
Approval complexities will rise for business operating in multiple region
SOURCES: Directorate General of Regional Autonomy , Ministry of Home Affairs Indonesia; Skha Analysis
Riau Islands
Bangka-
Belitung
Aceh
Banten
Riau
Jambi
South
Sumatera
Lampung
North
Sumatera
West
Sumatera
Bengkulu
Jakarta
West
Java
Central
Java
Yogyakarta
East
Java Bali
NTT
NTB
Maluku
North MalukuNorth
SulawesiGorontalo
Central
Sulawesi
South
SulawesiSoutheast
Sulawesi
South
Kalimantan
East
Kalimantan
Central
Kalimantan
West
Kalimantan
Papua
Population (Mn) : 12.5
Cities/Regencies : 41
Provinces : 3
Bali, NTB & NTT
Population (Mn) :49.0
Cities/Regencies : 154
Provinces : 10
Sumatera
Population (Mn) : 132.4
Cities/Regencies : 119
Provinces : 6
Java
Population (Mn) : 13.5
Cities/Regencies : 56
Provinces : 5
Kalimantan
Population (Mn) : 16.8
Cities/Regencies : 78
Provinces : 6
Sulawesi
Population (Mn) : 5.0
Cities/Regencies : 63
Provinces : 4
Maluku & Papua

8. ...and also from vertical/sectors perspectives
Business operating in strategic sectors will also deal with complexities as it require
approval from more stakeholders at different level of government institutions
SOURCES: Indonesia Investment Coordinating Board (BKPM)
Phase Activities Institution
Preparation
Establish
Company (PMA)
• Obtaining Principal License
• Establishing of Limited Liability Company
• Researching about the sectors open for investment under
the Negative Investment List
• BKPM
• Ministry of Law &
Human Rights (with
the help of notary)
Pre-
Operation
Obtain Facilities
& Permits
• Obtain import identification number (API-P) for
manufacturing companies (if needed)
• Submitting investment activities report (LKPM) every 3 mth
• Obtaining facilities such as machinery import duty
exemption and approval of tax facilities
• Obtaining licenses from local gov’t such building permit,
domicile certificate.
• Obtaining permits from relevant sectoral ministries, such as
plantation permits.
• BKPM
• BKPM
• DGTaxation &
Ministry of Finance
• Local Gov’t
• Sectoral Ministries
Commercial
operation
Securing
Business License
• Obtaining business license (IU) before the start of
commercial operation
• Obtaining general import identification (API-U) number and
material import duty, if needed
• Submitting investment activities report (LKPM) every 6
months.
• Obtaining periodic operation permits, such as construction
services permit
• BKPM
• BKPM
• BKPM
• Sectoral ministries

9. For example, on business approval process for setting-up
integrated palm oil plantation and production in Indonesia
Adaptation is key, business entities should either build their capabilities
or partner with local to operate in these environment
SOURCES: Ministry of Agriculture Regulation 26/2007; 11/2015
Regency Gov’t Province Gov’t Central Gov’t
Required legal
and documents
Regents Approval
Governor
Approval
Establish
Company
Legal & Local
Partnership
Land-use (Forest)
Availability Check
Monitoring &
Evaluation
BKPM & Ministry of Law
Ministry of Forestry
BKPM & Ministry of
Agriculture
Province BPPTRegency BPPT/KPPT
ILLUSTRATIVE
RT/RW/Village/Districts
123
5 6 7
4
Main Assumptions:
• Integrated Plantation with Production Facilities (PerkebunanTerintegrasi: Budidaya dan Pengolahan)
• Land cover >1000 Ha and some area overlapping with forest
• Foreign InvestmentCompany is mandatory partnering with locals to form joint business entities

10. 10
DISCUSSION AGENDA
1. Indonesia’s progress on democracy and decentralization and it’s impact
for business
2. Investment issues in central and regional government
administrative
3. Approach for business entities in overcoming complexities entering and
expanding in Indonesia: industry best practices

