22 Developing BDS Markets in Indonesia Impact Assessment o. · adb sme developmentta background report development of bds markets in indonesia – impact assessment of selected programs

ADB SME DEVELOPMENT TA

BACKGROUND REPORT

DEVELOPMENT OF BDS MARKETS IN INDONESIA – IMPACT ASSESSMENT OF SELECTED

PROGRAMS

FRANK NIEMANN

MAY 2002

Published by: ADB Technical Assistance

SME Development State Ministry for Cooperatives & SME

Jalan H.R. Rasuna Said Kav.3 Jakarta 12940

Tel: ++62 21 520 15 40 Fax: ++62 21 527 94 82

e-mail: [email protected]

ADB SME DEVELOPMENTTA

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I. TABLE OF CONTENTS

I. TABLE OF CONTENTS I

II. TABLE OF ABBREVIATIONS III

III. TABLE OF FIGURES IV

IV. TABLE OF REFERENCES VII

V. EXECUTIVE SUMMARY ENGLISH VIII

VI. RINGKASAN EKSEKUTIF DALAM BAHASA INDONESIA ERROR! BOOKMARK NOT DEFINED.

1 INTRODUCTION .....................................................................................................1 1.1 Background and Purpose ........................................................................................1 1.2 Approach and Methodology .....................................................................................2

2 IMPACT ASSESSMENT OF SELECTED PROGRAMS .........................................4 2.1 Swisscontact Voucher Program...............................................................................4 2.2 DAPATI - Technology Services Matching Grant Scheme........................................9 2.3 Technical Assistance and Training Program (TATP) ICT Services Matching Grant

Scheme..................................................................................................................15 2.4 MONE – 'Vucer' Program for Technological Assistance........................................25 2.5 SwissContact Business Development Center (BDC) Project (Phases 3&4)..........29

3 SPECIFIC POINTS OF INTEREST .......................................................................37 3.1 Funding Instruments for BDS Market Development ..............................................37 3.2 SME's Demand for BDS ........................................................................................43

3.2.1 Attitudes towards BDS 43 3.2.2 BDS awareness and demand 49 3.2.3 External influence factors on BDS demand and usage 52 3.2.4 Supply-induced demand effects 57 3.2.5 Effects of public interventions and BDS market development programs 59 3.2.6 Synthesis and outlook 63

3.3 BDS Supply............................................................................................................66 3.3.1 Supply structure 66 3.3.2 Commercial Feasibility 69 3.3.3 Supply-side constraints 74 3.3.4 Does Supply Match Demand – Summary and Conclusions 78


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4 PROPOSED STRATEGY FOR BDS MARKET DEVELOPMENT ........................80 4.1 Combining Demand and Supply Development – The Overall Approach ...............80 4.2 Minimizing Intervention And Market Distortion By Government And Donors.........83 4.3 Specific Interventions.............................................................................................85

ANNEX 1: PROPOSED BDS EVALUATION FRAMEWORK ..........................................89

ANNEX 2: BDS PROGRAM STREAMLINING AND DIVESTURE...................................92


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II. TABLE OF ABBREVIATIONS

ADB Asian Development Bank ASEAN Association of South-East Asian Nations BDC Business Development Center BDS Business Development Services BPS Biro Pusat Statistik (Indonesian Central Statistical Office) DAPATI Dana Kemitraan Peningkatan Teknologi Industri FSC Forest Stewardship Council FY Fiscal Year GAP Generally Accepted Practice GoI Government of Indonesia IDR Indonesian Rupiah IAI Ikatan Akuntan Indonesia (Indonesian Accounting Institute) IAI -KAM Kompartemen Akuntan Manajemen (Management Accountant

Compartment) of the Indonesian Accounting Institute ICT Information and Communication Technology IMF International Monetary Fund ISO International Standardization Organization IT Information Technology ITS Institute of Technology Surabaya ITS - LPM Lembaga Pengabdian Masyarakat (Institution to Serve the

Community) of the Institute of Technology Surabaya MOIT Ministry Of Industry & Trade MONE Ministry Of National Education MTAP Medium Term Action Plan NAFED National Agency For Export Development OECD Organization for Economic Co-operation and Development R&D Research and Development SC Swisscontact SME Small and Medium Enterprises SMI Small and Medium Industry SMSP Small- or Medium-scale Service Provider SP Service Provider SwF Swiss Francs TA Technical Assistance TATP Technical Assistance and Training Program USD US-Dollar WB The World Bank WTO World Trade Organization


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III. TABLE OF FIGURES

Figure S1: Comparison Of Outreach And Efficiency Indicators For The Programs / Projects Assessed (in USD)...........................................................................X

Figure S2: SME's reasons for not using BDS - Results from the TA's survey in Medan and Semarang..................................................................................XII

Figure 1: Services offered under the SC Voucher Program..........................................4 Figure 2: Voucher sale and usage under the SC Voucher Program .............................5 Figure 3: Services used under the SC Voucher Program, by number of

participants.....................................................................................................6 Figure 4: Voucher sales in East Java, by City...............................................................6 Figure 5: Expenses for the East Java Voucher Program (May 1999 - December

2000) 8 Figure 6: Development of DAPATI applications and contracts, 10/97 – 07/01 ...........10 Figure 7: DAPATI applications by processing status and region ................................10 Figure 8: DAPATI sub-projects by consultancy type and region (multiple

answers possible) ........................................................................................11 Figure 9: DAPATI beneficiaries by turnover and region ..............................................12 Figure 10: DAPATI - Screened Service Providers by Sector and Location

(multiple answers possible)..........................................................................13 Figure 11: DAPATI – Provider Usage by Provider Type ...............................................13 Figure 12: Total Contracted DAPATI Expenses per June 01, in USD ..........................14 Figure 13: Number of processed TATP matching grant applications, per April 6,

2001 17 Figure 14: TATP contracts by type of beneficiary .........................................................18 Figure 15: TATP contracts by region (as per April 6, 2001) ..........................................18 Figure 16: TATP grants by type of activity supported (per August 2001)......................19 Figure 17: TATP contracts by type of Service Provider (per April 6,2001)....................21 Figure 18: Total Contracted TATP Expenses per April 01, in USD...............................23 Figure 19: Sector Distribution of MONE 'Vucer' Program subprojects, 1993-2000.......25 Figure 20: Distribution of MONE 'Vucer' Program Subprojects by Service Focus

(93-2000)......................................................................................................26 Figure 21: Cooperation Concept of the SC BDC Project (Phases 3-4).........................30 Figure 22: Service Focus of BDC created/ supported under the SC project.................31 Figure 23: Planned And Actual Business Development Of A Selected BDC During

