SPEECH OF THE STATE MINISTER OF COOPERATIVES AND SME OF THE REPUBLIC OF INDONESIA Interim CGI meeting Jakarta, April 24th, 2001

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1 SPEECH OF THE STATE MINISTER OF COOPERATIVES AND SME OF THE REPUBLIC OF INDONESIA Interim CGI meeting Jakarta, April 24th, 21 Honorable Coordinating Minister of Economy, Mr. Rizal Ramli Honorable Representatives from Donor Countries and Agencies, Distinguished Guests, Ladies and Gentlemen, It is a great pleasure for me to be able to speak at this important meeting to elaborate development programs for Cooperatives, Small and Medium Enterprises (SME) As you might be aware, during economic crisis, SME have played an important stabilizing role. They account for a major proportion of employment and are major actors in economic activities. Distinguished Guests, Ladies and Gentlemen, Admitting the potentials of SME as the main player in the Indonesian economy, they are facing some obstacles in Administrative and business environment, financing, and non-financing. It has been recognized that the unavailability of sufficient financing, collateral, applied technology, managerial, skilled human resources, and access to commercial banks, markets, networks, and information are common problems of SME development in Indonesia. To overcome these problems, the Government, through the State Ministry of Cooperatives and SME & the SME and Cooperatives Development Agency ( SMECDA), has promoted programs with the objectives to facilitate and support SME development. In the area of Administrative and Business Environment, support could be extended through tax incentives, administrative facility/subsidy and promoting a competitive business environment to support SME productivity. In addition, it is necessary for local government and stakeholders to develop advocacy for improving the conducive environment for SME business development. In the field of Financing, SME development will be promoted through services of commercial banks and alternative financial institutions, including micro finance institutions (MFI). These programs include, inter alias : First, increasing fund allocation to SME through experienced and reputable financial institutions in managing micro, small and medium credits for working capital and investment. Second, promoting integration, modernization and credit expansion to MFIs, including revolving fund mechanisms. Third, rationalization of financing schemes for micro, small and medium

2 scale businesses. Fourth, improving services of the existing credit guarantee scheme, including developing a credit guarantee scheme for SME at the regional level. In the area of Non Financial Support, the development of SME will be promoted through the strengthening of Business Development Services (BDS). This includes inter alias: Firstly, evaluating, re-organizing and promoting existing private and public BDS providers for SME, and encouraging the establishment of new ones, when necessary. Secondly, promoting selected prime product in existing centers or clusters by providing both financial and non financial support. Thirdly, developing human resources through empowerment of SME training institutions, either private or public institutions. Distinguished Guest, Ladies and Gentlemen One of the very strategic opportunities in SME development is in the area of resource based economic activities, such as agroindustry, fisheries and also trades and tourisms. It can increase the capacity for export directly as well as indirectly, farmer s income, and generate employment. Moreover, investment in agro-industry is urgently needed to help farmers who have invested in primary production. SME are looking for a competitive environment that allows them to perform efficiently and productively, so that are able to contribute more to the economic recovery and sustainable growth at the national and regional level. To achieve this goal support and assistance from the donor countries and agencies are urgently required. Distinguished Guest, Ladies and Gentlemen The support of the International communities can be extended for - Capacity Building, such as training, technical assistance and management support - Capital, in terms of credit and equity financing - Information Technology, such as Industry knowledge, a commerce, internet-based business tools and credit information system - Supporting Conducive Business Environment, inter alias, by reforming legal/regulation, taxation, licensing, and other trade issues. Distinguished Guests, Ladies and Gentlemen, It is my greatest expectation that by having this interim CGI meeting, we shall be able to establish better understanding and close cooperation between the Indonesian government and Donor Countries and Agencies to support SME development programs. Finally, I would like to express my deepest gratitude and appreciation to all of the officials of the donor countries and agencies under CGI for the continuous support and cooperation of the development of SME in Indonesia. Thank You.

3 SUPPLEMENT to the Speech of the State Minister of Cooperatives and Small and Medium Enterprises A. SME PERFORMANCE 1. Small and Medium Enterprise including Cooperatives (SME) in Indonesia have been playing an important role in the national economy. Based on 2 statistical data (table 1), there are about 39 million enterprises in Indonesia, consisting of million (99.85%) small enterprises (SE), 55.1 thousand (.14%) medium enterprises (ME) and 1.9 thousand (.1%) large enterprises (LE). According to the law, a small enterprise is defined as a legal private enterprise, organization, foundation or cooperative that belong to Indonesian citizens, has total assets of less than Indonesian Rupiah (IDR) 2 million (excluding land and buildings), and has a turnover of no more than IDR 1 billion a year. A medium enterprise is defined as a legal private enterprise, organization, foundation or cooperative, which owned by Indonesian citizens, which has total assets of IDR 2 million (excluding land and building) but less than IDR 1 billion. These definitions are now under review to accommodate the change in recent economic changes, including inflation. In 2, SMEs employed more than 74.3 million workers (99.4%) of the total 74.7 million workers consisted of SEs 66.8 million workers, MEs 7.5 million workers and LEs thousand workers. The agricultural sector has the largest employment amounting to 32 million workers (42.9%), followed by trading, hotels and restaurants in the amount of 18.4 million workers (24.7%), see table The contribution of SMEs to Gross Domestic Product (GDP) in 2 was 56.7% of the total GDP IDR trillion, which consisted of small enterprises 4.4% and medium enterprises 16.3%. The largest contribution was from the non-agricultural sector, which reached 81.2% of the total GDP. Comparing to the 1999 GDP, the contribution of SEs increase by 5.7%. On the other hand the shares of LEs in the agriculture sector decrease by 4.4% respectively. In addition, the contribution of the agricultural sector increased by 5.6%. This indicates that SEs as well as MEs may have better economic foundation. Therefore, during the crisis, it tended to be able to survive and even improve their contribution to GDP (Table 3).