11. INDONESIA’S STRONG ECONOMIC POSITION IN ASIA PACIFIC REGION
Indonesia is now the 5th largest economy in Asia, with more
than half of ASEAN GDP...
Indonesia have the potential and predicted to become
the next economic powerhouse
SOURCES: IMF; Skha Analysis
1,877
1,561
1,305
868.3
489.2
387.3
312.4
297.9
274.0
272.0
182.6New Zealand
Philippines
Hong Kong
Singapore
Malaysia
Thailand
Taiwan
Indonesia
Korea
Australia
India
Japan
China 7,298
ASEAN member
GDP (USDb, 2013)
5,867
1
2
3
4
5

12. INCREASINGLY A PRIORITY
INVESTMENT TARGET
... and is Increasingly a Priority Investment Target due to better
investment climate
Indonesia takes 1st place for the
first time since 1992 for Promising
Countries/Regions for Overseas
Business over the Med-term.
SOURCES: Bank Indonesia IMF, Japan Bank for International Cooperation (JBIC); Skha Analysis
Overseas BusinessOperations of Japanese
ManufacturingCompanies In Indonesia 2012-2013
BETTER INVESTMENT CLIMATE
FROM TIME TO TIME
Sovereign Credit RatingTrends
in Indonesia 2005-2011
Risky Speculative Non-Investment
Grade
Investment
Grade
Indonesia had achieved
investment grade for the 1st time
since 2011 from Fitch Ratings and
maintain the rating until today.

13. However, there are still some issues related to investment in
central gov’t...
NOTE: * Analisis Mengenai Dampak Lingkungan (Environmental Impact Analysis) SOURCES: detikFinance ; Skha Analysis
Investment-friendly BKPM... ...but not for other ministries/dept.
“It will be easier for investor for applying
business permit as there’s no need to
going around Jakarta visiting various
ministries/department one by one”
“Investor should only come to 3 place to
apply business permit, Central PTSP,
Province PTSP and City/Regency PTSP
following the authorities given by
regulation” – Head of BKPM
e.g. One-stop service
(PTSP) policy for
business permit
• “sector-centric issues: e.g. causing double
permit for same issues: AMDAL* which is
authorized by ministry of environment but
also ministry of transport”
• “coordination & clarity issues on
regulation: e.g. for electricity business
expansion, if all mandatory permits have
been complete the business logically can
proceed to construction, no need to wait
until all cross-sectors permits have been
approved like now. – Head of BKPM
e.g. Electricity business,
investment and
expansion permit issues

14. At Regional gov’t (esp. cities) have been competing to attract
investments by doing business-friendly initiatives...
SOURCES: World Bank, Ease of Doing Business Report Indonesia 2013; Skha Analysis
CITY
RANK IN
EASE ON
STARTING
BUSINESS
RANK IN EASE
OF ACQUIRING
BUILDING
PERMIT
RANK IN
EASE OF
REGISTERING
PROPERTIES
TOTAL
SCORE
OVERALL
RANK
Yogyakarta 1 5 6 12 1
Palembang 11 3 3 17 2
Balikpapan 7 1 12 20 3
BandaAceh 5 4 12 21 4
Bandung 12 8 1 21 5
Mataram 10 12 4 26 6
Jambi 18 2 7 27 7
Jakarta 8 19 1 28 8
Pontianak 13 7 9 29 9
Semarang 4 8 19 31 10
Key success factors that drive these cities to perform: political will from leadership,
strong support from society and gov’t capabilities in modern public management
• BandungOne Stop Service (BOSS)
• Online system for regional tax filling
and permit application
• Bandung Investment acceleration
team providing support & advocacy
• Consistently maintain ISO 9001:2008
as standard on permit procedures
• Fastest in Indonesia (only 7
procedures) to setup new business
KotaYogyakarta Kota Bandung
1
2
1 2