The 18-months Start-up Period....................................................................33 Figure 24: Efficiency Indicators For The SC BDC Program (Phases 3 & 4) .................35 Figure 25: Comparison Of Outreach And Efficiency Indicators For The Programs /

Projects Assessed (in USD).........................................................................37 Figure 26: Comparison Of Market Development Instruments .......................................40


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Figure 27: SMEs' BDS usage and willingness to pay for BDS – Results from the TA's survey in Medan and Semarang ..........................................................43

Figure 28: SMEs' reasons for not using BDS - Results from the TA's survey in Medan and Semarang..................................................................................44

Figure 29: BDS payment in relation to enterprise turnover – Results from the TA's survey in Medan and Semarang ..................................................................45

Figure 30: Relation between BDS usage and business performance - Results from the TA's survey in Medan and Semarang............................................45

Figure 31: BDS usage by enterprise age group - Results from the TA's survey in Medan and Semarang..................................................................................46

Figure 32: Motivation for using BDS - Results from the survey in Medan and Semarang.....................................................................................................46

Figure 33: BDS usage by education of manager - Results from the TA's survey in Medan and Semarang..................................................................................47

Figure 34: BDS usage and reasons for non-usage by age of manager - Results from the TA's survey in Medan and Semarang............................................47

Figure 35: SMEs' awareness of and latent demand for BDS – Results from the TA's survey in Medan and Semarang ..........................................................49

Figure 36: SMEs with low interest in paid BDS by sector –Results from the TA's survey in Medan and Semarang ..................................................................50

Figure 37: Relation between demand for specific services – Findings from the TA's survey in Medan and Semarang ..........................................................51

Figure 38: BDS usage in relation to access to bank credit - Results from the TA's survey in Medan and Semarang ..................................................................52

Figure 39: Impact of the business environment on BDS usage and demand – Comparison of results from the TA's survey for Medan and Semarang.......54

Figure 40: Estimated impact of improved taxation practice on BDS demand. ..............54 Figure 41: Impact of internationalization on BDS usage and demand –

Comparison of results from the TA's survey for Medan and Semarang.......56 Figure 42: Service usage and provider knowledge by city –Results from the TA's

survey in Medan and Semarang ..................................................................58 Figure 43: BDS users by enterprise age– Comparison between the TA's survey in

Medan and Semarang and SC's Voucher Program East Java Phase I .......60 Figure 44: Age structure of BDS users – Comparison between the TA's survey in

Medan and Semarang and SC's Voucher Program East Java Phase I .......60 Figure 45: Education background of BDS users – Comparison between the TA's

survey in Medan and Semarang and SC's Voucher Program East Java Phase I 61

Figure 46: SME's usage of and interest in IT services – Comparison of results from the TA's survey for Medan and Semarang...........................................61

Figure 47: SME's usage of and interest in management and technical training – Comparison of results from the TA's survey for Medan and Semarang.......63

Figure 48: Relation between enterprise age and interest in selected BDS – Results from the TA's survey in Medan and Semarang...............................65


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Figure 49: Individual membership in the Management Accountant Compartment of the Indonesian Accounting Institute (IAI), by province and occupation of member..................................................................................67

Figure 50: Ownership status of BDS providers applying for / participating in market development programs ....................................................................68

Figure 51: Average service fee in IDR per hour of providers participating in SC's Voucher Programs, by provider ownership / institutional type .....................68

Figure 52: Estimation of BDS market volume (excluding services to agriculture), by enterprise turnover class .........................................................................70

Figure 53: BDS payment according to the TA survey in Medan and Semarang, by payment classes ..........................................................................................71

Figure 54: Average service prices and market volumes by service segment – Calculations based on the TA survey in Medan and Semarang ..................72


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IV. TABLE OF REFERENCES

Author Title Bissegger, Peter The BDS Market in East Java, Indonesia (Market Assessment

and Application of Performance Measurement Framework), Presentation for the International Conference on "Business Ser-vices for Small Enterprises in Asia: Developing Markets and Measuring Performance" in Hanoi, Vietnam - April 3-6, 2000

Bissegger, Peter / Schwegler, Johannes / Nurwathoni, Mohamad/ Suryatin, Etih / Wilujeng, Nunuk

Draft Report on the Progress - Implementation of the Voucher Program – Period: April 2001 - March 2002, SwissContact Indonesia, Jakarta, 2002

DAPATI Background Report on Dapati Program and Progress, Jakarta, September 1999

DAPATI Operating Manual, March 1998

Hickling Indonesia (P.T.)

TATP – Indonesia's Technical Assistance and Training Program; Successes To Date, Jakarta, August 2001

Kurniawan, Dudi M./ Indriantoro, Nur (IAI)

The Role of Disclosure in Strengthening Corporate Governance and Accountability, Presentation for The Second Asian Roundta-ble on Corporate Governance organized by ADB, OECD and the World Bank, Hong Kong, China, 31 May –2 June 2000

Lerche, Dr. Dietrich Project Cook Book – Recipe for "How to Kill a (Good) Project", Jakarta, September 1999

Miehlbradt, Alexandra Overy

Business Development Services in Vietnam - A Study to Assess the Market for BDS among 1,200 Small and Medium Enterprises in Ha Noi, Ho Chi Minh City, Da Nang, Hai Phong Dong Nai and Binh Duong, for GTZ and SwissContact, Hanoi / Ho Chi Minh City, June 2002

Office of the US Trade Representative

2002 National Trade Estimate Report on Foreign Trade Barriers, Washington D.C., 2002

Phillips, David A. Implementing the Market Approach to Enterprise Support – An Evaluation of Ten Matching Grant Schemes; The World Bank, Europe and Central Asia Region, Private and Financial Sectors Development Sector Unit, 2001

Swiss Agency for De-velopment and Cooperation (SDC)

Developing Markets for Business Development Services: De-signing and Implementing More Effective Interventions", SED Issue Paper No. 5, Bern, June 2000

Swisscontact Indonesia BDS market development in Indonesia (undated)

Semester Report – Voucher Program in Jabotabek, Period of: April-August 2001

Weir, Robin AsiaLaw Profiles 2002 – Indonesia, Euromoney Publications (Jersey) Ltd.


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V. EXECUTIVE SUMMARY ENGLISH

Report Context and Objectives Under the SME Development Policy Matrix' objective of "promoting commercially oriented technical and business support", the SME Development Task Force, supported by the ADB SME Development TA, is inter alia to (1) review existing SME technical/business support programs, develop performance criteria, and evaluate selected major programs, (2) prepare an action plan identifying opportunities for market based provision of services and private sector participation, and (3) consolidate and streamline technical / business support programs.

