Indonesia’s Trade Ministry announced in October that it plans to introduce new e-commerce legislation. This follows an earlier draft which spooked the whole tech industry, especially foreign investors. We would like to add a broader context to the issue – how regulations get made in Indonesia, why the process creates uncertainty for investors, and why we are optimistic rather than pessimistic for the future.
E-commerce regulation is on the way
In a broadly-based review of the sector, the Indonesian Trade Ministry announced that it would introduce a range of measures to better govern rapidly Indonesia’s growing e-commerce market. These would cover closer regulation of existing e-commerce providers, offer new consumer protections, introduce clearer regulation for products sold online, and potentially introduce a tax for online transactions (see the Jakarta Globe article here).
Last August a storm erupted within the Indonesia e-commerce sector following a low-profile announcement by the Government that online retailers would fall under the same foreign investment rules as offline retailers.
Initially the fear was that foreign investment in e-commerce would be severely restricted (see Remko Lupker’s excellent post here), followed two weeks later by a more detailed legal analysis suggesting the situation was not as bad as initially feared (see TechInAsia’s thorough legal analysis of the new rules here).
Long-time observers of Indonesia were not in the slightest bit surprised by this turn of events. But for the young Indonesian tech industry this was an unsettling experience of the vagaries of Indonesian law-making.
In this post we will provide some context and background to help explain what has happened, why it isn’t as bad for the tech industry as it first appeared, and why we are somewhat optimistic about the future regulatory regime.
The regulatory process in Indonesia is full of uncertainty
Regulatory uncertainty and ambiguity is a fact of life across all business sectors in Indonesia (just talk to anyone in the oil, gas or mining industries).
Three primary factors create this uncertainty:
1. Inconsistencies between the various Government ministries.
The new e-commerce regulation will be issued by the Trade Ministry. However, some aspects of e-commerce also fall under the Informatics and Communication Ministry and the Small and Medium Enterprises Ministry. The different Ministries have quite different views of how e-commerce should be regulated, and are influenced by different lobbying groups. Regulations in Indonesia thus tend to be inconsistent over time, rather than being driven from a common set of principles.
2. A rear-view mirror approach to regulation, especially for new sectors such as tech.
Indonesian regulators tend to be reactive rather than pragmatic or visionary, and often react too hastily, especially in fast-changing sectors e.g. the regulation of premium SMS services in October 2011 which throttled the Indonesian RBT (ringback tone) market at a stroke. This means regulations are often poorly thought through, and can be quite out of sync with the trends taking place in the industry sectors they affect.
3. A “run it up the flagpole” approach to new regulations.
New regulations are often launched to see how the various interested parties will respond, almost like a public consultation process. There are scores of examples of Indonesian regulations which were issued, then re-negotiated (and sometimes even withdrawn), across all industry sectors.
New regulations should therefore be viewed as proposals from the Ministry, rather than hard and fast rules. It is then up to the various players to argue their case to the Ministry to shift the regulation in their favor.
Uncertain regulation has many bad sides, and some good ones too
Investors do not like uncertainty, and the vagaries of the Indonesian regulatory process is an overall negative factor for the tech sector. However, the cloud does have some silver linings.
First, it caused the tech industry to realize that it needs to build stronger platforms from which to lobby the Ministries. The e-commerce and the ISP associations are already in place, and the Venture Capitalist sector is also considering the formation of an industry group (see here).
This is a very positive factor for the tech industry, since it will give start-ups and entrepreneurs more of a voice. This is critically important if Indonesia is to develop a strong and thriving tech sector.
The second positive point is that it has caused everyone in the tech sector to become rapidly more educated about regulatory impacts. The global tech sector has a tendency to try and fly under the regulatory radar, and while this is a necessity in such a fast-moving industry, it is also a requirement to keep one eye on the shifts in regulation, from the perspective of both the opportunities and the threats that result.
More positive than negative trends in the future
Indonesia will move towards greater regulatory structure and clarity in the future. Further, the current and future trends are positive rather than negative.
The first positive trend is – paradoxically – due to the recent blip in the world economy which caused the Rupiah to weaken dramatically and for foreign investors to cool towards Indonesia. This was quite a shock to the Government, and has dented their economic growth plans.
The Government’s (positive) response has been to put in place a number of encouraging regulatory proposals to re-stimulate foreign investment, and it has stated a clear intent to further encourage foreign investment (see here).
Secondly, with Presidential elections coming up in mid-2014 (and especially given the openness of the Presidential race) we expect to see increasing political jockeying between the various parties. This will cause an overall slowdown of new restrictive regulations, which for the young tech sector is a good thing.
Lastly, a number of the leading candidates for Presidency of Indonesia are strong-minded and competent individuals. Usually the President’s first term is characterized by forward-thinking and a new sense of purpose, and this is likely to lead to clearer growth-oriented regulations.
So while investors will continue to face a relatively high level of regulatory uncertainty in Indonesia, the big-picture indicators for the future suggest Indonesia’s regulatory environment for the tech sector will improve.