15. ...for example: Business-friendly initiatives in Bandung
SOURCES: Bandung Government; WorldBank; Ombudsman; Skha Analysis
Bandung One Stop
Service (BOSS)
Bandung Investment
AccelerationTeam
RegionalTax Service
Reforms
Key Initiatives:
• Refine standard operation
procedure (SOP) and
organization and work
structure (SOTK)
• Apply modern IT system for
processing permits with
tracking and notification
features to ease applicants
• Online CCTV for
transparency
Impact:
• Improvement in national
ease of doing business
rank (from below 10 to top
5 position)
Key Initiatives:
• Modernization of tax
service building and
implement ISO standard
• Mobile tax services through
mobile vehicle unit to reach
tax-payers
• Implement Regional Income
Module (MPD)/ end-to-end
IT system for regional
income management
Impact:
• From low performing
agency (red) to top
performing (green)
agencies in Indonesia
Key Initiatives:
• Bandung Investment book
that comprehensively
mapping IDR 84.5Trillion
potential investment
• Create tools & mechanism
for investment in Bandung,
to help agencies/investors
understanding the projects
• Promotion and advocacy to
potential investors
Impact:
• Attract multi-billion dollar
investment commitment
from local to international
investors
1 2 3

16. SLOW
BUREAURCACY
But majority of regional gov’t may be not so easy to deal with,
especially for resource-rich regencies
CORRUPTION FOR
ISSUING LICENSE IS
STILL RAMPANT
1 LOCAL POLITICS
INVOLVED
2 3
EXAMPLE
CASES
POSSIBLE
CAUSES
SOURCES: Online Literatures, Skha Analysis
• Corruption for fake-
licensing iron-sand in West
Pasaman, Sumatra;
• Alleged corruption
granting concessions to
mining companies in South
Konowe, Sulawesi
• Allegations of corruption
granting concessions to a
company in Banyuwangi,
Java
1. Regent/Mayor has
tremendous
authority/power
2. The lack of monitoring/
supervision from the
central government
3. Opposition and civil
society movement are
not strong/vocal
• Regent was intervened to
allow a particular business
entity to violate the law
related to zoning
regulation, Nunukan,
Kalimantan
• “Political dynasty” that
affect certain entities that
can do business in a
region/city, Banten, Java
1. Rise of “political
dynasty” in several
regions
2. Major/Regent that was
appointed represent
political party or
supported by
groups/individual that
already have vested
interest
• Incoordination among
department causing
approval from regent for
business license takes
too long and unclear,
Tangerang, Java;
• Too many approval
needed for license
extension, Lampung,
Sumatera
1. Complexities of
regulations
2. Non-standardized
internal procedures
and lack of performance
management
3. Conflict of interest
among department or
management levels

17. 17
DISCUSSION AGENDA
1. Indonesia’s progress on democracy and decentralization and it’s
impact for business
2. Investment issues in central and regional government
administrative
3. Approach for business entities in overcoming complexities
entering and expanding in Indonesia: industry best practices

18. We recommend four approaches for business entities in
overcoming complexities entering and expanding in Indonesia
MAPPING
LOCAL
DYNAMICS
FINDING
CREDIBLE
LOCAL
PARTNER
DO CSR
UPFRONT
TO GAIN
SUPPORT
1 32
MANAGE
PUBLIC
RELATION
WELL
4
SOURCES: Skha Analysis

19. 1. Mapping Local Dynamics
Comprehensive planning helps NRI enter local market effortlessly
1 2
3
Research & Planning
Talk with Local Experts
Visits/Observe
Best Practice:
Nomura Research Institutes
[ Logo ]
Overview:
• NRI is Japanese largest consulting & IT
services firm
• NRI is considering to enter consulting
market targeting Japanese companies
operating in Indonesia
Actions taken:
1. Intensive meetings and discussion with
locals experts, figures and stakeholders
2. Joint-research for feasibility studies and
market research on key market
Results:
 Ease of operation (less than 1 year to
enter) by joint-operation with selected
local firm instead of opening reps. office
 Faster access to acquire new network,
knowledge and secured multiple
contracts
SOURCES: NRI Interviews, Skha Analysis