In complementing other TA outputs, namely (i) an 'Inventory and Resource Assessment of Non-Financial SME Support Programs' (Background Report 8, July 2001), (ii) a proposed evaluation framework for BDS (Internal TA Paper, April 2001, Annex 1 to this report), and (iii) an ‘Evaluation Of SME Trade And Export Promotion In Indonesia’ (Background Report 24, May 2002), this report aims at

Assessing and evaluating relevant government- and donor-sponsored programs for their impact on developing markets for Business Development Services (BDS),

Relating assessment observations and findings to available information on SME demand for and usage of BDS, and

Outlining, based on the study's findings, possible action lines for promoting market based provision of BDS.

The TA outputs have been synthesized into (i) a proposed action plan for enhancing mar-ket based provision of services and private sector participation, as presented in the TA's Final Report and its Policy Paper No. 10 "Action Plan for SME Development: Strategy and Recommendations" (April 2002) and (ii) a synopsis of recommendations on consolidation, streamlining and divestment of government-sponsored BDS programs (May 2002, Annex 2).

Impact Assessment of Relevant Programs Project evaluation was constrained by lack of sufficient information about (i) the number of beneficiaries, as well as the total number of eligible SMEs (outreach), (ii) full cost contribu-tion of beneficiaries, as well as project management costs incurred with the GoI (effi-ciency), and (iii) partial unavailability or insufficient access to monitoring information on impacts on beneficiaries and providers, respectively (effectiveness). Nevertheless, avail-able information and interviews with project managers and selected BDS providers and beneficiaries allow for the following assessment:

The Swisscontact Voucher Program in East Java (1999-2000) has proved to be a useful instrument for developing the low-cost segment of the market for commer-cial BDS provision to SME. 78% of voucher users had never used BDS before, and 72% of users indicated to be ready to use other services from the same pro-vider. On the supply side, the program stimulated providers to adjust their services to actual demand. However, only half of accredited providers were active under the program, as low voucher values did apparently not provide sufficient incentives for them to refocus activities onto voucher users' demand. Outreach, although signifi-cant, remained below expectation. Possible program-level explanations for this phenomenon include a too sparse voucher distribution network, and the limited number of active providers.

After having overcome initial conceptual problems, the World Bank / MoIT DA-PATI matching grant scheme for technology upgrading services (1997-2001) found considerable interest among eligible SME. Outreach, although significant,


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remained below expectation, which is partly due to project implementation coincid-ing with the 1998 financial crisis. DAPATI sub-projects appear to have in general benefited the participating SME and contributed to stimulating their competitive-ness and modernization. The approach seems to be most appropriate to larger SME with turnover exceeding 2 billion IDR (USD 200,000), while smaller SME may lack sufficient management capacities to absorb the consultancy input. DAPATI's overall contribution to developing SME demand for technology-oriented BDS has been relatively small and primarily restricted to enhancing transparency on avail-able BDS supply. Through its phased sub-project approach and intensive imple-mentation monitoring and evaluation, however, DAPATI has significantly contrib-uted to provider capacity building. Overall impacts on BDS market development could have been enhanced by a stronger focus on publicizing provider information gained during implementation to interested SME.

By providing matching grants for ICT service usage, the ongoing World Bank / MoIT Technical Assistance and Training Program (TATP) aims at increasing SME's willingness to use IT consulting services in future at full market costs, as well as the quantity and quality of respective services available in Indonesia. These objectives are unlikely to be achieved. Current implementation experience indicates an already well-developed service supply, while service demand is pri-marily restricted by external factors such as high hardware and communication costs. The TATP is mainly supporting basic IT training, an area in which service demand and supply are already reasonably well developed. The high grant portion of 75% appears to have resulted in overly costly sub-projects that are unlikely to be replicated in the absence of matching grants. The TATP lacks approaches for sub-project standardization and systematic implementation monitoring, which could bring forward provider capacity building. By sending wrong price signals, the program is likely to negatively affect service providers' orientation on SME's real demand and needs. Project design does not correspond with international best practice.

The MONE 'Vucer' program provides grants to universities for student/ lecturer teams delivering technology services to SME. Although the program has so far reached out to more than 1% of small and medium industries, its main focus is in-stitutional and educational. The program is a legitimate and relatively cost-efficient instrument for enhancing the practical orientation of technical education, and has promoted a stronger orientation of universities and polytechnics on the require-ments and demand of local SME. Effects on SME's overall demand for technology-related BDS seem negligible. SME appear to be in general aware that the pro-gram's primary objective is educational, and adjust their expectations accordingly. Neither the development of applications for program participation, nor the low-tech and relatively simple outputs delivered by the sub-projects, give reasons to as-sume that the 'Vucer' program is significantly crowding out commercial providers of technology services. For IT-related subprojects, however, crowding out of com-mercial service providers is likely. MONE should review sub-project eligibility crite-ria and accord priority to sub-projects that assist SMEs in (i) defining their me-dium-term technological strategy and (ii) selecting adequate equipment suppliers and/or commercial technological consultants for implementing this strategy. IT-related subprojects should not be supported anymore. Improved public access to technical solutions elaborated could greatly enhance transparency on applied technological know-how available in Indonesia, promote spill-over effects, and would add legitimacy to public spending on the program.

The SwissContact BDC Project supports the establishment of financially self-sustainable Business Development Centers through financial contributions to initial investment and start-up losses combined with counseling. Seven of the ten BDCs supported during Project Phases 3 and 4 have developed into financially self-


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sustainable providers of BDS to SME. The well-structured financing structure, a selection process based on initial business planning, and intensive financial moni-toring during the start-up phase contributed significantly to developing commercial management capabilities of the Centers. Product and strategy development bene-fited from regular BDC forums, as well as individual counseling and assistance in case of specific need. The low number of Centers funded, however, limits the overall impact on BDS supply. The Project's main achievement is to have demon-strated that it is possible to establish commercial and financially self-sustainable providers of BDS to SME in Indonesia. Challenges addressed during the on-going Project Phase 5 are (i) implementing the approach outside Java, (ii) reducing SC's financial contributions in favor of investment funds provided by local venture capital companies, and (iii) developing a sustainable model for product development as-sistance and counseling to BDCs that can replace SC's current case wise support. First experience indicates that it will not be easy to meet these challenges.