4 Total export in 2 were IDR 438,853 billion, comprising contributions 2.94% from SEs, 11.76% from MEs, and 85.3% from LEs the actual contribution of SEs to export was much greater than which indicated by the figures because many production of SEs are exported by MEs and LEs for example rubber, coffee and pepper. Compare to the data in 1999, in terms of IDR, there was an increase in the total exports by 24.61% from IDR 352,17 billion. This increase was, mostly due to a depreciation of IDR againts foreign exchange, particulary the US dollar. The increasing from 1999 until 2 in SME exports is quite substantial. The SEs export increased by 1.5% and MEs by 29.7%. On the other hand, the LEs export increased by 24.4% (Table 4). B. STRATEGIC PLANNING In regard to the 1999 Basic Guidelines to State Policy (GBHN), a Strategic Planning for Cooperatives, Small and Medium Enterprises (SME) Development has been introduced to empower Cooperatives and SME for the period of year This Strategic Planning focuses on the establishment of people s economy based on the market justification, local natural resources, virtual resources and human resources that are productive, independent, progressive, competitive, and awareness of sustainable environment, as well as maintaining the nation s norms and value. C. SME DEVELOPMENT PROGRAM Based on Strategic Planning a SME Development Program has been developed, that consist of three areas/aspects : 1. Administrative and Business Environment; 2. Financing; 3. Non Financial Support/Business Development Services (BDS). A matrix of SME Development Program is attached herewith (table 5).

5 Table 1. THE NUMBER OF SMALL, MEDIUM & LARGE ENTERPRISES ACCORDING TO ECONOMIC SECTOR 1999 AND 2 SECTOR Small Medium Large Amount Small Medium Large Amount 1. Agriculture Cattle breeding & Fishery 23,174,579 1, ,176,386 23,516,865 1, ,518, Non Agriculture: - Mining & Exploration 155, , , ,13 - Manufacture industry 2,451,266 9, ,461,671 2,627,122 1, ,273 - Electricity, gas & water 3, ,36 4, ,724 - Property 12,787 6, ,92 136,423 7, ,479 - Merchandising hotel & rest. 8,741,176 21, ,763,581 9,139,645 22, ,163,71 - Transportation, Communication 1,679,836 2,5 98 1,681,984 1,872,892 2, ,875,287 - Finance & Rental 18,437 4, ,699 19,44 4, ,933 - Services 1,458,554 4, ,462,976 1,512,938 4, ,517,525 Amount 37,84,536 51,798 1,832 37,858,232 38,985,72 55,61 1,946 39,42,43 Source: SMOC SME & Statistic Agency (BPS)

6 Table 2. SME EMPLOYMENT ACCORDING TO ECONOMIC SECTOR 1999 AND 2 SECTOR Small Medium Large Amount Small Medium Large Amount 1. Agriculture cattle breeding & Fishery 31,839, ,748 36,173 32,56,46 31,35,488 73,752 38,127 32,74, Non Agriculture: - Mining & Exploration 295, ,152 12,57 433,43 433,43 124,764 12,531 57,698 - Manufacture industry 6,883,12 3,418,84 225,959 1,527,811 1,527,811 3,664,11 242, ,9 - Electricity, gas & water 5,614 77,87 8, ,149 91,149 83,579 9, ,887 - Property - Merchandising hotel & rest. 334,252 15,551,379 32,97 1,397,429 6,583 26,62 643,742 16,975, ,742 16,975, ,118 1,461,131 7,435 27, ,295 18,464,393 - Transportation, Communication 2,11, ,627 1,196 2,333,671 2,333, ,63 11,368 2,582,12 - Finance & Rental - Services 69, ,52 7, , , ,397 8, ,2 2,557, ,323 25,568 3,276,4 3,276,4 719,174 26,521 4,21,699 Amount 59,646,722 7,75,615 36,111 67,82,448 66,827,98 7,535,88 383,573 74,746,641 Source: SMOC- SME & Statistic Agency (BPS)