20. 2. Finding Credible Local Partner
Partnership with local player ease Ocean Energy to invest in new market
New EntrantsSolving local needs by
proposing new business
initiatives
Advantages:
• Access to raw resources and
local talents
• Local expertise (geographical,
culture, compliance)
• Eligibility and ease of doing
business (permit, concession,
regulatory, etc.)
Challenges:
• Innovation and technology
readiness
Advantages:
• Better capabilities in research and
development and technology
application
• Abundant sources of capital
• Products innovation and innovative
business scheme
Challenges:
• Access to raw resources and talents
• Local understandings
Strategic options:
1. Strategic alliances
(Highly preferred,
esp. with GOC/
BUMN)
2. Merger
3. Acquisition
1
2
3
Local Player
Overview
Indonesia is seeking to boost the value of metal shipments by promoting domestic processing.
Key ActionsTaken:
• PTANTAM (Persero) Tbk andOcean Energy Pte. Ltd. entered into cooperative relationship
through the signing of an Investment Heads of Agreement
Result
 Ocean Energy will provide financing for NPI & stainless-steel plant (~US$280 million)
 TaizhouYongXingAlloy MaterialTech. Co., Ltd. will provide technology support.
 ANTAM will provide key essential contributions in the form of mining expertise, land
development, facilities and infrastructure development
Best Practice: Ocean Energy & PT. AnekaTambang, Tbk &Yon XingAlloyTech.
SOURCES: Bloomberg, Interviews, Skha Analysis

21. Impact of CSR in Antam Case
3. Do CSR Upfront to Gain Support
Effective CSR help Antam win local’s heart to maintain and expand their operation
 Possibility to engage local residents
immediately
 Invest and build stronger relationships with
key stakeholders
 Affect corporate images and society
perceptions, including how good a corporation
is doing outside of the workplace
Relevance of CSR Activities Best Practice:
PT. AnekaTambang,Tbk.
Overview:
PTAnekaTambangTbk operates as a diversified
mining and metals company. It holds interests in
various mines located in North Maluku.
Actions taken:
1. Planned and allocate IDR >4Bio budget for
community development & stewardship
(PKBL)
2. Maintain program and impact monitoring
with 94% CSR effectiveness rate
Results:
 Strong support from locals & key gov’t
figures for regional and future projects
 Public acknowledgement: CSRAward 2014
in human rights, environment and
community development
SOURCES: AntaraNews, Rakyat Sultra, Antam Annual Report, Interviews, Skha Analysis

22. 4. Manage Public Relation Well
Good PR ensure Carrefour continue to expand, even after “image-crisis”
Best Practice:
PT. PT Trans Retail Indonesia
Overview:
In 2006, PT Carrefour Indonesia (before PT Trans
Retail Indonesia) is widely viewed as competitor
against traditional market in several region in
Indonesia. There are pro’s and cons among people’s
reps. council to regulate hypermarket.
Actions taken:
1. Comprehensively plan their PR strategy,
explainingCarrefour targeting different
customer segments on multiple media-channel
2. Gain support by working collaboratively with
local experts and academician supporting their
arguments on news
Results:
 Carrefour maintain its existence, hypermarket
regulation is postponed and to be reviewed in
several region
Proactive Phase
Monitoring media for emerging issues,
Includes activities and thought processes
that can prevent conflicts. Environmental
scanning issues tracking which lead to
Issues management and a crisis plan.
Strategic Phase
an issue is identified as needing concerted
action, Includes Risk Communication,
Conflict positioning strategies, and
Development of a crisis management plan.
Reactive Phase
employing strategies either to bolster or
repair its reputation in the eyes of the Key
Public by reacting to events as they unfold
in the external communication
environment.
Recovery Phase
Evaluate strategies and rebuild connection
4 PR Phases in Managing Conflict
1
2
3
4
SOURCES: Suara Merdeka, Carrefour Interviews, Skha Analysis

23. How well does your company applied this approaches to
manage complexities entering and expanding in Indonesia?
MAPPING
LOCAL
DYNAMICS
FINDING
CREDIBLE
LOCAL
PARTNER
DO CSR
UPFRONT
TO GAIN
SUPPORT
1 32
MANAGE
PUBLIC
RELATION
WELL
4
SOURCES: Skha Analysis

24. Our Contacts
Authors of This Study
Herianto Pribadi
Managing Partner
herianto.pribadi@
skhaconsulting.com
Sayed Musaddiq
Director
sayed.musaddiq@
skhaconsulting.com
Mohammad Iqbal
Consultant
mohammad.iqbal@
skhaconsulting.com

25. END OF DOCS
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