Cross-comparison of outreach and efficiency The voucher program has clearly achieved the highest outreach in terms of the average number of BDS deliveries supported per project year, and is, with some 50 USD total cost per BDS delivery supported, also the most cost-effective instrument. The SC BDC Project, although primarily geared at improving BDS supply, ranks second in terms of service de-livery outreach and total costs per BDS supported. The most costly instruments in terms of total costs per BDS delivery financed are the DAPATI and TATP matching grant schemes. All projects / programs have a high ratio of overhead costs to total costs, which is due to the large geographic area to be covered, and specific provider assistance deliv-ered during implementation and sub-project monitoring. The overhead ratio is lowest for the TATP. However, with nearly USD 16,000 administration costs per sub-project and low assistance content, the TATP cannot be regarded as particularly efficiently managed.

Figure S1: Comparison Of Outreach And Efficiency Indicators For The Programs / Pro-jects Assessed (in USD)

Program SC Vou-cher Pro-

gram DAPATI

(WB / MoIT)TATP

(WB / MoIT)MONE 'vucer'

program SC BC-Project

Base and time period East Java, 1999-2000

Contracted,9/97-6/01

Contracted 03/00-07/01

FY 93/94- FY 2000

Phases 3&4,1997-2000*)

BDS deliveries financed/ supported 1,918 145 638 1,006 1,066Average no. of BDS per project year 959 36 213 155 267Providers financed / actively participating 20 84 133 58 6Total financing of activities / providers 10,440 516,451 3,076,262 1,006,000 46,114Program management cost 85,720 826,007 2,18,317 n.a. 126,000Total program cost 96,160 1,342,458 5,194,579 n.a. 172,114Program Management/ Total Cost 89% 62% 40,8% n.a. 73%Avg. direct cost per BDS delivered 5.44 3,562 4,822 1,000 43Avg. direct cost per provider 522 6,148 23,130 17,345 7,686

Avg. management cost per contract unit USD 45 per voucher

USD 5,697 / sub-project

USD 15,927 / sub-project n.a. ~ USD 21,000

/ BDCTotal program cost per BDS delivered 50 9,258 8,141 n.a. 161Total program cost per provider 4,808 15,981 39,056 n.a. 28,685*) Excluding BDCs taken over from Phase 2 and BDCs active in brokerage

General conclusions on the support instruments assessed Each instrument has its strengths and weaknesses and addresses specific BDS market constraints:


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Voucher schemes are a cost-efficient instrument to increase the willingness to pay for low-cost, basic BDS among SME as well as micro-enterprises. Pre-condition for effectiveness is a developed supply of low-cost BDS.

Matching grants can support early stages of market development for more so-phisticated BDS geared primarily towards larger SME. They simultaneously ad-dress service quality (supply-side) and low willingness to pay due to unclear ser-vice benefit (demand side). However, as there is considerable risk of market distor-tion, matching grants schemes should be used rather selectively and be designed carefully.

Program funding ('duet system') is a cost-efficient mechanism to address benefi-ciaries which are unable to pay for BDS, and for refocusing public institutions. However, as program funding is significantly distorting BDS markets, it has to be used very selectively and should be confined to the a/m purposes.

Seed finance can support establishment of new BDS providers and support com-mercial spin-offs from public support institutions. Seed finance only becomes effec-tive when there is a latent, unsatisfied demand for commercial BDS. The risk of supply distortion is high. The financing and incentive structure has to be structured carefully.

Technical assistance (training, counseling, product development) to BDS provid-ers can support skills improvement of providers. Stand-alone technical assistance has to invest considerable efforts into building trust relations with providers, which often leads to low cost-efficiency. Efficiency and effectiveness can be improved if the TA is bundled together with other instruments such as seed finance or match-ing grants, and provided as integral element of respective appraisal and monitor-ing.

BDS provider networking (forums, seminars, internet-based exchange tools) can support skills improvement of providers, in particular during the take-off stage of the BDS market, when a basic commercial provider structure has emerged but in-formal provider networks are still weak. Regional networking may reduce fixed costs through resource sharing and mutual client referral. National networks may lead to product exchange and improve service standardization.

The key for success is to base and align intervention selection and design with in-depth assessment of the BDS market and its constraints. Since each support instrument re-quires specific skills, it is strongly recommended to outsource program management to competent external institutions. Multi-annual time horizons for all interventions imply the need to secure medium-term budgets. For this reason, many countries have transferred funding of BDS market development programs to specific agencies, foundations or trust funds, which are less dependent on annual parliamentary budget decisions.

BDS usage and demand The TA's survey of some 500 SME in Medan (North Sumatra) and Semarang (Central Cava) provides the following insights on SME's demand for and use of BDS:

Overall usage of BDS is still relatively low. 71% of respondents did not use any BDS during the last 3 years. Usage rates for specific BDS reach at maximum 10% (Taxation, Advertisement). Only 12% of all respondents (42% of BDS users) have used more than one service. These usage rates are substantially lower than in comparable countries such as Vietnam.

The vast majority of SME is willing to pay for BDS. 87% of BDS users paid for the services. Around 90% of SME are willing to pay for services if they think such services are important. Only 3% of respondents do not think any BDS is important and worth being paid for.


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Ability to pay is no major constraint, Only 13% of all respondents are of the opinion that BDS are too expensive. Concerns appear to center primarily around the perceived cost-benefit of BDS usage and not on the service price in relation to the SME's ability to pay. 88% of non-users so far felt no need to use BDS (Figure S2).

Figure S2: SME's reasons for not using BDS - Results from the TA's survey in Medan and Semarang

All respondents Non BDS users

Have not used BDS during the last three years because .. 71% 100%I never needed BDS 64% 88%BDS are too expensive 13% 18%I don't know where to find BDS 5% 7%Qualified BDS not available 0,2% 0,3%Note: Multiple answers possible, therefore individual answers sum up to more than 100%.

Typical BDS users are:

Larger and/or older SME, in particular those managed by university-educated external managers or heirs of the enterprise founder. These enterprises ac-count for the majority of high-priced BDS with turnover above 500 million IDR. They use in particular accounting, tax, IT and advertisement services, and account for some 10-15% of all SME surveyed.

Young and dynamic enterprises (less than five years in business) that are founded and managed by younger university and high school graduates. Such SME primarily look for low-cost assistance by means of brief counseling on business strategy, business operation and enterprise formalization. They account for some 20-25% of all SME surveyed.

The typical non-user of BDS has no university education, is older than forty years, has been running his own SME for more than five years, and/or has an annual turnover of less than 50 million IDR.

Least interested in BDS are 40-50 years old male entrepreneurs with only pri-mary or secondary school education. This entrepreneur type accounts for some 15-20% of all SMEs surveyed and is in particular frequent in the transport and manufacturing / crafts sectors.

Small enterprises with less than 50 million turnover hardly use BDS. 80% of such non-users feel they do not need BDS. However, the remaining 20% complain about BDS being too expensive or not knowing where to find BDS.