7 Table 3. DISTRIBUTION OF GDP BY SIZE OF ENTERPRISES AND ECONOMY SECTOR (Billion IDR) SECTOR AGRICULTURE NON- AGRICULTURE AMOUNT Small 177,77 (38.4) 284,849 (61.6) 462,556 (1.) 1999 Medium 33,58 (18.2) 149,886 (81.8) 183,395 (1.) Large 6,829 (1.4) 466,661 (98.6) 473,49 (1.) Amount 218,45 (19.5) 91,397 (8.5) 1,119,442 (1.) Small 188,715 (38.2) 34,959 (61.8) 493,674 (1.) 2 Medium 35,21 (17.5) 164,27 (82.5) 199,228 (1.) Large 6,522 (1.2) 521,486 (98.8) 528,8 (1.) Amount 23,257 (18.8) 99,653 (81.2) 1,22,911 (1.) Figures in bracket indicates percentage Source: SMOC SME & Statistic Agency (BPS)

8 TABLE 4 EXPORT PRODUCT OF SMALL, MEDIUM & LARGE ENTERPRISES ACCORDING TO THE ECONOMIC SECTOR (Million IDR) S e c t o r Small Medium Large Amount Small Medium Large Amount (1) (2) (3) (4) (5) (6) (7) (8) (9) 1. Agriculture, cattle breeding, forestry & fishery 3,68,591 (1.5) 1,782,169 (.51) 847,53 (.24) 6,39,813 (1.79) 3,628,483 (.83) 1,872,323 (.43) 843,195 (.19) 6,344,1 (1.45) 2. Mining & Exploration 13,958 (.4) 211,388 (.6) 52,679,313 (14.96) 53,21,659 (15.6) 38,32 (.9) 146,876 (.3) 58,641,874 (13.36) 59,168,782 (13.48) a. Oil & gas 33,568,137 33,568,137 4,933,994 4,933,994 b. Non Oil-gas c. Exploration 25,274 15, ,978 89,41 18,996, ,349 19,144,79 39,443 1, , ,372 17,627,342 8,538 17,676, , Manufacturing industry 7,855,959 (2.23) 37,791,491 (1.73) 247,191,825 (7.19) 39,49, ,839,275 (83.15) 39,49,572 8,885,768 (2.2) 49,66,367 (11.3) 314,848,721 (71.74) 46,221, ,34,856 (85.7) 46,221,399 a. Oil-gas Industry 7,855,959 37,791,491 27,782, ,429,73 8,885,768 49,66, ,627, ,119,457 b. Non oil-gas industry TOTAL EXPORT 11,667,5 8 (3.31) 39,785,48 (11.3) Figures in bracket indicates (%) percentage 3,718,191 (85.39) 352,17,747 (1.) 12,894,283 (2.94) 51,625,566 (11.76) 374,333,79 (85.3) Source: SMOC SME & Statistic Agency (BPS) 438,853,639 (1.)

9 (Table 5) SMEs DEVELOPMENT PROGRAMS I. ADMINISTRATIVE AND BUSINESS ENVIRONMENT NO PROGRAMS 1 Program on the Implementation of SMEs Policy design in some selected provinces. To create the SMEs conducive environment Indonesia needs to learn some other countries experiences in policy design especially in the following aspects : - Inter government institution coordination. - Decentralization (central - regional relationship). - Stakeholder participation. To apply the relevant best practice for SMEs policy design and formulation some pilot projects in different local areas need to be conducted. 2 Replication of one stop services in priority regions. Lack of understanding to the role of SMEs has brought about over regulation and licensing toward the Indonesian SMEs by government. Entering the autonomy era, it seems likely that the burden to SMEs, will be becoming heavier. To cope with these problems, therefore it is necessary to develop so-called one stop services that gives services for SMEs to get licenses, permits and other services under one roof. To evaluate, improve and implement the one stop service in other local area represent West, Middle and East Indonesia. 3 Policy on women entrepreneur s development focused on their access to the financial resources. The role of women entrepreneur (mostly as the micro enterprise) in the Indonesia economy has been reorganized, as the positive contributor especially during the economic crisis where their husband lost their job. To study policy constraint to the women in access financial and their economics resources. To make recommendation and draft of policy.

10 4 Providing tax incentive, administrative facilities/subsidies and promoting competitive business environment to support SMEs productivity - Reforming and innovating tax regulations for SMEs - Provision of administrative facilities/subsidies * Standardization of SMEs definition * Simple licence and easy process for SMEs. * Restraining and reducing unnecessary retribution, which hinder SMEs development 5 Simplification and revision of sectoral policy which is conducive for SMEs 1. To study local regulations hindering SMEs development. 2. Revision, simplification, syncronization of regulation, especially : a. Law for SMEs and its supporting b. Law for Cooperative and its supporting c. Regulation for sub contract, frenchise and partnership d. Regional regulation including related restribution, business permit, location permit. 3. Study and formulate insentive system and facilities to develop SMEs covering : finance, investment, marketing, technology and information