The Use of Discretion

Ease of Doing Business within the Business Licensing Process

27 July 2023

Obtaining a license is a crucial step that business actors must navigate before commencing their operations. In fact, this holds particularly true in Indonesia, where business actors often find themselves caught in a predicament during the application process, grappling with a perplexing set of circumstances. The disparity between the theoretical framework of the business permit application process and its practical implementation presents significant challenges. Business actors embarking on their ventures are confronted with an intricate web of regulations and procedures, making it arduous and time-consuming to navigate through these layers of bureaucracy. This hindrance affects their ability to launch their ventures promptly and leaves them feeling overwhelmed by the complex and convoluted paperwork involved in the application process.


To address these challenges, a comprehensive review of the business license application process is necessary. Regulatory authorities must bridge the gap between theory and practice by streamlining procedures and providing clear and consistent guidelines. Simplifying the paperwork, reducing unnecessary requirements, and expediting the issuance of business licenses will foster an environment conducive to entrepreneurship and economic growth.


Discretionary Power


The Indonesian government, as part of its role in a welfare state, is responsible for providing essential services to improve the general welfare of its people. This involves intervening in the socio-economic aspects of people's lives through the delegation and transfer of authority. However, it is noteworthy that the government is limited by legal boundaries to prevent the misuse of power. These boundaries are set by the Law No. 30 of 2014 on the Government Administration and its amendments (“Law 30/2014”).


However, the government is often face with some conditions whose scope has not been regulated by regulations (written) or is in the process of promulgation.


Job Creation, State Administrative Decree, and Business Licensing


In Indonesia, there has been a significant shift in trade patterns, as evident from the enactment of Law No. 11 of 2020 on Job Creation (subsequently repealed by Government Regulation in Lieu of Law No. 2 of 2022 on Job Creation and Law No. 6 of 202 “Job Creation Law”) by promoting liberalization of business activities through streamlined business licensing procedures to enhance the investment ecosystem and facilitate the simplification of business licensing processes.


Based on the Job Creation Law, the implementation of providing business licensing facilities is carried out based on the determination of the business scale and risk level of business activities involved. This includes low-risk business activities (requires a business license in the form of a Business Identification Number—NIB); medium-risk business activities (requires business licensing in the form of NIB and Standard Certificate); or high-risk business activities (which require business permits in the form of NIB and Permits). Additionally, the law simplifies the "basic requirements" necessary for obtaining a business license. This includes the Confirmation/Approval of Conformity of Spatial Utilization Activities (KKKPR/PKKPR), which replaces Location Permits; Environmental Approval, which supersedes Environmental Permits; and Building Approval, which supersedes Building Permits.


It is important to note that both the business licensing process and the aforementioned basic requirements are considered as State Administrative Decrees (Keputusan Tata Usaha Negara or "KTUN") issued by the government officials, as they possess a concrete, individual, and final nature.


Definition, Scope, and Discretionary Requirements


The concept of independence for government officials to act on their own judgment or initiative in addressing urgent issues through discretionary power is outlined in Article 22 of Law 30/2014. However, it is important to note that this discretionary power can only be exercised by authorized government officials with the objectives of (1) launching government administration, (2) filling legal vacancies (rechtsvacuum), (3) providing legal certainty, and (4) addressing government stagnation in specific circumstances, all for the benefit of the public and the common interest.


The scope that allows government officials to take discretion according to the provisions of Article 23 of the Law 30/2014, includes the following circumstances:


  1. When there are provisions in laws and regulations that offer a choice to do so.
  2. When laws and regulations are absent or insufficient, particularly in cases that fall outside the ordinary or under specific conditions.
  3. When laws and regulations are incomplete or unclear, requiring further clarification, addressing overlapping regulations that lack harmony and synchronization, or necessitating the creation of implementing regulations that have not yet been established.
  4. When there is government stagnation for broader interests, such as those pertaining to the lives of many people, the preservation of humanity, and the integrity of the state. This includes situations involving natural disasters, disease outbreaks, social conflicts, riots, defense, and national unity.


Government officials are granted the necessary discretion to handle complex and unforeseen situations, always with the objective of serving the broader public interest. To ensure that this discretion is not abused, it is crucial to observe and regulate their authority through the application of general principles of good governance (AUPB). In the context of Indonesian constitutional law, Law 30/2014 outlines the scope of AUPB coverage, which encompasses principles such as legal certainty, expediency, impartiality, accuracy, prevention of abuse of authority, transparency, consideration of public interest, provision of good service, and adherence to established jurisprudence.


Discretion in Business License Issuance


One example of the potential use of discretion is the acceleration of the granting of Environmental Approval in Article 7 paragraph (8) letter a of Presidential Regulation No. 3 of 2016 concerning the Acceleration of the Implementation of National Strategic Projects, along with its amendments (Perpres 3/2016); i.e. for 60 working days which is not in accordance with the normative provisions of granting Environmental Approval.


As an example the massive construction of toll roads as one of the national strategic projects. Toll road construction is a business activity covered by KBLI 42901 – Road Civil Building Construction. This business permit for KBLI 42901 is given after business actors obtain basic requirements in the form of Environmental Approval, which must have an Environmental Impact Assessment (Analisis Mengenai Dampak Lingkungan or Amdal) document.


In practice, the process of obtaining this Environmental Approval is quite complex and not short, as it will relate to the required Amdal categories (A, B or C); community involvement; technical examination of terms of reference, preparation of Environmental Impact Assessment (Andal) documents; and RKPL-RPL and assessment of Amdal documents, both administrative and substance, by ministers, governors, or regents/mayors (in accordance with their authority) through environmental feasibility test teams.


Therefore, at least to obtain Environmental Approval to obtain a business permit to carry out toll road construction projects based on KBLI 42101 above, it will take at least 110 days (60 days + 50 working days) and a maximum of 230 days (180 days + 50 working days), assuming there is no improvement in documents and objections from the community. This will certainly miss far from what is written in Article 7 paragraph (8) letter a of Presidential Regulation 3/2016, where Environmental Approval must be issued within a maximum of 60 working days.


That is why, as mandated by Article 28 of Presidential Regulation 3/2016, if there are obstacles or problems in the KTUN—business license issuance in the form of Environmental Approval for the National Strategic Project business permit process that exceeds the stipulated time period, taking into account the requirements for discretionary issuance, relevant government officials must take discretion so that the Environmental Approval is still issued within 60 working days.


Importance of Discretionary Power to Business Licensing Issuance


Thus, not only related to National Strategic Projects and in order to increase the value of Ease of Doing Business (EODB), government officials are also expected to be able to produce to take the necessary steps in relation to the process of KTUN—business license issuance for business actors, including exercising the discretion while maintaining adherence to the AUPB.


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