Many well-established medium-scale enterprises managed by the owner who is older than 45 years and not university-educated do not need BDS, either be-cause they have built-up respective in-house capacities, or have developed spe-cific approaches towards client acquisition and handling tax and legal matters.

A number of external factors impact on SMEs' demand for BDS:

SME that have obtained bank credit are 40% more likely to use BDS. Insufficient credit access impacts in particular on BDS demand from manufacturing enter-prises, and demand for IT services.

Tax regulation, compliance, and implementation practice shapes demand for a number of services. BDS usage could be some 40% higher if tax coverage would be better and corrupt bureaucratic practice were contained.

Public and industry standards such as ISO 9xxx certification can be a relevant driving force for BDS usage. However, since small enterprises mostly operate in


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lowly standardized markets, the overall impact of standards on BDS demand is relatively low.

Internationalization is strongly promoting demand for legal, information, corre-spondence and transport-related services. Past and recent protectionist policies have contributed to the low level of BDS usage among SME. Transaction barriers, in particular the client's obligation to withhold income tax on behalf of BDS provid-ers, may also have negatively influenced BDS usage.

For most BDS, service density does not impact on BDS usage. Very low usage rates in relation to service demand, however, suggest insufficient supply of productivity- and performance-enhancing BDS. High quality services offered by individual providers can create their own demand via informal referral (word of mouth) within the local business community. However, current low BDS usage rate limits the overall effects of such infor-mal referral.

Complementary finding on external interventions Survey data allows for the following conclusions:

The SC Voucher Program East Java has been successful in increasing SME's usage of BDS. Some 20-25% of voucher users would not have used BDS without the program. The voucher program addresses, in a well targeted manner, the low willingness to pay for BDS of some micro- and very small enterprises, and a lack of information on available low-cost BDS. However, these factors only constrain some 12% of BDS non-users. Since 88% of BDS non-users see no need for BDS, either for objective reasons related to their business environment, or because they are subjectively unaware of the usefulness of external assistance, program out-reach remained lower than expected.

In spite of much stronger TATP involvement in Medan than in Semarang, the rate of SME that feel IT services to be important for their enterprise is identical in both cities. The TATP has only activated latent demand, without increasing SMEs' will-ingness to use IT services in future at full market costs.

Free provision of training by the government or donors has no significant impact on SMEs' training demand and usage, except for crowding out commercial provi-sion and eroding the willingness to pay. The same applies to IT services provided under MONE's 'vucer' program.

Demand outlook In general, SMEs' usage of BDS can be expected to rise in future:

Latent demand and willingness to pay is strong across all service areas. In av-erage only 20% of SMEs that find a service important have used it in the past.

BDS usage will be promoted by demographic change: Some 14% of SME will over the next ten years transfer management into younger hands. As these new managers are likely to be better educated but less experienced, they should use more BDS than the current owners / managers. For demographic reasons, the cur-rent trend towards enterprise start-up is likely to continue and even intensify, which implies further strong demand for (post -) start-up assistance.

Many young enterprises appear to have grown into a size that requires further assistance to be managed adequately. SME that have been 2-5 years in business are far over proportion interested in accounting services, management advice and communication & correspondence services. Since many such enterprises have in the past been active BDS users, their interest is likely to translate into actual ser-vice usage in near future.


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Current policy moves towards increasing tax coverage as well as ongoing trade liberalization in line with WTO and ASEAN agreements should promote further BDS usage.

However, high latent demand for BDS has to be related to the fact that 70% of survey re-spondents are willing to invest into expanding their enterprise. Should the overall business climate deteriorate, and access to credit remain difficult, many SME will review their business outlook and adjust BDS usage accordingly.

BDS supply In quantitative terms, BDS supply is relatively well developed, at least what concerns large urban agglomerations on Java. Service quality, however, varies strongly among service areas and providers:

A common deficit across most segments appears to be lack of practical busi-ness experience among providers. Being academically trained, technology ori-ented, and often having an NGO background, many providers seem to have prob-lems in finding common grounds with a more hands-on and business oriented SME clientele.

In terms of approach and content, most technical, management and start-up training offered appears to not meet SMEs' demand for practical, hands-on train-ing that is delivered by experienced instructors.

Few providers are able to give qualified assistance on marketing and business strategy including assistance in obtaining credit.

Deficits in academic training in some BDS-relevant areas contributes to service quality problems.

SMEs' current usage of paid BDS only allows for existence of some 2,000 commercially viable small BDS providers all over Indonesia in all service sectors. Many providers have to search for clients outside the SME segment and for cross-selling potentials. This leads to unclear service and product foci. Widespread unawareness of actual costs of service provision contributes to strategic management problems.

Widespread donor and government sponsorship has enhanced deficits:

Subsidized provision of technical and management training has sent wrong price signals to SMEs and resulted in service fees that hardly provide incentives for product development and employing adequately qualified trainers.

Sponsorship may have allowed providers to stay in the market that commer-cially would not have survived. This concerns in particular training and technol-ogy-oriented services, where (at least on Java) supply appears to be overcrowded in relation to demand.

External sponsorships promote a management attitude that is more oriented to-wards acquiring government or donor funding than developing and maintaining a distinct service profile, thereby contributing to strategic and managerial deficits of BDS providers.

There is indication that sponsorships have reduced incentives for product de-velopment and innovation.

Supply-side deficits are likely to have significantly contributed to the current small market size, in particular what concerns productivity & performance enhancing services, where supply is often not meeting SMEs' demand. Varying and not transparent service quality enhances risks for potential BDS users across most service sectors and is likely to have contributed to low BDS usage rates. Business models for commercially viable BDS provision to SME are in particular:


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Accounting and tax services combined with complementary BDS (legal / management / finance);

Combined provision of sales-related services (Advertisement & promotion, marketing, information, correspondence);

Enhanced IT-services (training, system and software development, IT-related management advice);

Sector-specific 'full service packages' with focus on improving productivity & performance as well as marketing and financing assistance.

Provider development and product innovation is hampered by insufficient access to working capital and growth finance, as well as income tax withholding, which de facto constitutes a forced short-term credit at 0% interest rate of (younger) BDS providers towards the government. Foreign investment in the BDS sector is constrained by a num-ber of regulative barriers.

Recommended strategy Successful development of the BDS market has to address BDS demand as well as sup-ply. A focus on BDS supply only will hardly be effective, since many supply-side con-straints originate from SMEs' current low usage of paid BDS. Demand-oriented strate-gies are in general more promising:

Any policy action geared at removing market barriers and enhancing competition strengthens the demand for BDS. Specific attention should be given to (i) improv-ing SMEs' access to (investment) finance; (ii) removing barriers to interna-tional trade including imports, and (iii): promoting business registration and formalization.

Improving tax coverage and compliance has particular strong demand effects. In this context, specific attention should be given to the possibility of extending par-tial non-collection of VAT according to Article 16B of the VAT law to SME that are currently VAT-exempt.

In order to reach also those SME that are unaware of the need for and usefulness of BDS, a new approach towards enforcement of public standards is required. Government should in areas of prime public concern such as fire security gradually introduce mandatory regular certification by independent experts. This would cre-ate new markets for BDS providers, while at the same time relieving public officials from detailed examinations, which would enable them to increase enterprise cov-erage

While Indonesia is relatively advanced in the use of such voluntary certificates, certification is in many cases still done by the regulatory authority instead of be-ing entrusted to accredited providers. Opening up 'halal' certification to com-mercial BDS providers that undergo accreditation with and are supervised by the Council of Ulemas, for example, could greatly enhance service demand and re-duce certification cost for companies outside Jakarta.

Strengthening BDS supply Tax advisors & accountants will have to be the prime field structure that provides BDS outside large urban centers. As secondary, albeit less dense field structure, providers of sales-related services should be promoted. In clustered regions, there is potential for providers offering a full service range for a specific sector that includes combined technical/ management training, management, production and operation assistance, and sector-specific marketing & investment consultancy. Such sector/cluster-specific providers will in rural regions often be agro-focused. While respective privately-owned providers should in no way be discriminated, it appears to be particularly promising to promote de-velopment of respective commercial services by local business associations.


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Large urban agglomerations may provide opportunities for more sophisticated and more specialized service providers, including providers of IT services. However, respective pro-vider numbers will in most cases be too small to justify specific activities.

BDS supply should primarily be strengthened by:

Improving academic education in BDS-relevant areas. Particular attention in this respect should be given to promoting case-study based training.

Promoting provider networks by strengthening professional organizations, orga-nizing provider forums and promoting the use of electronic media in information exchange. Issues to be discussed in provider forums may include exchange on feasible business models and specific service ideas, as well as management and controlling issues.

Removing entry and transaction barriers and regulative constraints, in par-ticular restrictions for foreign investors, as well as tax withholding on BDS provision to incorporated clients.

Enhancing market transparency and creating quality incentives for BDS pro-viders by means of provider accreditation and certification. In addition, the need for a law on provider liability should be assessed.

For the time being, provision of investment and working capital finance for BDS pro-viders should not be a specific policy focus. Attention should rather be given to im-proving SMEs' access to finance in general in line with the strategy proposed by the TA. An exception, however, is technical training in manufacturing. The high investment re-quired to establish technical training centers justifies financial involvement of international donors.

Minimizing Intervention And Market Distortion By Government And Donors In order to promote effective BDS markets, provision of BDS by the government and do-nors should be minimized and restricted to

Services related to public functions, e.g. protection of intellectual property rights (IPR);

Services/programs explicitly running under wider objectives such as poverty al-leviation, consumer or environmental protection; and

Services geared at fostering public-private partnership and/or supporting re-spective reorientation of public institutions.

Even in the aforementioned cases, serious consideration must be given to possibilities for commercial service provision before embarking on direct service provision by the govern-ment.

A list of central government programs that should be divested, consolidated, and/or reviewed, respectively has been presented to the Task Force in May 2002 and is en-closed in Annex 2. It is in particular recommended to phase out / divest the TATP and re-view MONE's 'vucer' Program as described above.

For further review of ongoing programs and regular mandatory pre-screening of new pro-posals, an inter-ministerial working group under the proposed Small Business Council (SBC) should be established. The review should also include programs of state-owned enterprises that have no direct relation to their business activity.

A similar review is required for public institutions involved in BDS provision. For NAFED, e.g., the TA has recommended reorientation towards a facilitating role, while leaving dis-semination of export market information and provision of export training to the private sec-tor and business associations, respectively. For other institutions, commercialization privatization and/or divestment may be more adequate. Line ministries should in co-


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ordination with each other elaborate a detailed agenda for restructuring service pro-viders under the national government. The donor community should actively contribute by phasing out institutional sponsorships for BDS provision and assisting in restructuring of public institutions.

Specific programs proposed The following programs for supporting BDS market development are proposed:

Introduction of further regional Voucher Programs in addition to the ones already established by SwissContact is recommended. Several districts in co-operation ideally establish such programs. Even though local funding should in general be no problem, it is recommended for the national government to establish a support fa-cility for local voucher programs as incentive for inter-district co-operation. IDR 500 million central government budget for the next fiscal year excluding staff and travel costs appears to be sufficient for this purpose.

As diagnostic and strategic planning skills are only weakly developed among BDS providers, a matching grant scheme for business diagnostics and business strategy development is proposed. The matching grant shall cover 50% of a daily fee up to IDR 2 million IDR (USD 200) for a maximum of five consultancy days. It is estimated that some 50-60,000 SME in Indonesia might in principle be prepared to pay 3-5 million IDR on BDS. The scheme is therefore likely to be rather con-strained by insufficient service supply and capacities for sub-project handling than by a lack of demand. As program management including development of a service guideline requires specialist know-how, donor support for the scheme is recom-mended. Total program costs can be roughly estimated at some 3.5-4 million USD, including a grant fund of some 2 million USD, which corresponds to 4,000 – 5,000 subprojects over a duration of 3-4 years.

As follow-up to the DAPATI scheme, a matching grant scheme for product and process improvement and co-operative R&D is proposed. In order to increase outreach, the new scheme shall also support joint research of SME groups carried out in cooperation with research institutes, technology-oriented service providers, or equipment and component suppliers. Activities such as ISO 9xxx certification, which provide visible benefits to SMEs and for which service supply is already well developed, however, shall not be supported anymore. It is recommended to seek for donor support for further specification and subsequent implementation of the proposed scheme, in particular what concerns the new focus on co-operative re-search.

In order to improve the overall quality of information services offered, a matching grant scheme for input and output market research carried out by business asso-ciations is proposed. Matching grants shall only be available for initial research in areas yet uncovered by the respective association, and shall in particular be fo-cused on input market research including input, equipment and component testing. In evaluating grant applications, specific attention shall be given to the associa-tion's concept for disseminating the research findings to members and other inter-ested parties. Eligible for grants shall be costs for external assistance in research, testing, surveys and improving information dissemination. While donor support could help to elaborate and specify the scheme further, it may already imple-mented test wise with domestic funding and management. An initial grant fund in the range of 0.5-1 billion IDR (USD 50,000 –100,000) may be sufficient for such a test.


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VI. RINGKASAN EKSEKUTIF DALAM BAHASA INDONESIA

Laporan Konteks dan Tujuan Dalam rangka memenuhi tujuan Matriks Kebijakan Pengembangan UKM, yaitu "promosi dukungan teknis dan bisnis yang ber-orientasi komersial”, maka Kelompok Kerja Pengembangan UKM yang didukung oleh ADB-TA SME Development, melakukan (1) pengkajian program dukungan teknis/bisnis UKM, mengembangkan kriteria kinerja, dan membuat evaluasi program yang dipilih; (2) menyiapkan suatu rencana kerja untuk identi-fikasi peluang penyediaan jasa pengembangan usaha berdasarkan pasar dan partisipasi sektor swasta; dan (3) konsolidasi dan penyempurnaan program dukungan teknis / bisnis.

Dalam rangka melengkapi hasil output TA lainnya, yaitu (i) 'Inventarisasi dan Pengkajian Sumber Program Dukungan non-finansial UKM’ (Background Report 8, July 2001), (ii) usulan kerangka evaluasi untuk BDS (Internal TA Paper, April 2001, Annex 1 pada lapo-ran ini), dan (iii) ‘Evaluasi Promosi Perdagangan dan Export UKM di Indonesia’ (Back-ground Report 24, May 2002), maka tujuan laporan ini ialah:

Membuat pengkajian dan evaluasi dampak program-program yang didukung baik oleh pemerintah maupun donor terhadap pengembangan pasar Business Devel-opment Services (BDS),

Mengkaitkan hasil observasi pengkajian dan temuan dengan informasi yang tersedia tentang kebutuhan dan pemanfaatan BDS oleh UKM, dan

Berdasarkan hasil temuan studi, menjabarkan kemungkinan mengambil langkah-langkah tindakan untuk promosi penyediaan BDS berdasarkan permintaan pasar.

Hasil output TA telah dipadukan dalam (i) suatu usulan rencana tindak untuk mendorong penyediaan jasa berdasarkan permintaan pasar dan partisipasi sektor swasta, sebagai-mana disampaikan dalam Final Report TA dan Policy Paper No. 10 "Action Plan for SME Development: Strategy and Recommendations" (April 2002) dan (ii) suatu synopsis reko-mendasi tentang konsolidasi, penyempurnaan dan divestasi program-program BDS du-kungan pemerintah (May 2002, Annex 2).

Pengkajian Dampak Program-program yang Relevan Evaluasi proyek terhambat karena kekurangan informasi tentang (i) jumlah penerima manfaat (beneficiaries), maupun jumlah seluruh UKM yang layak (outreach), (ii) kontribusi biaya penuh dari beneficiaries, maupun biaya manajemen proyek pemerintah (efficiency), dan (iii) tidak tersedia secara parsial ataupun kurangnya akses terhadap informasi moni-toring tentang dampak terhadap beneficiaries dan providers (effectiveness). Namun demikian, dari informasi yang tersedia dan wawancara (interviews) dengan manajer proyek dan BDS providers serta beneficiaries terpilih masih dapat dibuat kajian sbb:

Program Voucher Swisscontact di Jawa Timur (1999-2000) ternyata merupakan suatu instrumen yang bermanfaat untuk mengembangkan segmen pasar biaya-murah penyediaan BDS komersial bagi UKM. Sejumlah 78% dari pemakai voucher belum pernah memakai BDS sebelumnya, dan 72% pemakai memberi indikasi bahwa mereka siap memakai jasa lainnya dari provider yang sama. Dari segi pen-yediaan, program tersebut mendorong providers untuk menyesuaikan jasa-jasa mereka dengan kebutuhan riil. Namun demikian, hanya separuh dari providers terakreditasi yang aktif dalam program tersebut karena nilai voucher yang rendah tampaknya tidak cukup memberikan insentif untuk refokus kegiatan mereka me-menuhi permintaan pemakai voucher. Jangkauan sasaran, walaupun cukup signi-fikan, masih dibawah harapan. Kemungkinan penjelasan di tingkat-program bagi fenomena ini ialah jaringan distributor voucher yang masih sedikit, dan jumlah pro-vider aktif yang terbatas.


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World Bank / MoIT DAPATI matching grant scheme for technology upgrading services (1997-2001): setelah mengatasi masalah-masalah konseptual awal, ternyata skema ini mendapat perhatian besar dari UKM yang layak. Jangkauan sasaran, walaupun signifikan, masih tetap dibawah harapan, antara lain karena implementasi proyek bersamaan dengan krisis finansial tahun 1998. Sub-proyek DAPATI secara umum tampaknya memberi manfaat kepada peserta UKM dan memberi kontribusi stimulasi daya-saing dan modernisasi mereka. Pendekatan program ini tampaknya sangat cocok untuk UKM yang lebih besar dengan omzet diatas Rp. 2 milyar, sedangkan UKM yang lebih kecil masih kekurangan kemam-puan manajerial untuk menyerap input konsultansi. Secara keseluruhan kontribusi DAPATI untuk mengembangkan permintaan UKM terhadap BDS ber-orientasi teknologi relatif masih sedikit dan terutama terbatas pada dorongan transparansi tentang supply BDS yang tersedia. Namun demikian, melalui pendekatan sub-proyek yang bertahap dan implementasi monitoring dan evaluasi yang intensif, se-cara signifikan DAPATI telah memberikan kontribusi kepada pengembangan ka-pasitas para provider. Dampak umum terhadap pasar BDS mungkin dapat diting-katkan dengan memberi fokus lebih besar pada publikasi informasi tentang para provider yang diperoleh selama masa implementasi bagi UKM yang berminat.

World Bank / MoIT Technical Assistance and Training Program (TATP) yang masih berjalan saat ini, menyediakan hibah padanan (matching grants) bagi peng-gunaan jasa ICT (Information Communication Technology), bertujuan meningkat-kan kesediaan UKM untuk menggunakan jasa konsultansi IT di hari depan dengan biaya pasar penuh, maupun meningkatkan jumlah dan mutu jasa-jasa IT yang tersedia di Indonesia. Tampaknya tujuan ini tidak akan tercapai. Pengalaman im-plementasi saat ini menunjukkan bahwa sudah terdapat supply jasa yang telah berkembang baik, sedangkan permintaan jasa terutama terbatas oleh faktor-faktor external seperti biaya perangkat keras dan komunikasi yang tinggi. Pada umum-nya TATP mendukung pelatihan dasar IT, suatu bidang dimana permintaan dan penyediaan jasa telah berkembang dengan cukup baik. Bagian hibah yang tinggi sebesar 75% tampaknya berakibat pada biaya yang sangat tinggi dalam sub-proyek yang mungkin tidak akan dapat di-replikasi tanpa ketersediaan hibah-padanan (matching grants). Kekurangan program TATP ialah dalam pendekatan standardisasi sub-proyek dan implementasi monitoring yang sistematis agar dapat menunjang pengembangan kapasitas provider. Dengan memberikan isyarat harga yang keliru, program tersebut mungkin mempengaruhi secara negatif orientasi service providers terhadap permintaan dan kebutuhan riil UKM. Disamping itu, desain proyek tidak sesuai dengan praktik terbaik internasional.

Program 'Vucer' DepdikNas menyediakan hibah kepada tim mahasiswa / dosen universitas untuk memberikan jasa teknologi kepada UKM. Walaupun selama ini jangkauan program telah mencapai lebih dari 1% industri kecil dan menengah, fo-kus utama program ialah institusional dan bersifat pendidikan. Program ini meru-pakan suatu instrumen dengan biaya relatif rendah untuk mendorong orientasi pendidikan tehnis yang praktis, dan telah mempromosi orientasi universitas dan politeknik yang lebih besar terhadap kebutuhan dan permintaan UKM lokal. Se-cara keseluruhan tampaknya dampak pada permintaan UKM untuk BDS yang ter-kait dengan tehnologi, sangat sedikit. Secara umum tampaknya UKM sadar bah-wasanya tujuan utama program adalah pendidikan dan dengan demikian UKM menyesuaikan harapannya. Pengembangan aplikasi peserta program maupun output teknologi-rendah dan sederhana dari sub-proyek menyimpulkan asumsi bahwasanya program ‘Vucer’ secara signifikan tidak ‘mendesak’ providers komer-sial jasa teknologi. Namun demikian, untuk sub-proyek yang terkait dengan IT, ada kemungkinan bahwa providers komersial jasa teknologi ‘terdesak’. DepdikNas seyogyanya mengkaji ulang kriteria kelayakan sub-proyek dan memberikan pri-oritas kepada sub-proyek yang membantu UKM dalam hal (i) merumuskan strategi teknologi jangka-menengah, dan (ii) memilih pemasok peralatan yang sesuai


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dan/atau konsultan teknologi komersial untuk implementasi strategi tersebut. Du-kungan bagi sub-proyek yang terkait dengan IT seyogyanya dihentikan. Peningka-tan akses publik terhadap penjabaran solusi teknologi dapat mendorong trans-parensi pengetahuan teknologi terapan yang tersedia di Indonesia, mem-promosi dampak pergulirannya (spill-over effects), dan meningkatkan legitimasi peng-gunaan anggaran negara bagi program ini.

Proyek SwissContact BDC mendukung pendirian Business Development Center yang mandiri secara finansial melalui kontribusi pembiayaan untuk investasi dan kerugian awal berusaha dengan kombinasi konseling. Tujuh diantara sepuluh BDC yang didukung selama Fase Proyek 3 dan 4 telah berkembang menjadi BDS pro-vider bagi UKM secara mandiri finansial. Struktur pembiayaan yang baik, dengan suatu proses seleksi berdasarkan perencanaan bisnis awal, dan monitoring finan-sial intensif selama fase pendirian awal telah memberikan kontribusi yang signifi-kan kepada pengembangan kemampuan manajemen komersial dari BDC. Pengembangan produk dan strategi telah mendapat manfaat dari pertemuan fo-rum BDC yang teratur, maupun dari konseling individual serta bantuan khusus apabila diperlukan. Namun demikian, jumlah sedikit BDC yang dibiayai membatasi dampak umum terhadap penyediaan BDS. Keberhasilan utama Proyek ialah memperlihatkan fakta bahwasanya memang mungkin untuk mendirikan BDS pro-vider yang mandiri secara finansial dan komersial bagi UKM di Indonesia. Tantan-gan yang dihadapi selama Fase Proyek 5 yang berjalan ialah (i) pelaksanaan pendekatan program diluar pulau Jawa, (ii) pengurangan kontribusi finansial SC dengan pemanfaatan dana investasi yang dapat disediakan perusahaan modal ventura lokal, dan (iii) pengembangan suatu model bantuan berkesinambungan untuk mengembangkan produk dan konseling bagi BDC yang dapat mengganti dukungan SC bagi setiap kasus pendirian BDC. Pengalaman pertama memberi indikasi bahwasanya memang tidak mudah untuk menghadapi tantangan ini.

Perbandingan-lintas Jangkauan dan Efisiensi Program voucher jelas telah mencapai jangkauan tertinggi dari segi penyediaan jum-

lah rata-rata BDS yang didukung per tahun-proyek, dan dengan biaya dukungan total US$50 bagi setiap penyediaan BDS, merupakan instrumen hemat-biaya yang paling efektif.

Proyek SC BDC, walaupun tujuan utama ialah untuk meningkatkan supply BDS, mempunyai urutan kedua dalam penyediaan jasa dari segi jangkauan dan biaya total per BDS yang didukung.

Instrumen yang paling mahal dari segi dukungan finansial bagi biaya total per BDS adalah skema hibah-padanan (matching grant) DAPATI dan TATP.

Semua proyek / program mempunyai ratio yang tinggi dari segi biaya overhead ter-hadap biaya total karena luas daerah geografis yang harus dijangkau, dan bantuan khusus provider selama implementasi dan monitoring sub-proyek.

Ratio overhead paling rendah ialah di program TATP. Namun demikian, dengan biaya administrasi per sub-proyek mendekati USD16,000 dan bantuan yang sedikit untuk content, maka dapat dikatakan bahwa pengelolaan proyek TATP tidak terlalu efisien.


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Figure S1: Perbandingan Pengkajian Indikator Jangkauan Dan Efisiensi Bagi Program / Proyek (dalam USD)

Program SC

Voucher Program

DAPATI(WB / MoIT)

TATP (WB / MoIT)

DepDikNas 'vucer'


Landasan dan periode waktu Jawa Timur 1999-2000

Kontrak 9/97-6/01

Kontrak 03/00-07/01

TA 93/94- TA 2000

Phase 3&4,1997-2000*)

Dukungan/finansial penyediaan BDS 1,918 145 638 1,006 1,066Rata-rata jumlah BDS per tahun-proyek 959 36 213 155 267Provider dibiayai / partisipasi aktif 20 84 133 58 6Total pembiayaan kegiatan / para provider 10,440 516,451 3,076,262 1,006,000 46,114Biaya manajemen program 85,720 826,007 2,18,317 n.a. 126,000Total biaya program 96,160 1,342,458 5,194,579 n.a. 172,114Manajemen Program / Total Biaya 89% 62% 40,8% n.a. 73%Rata2 biaya langsung per BDS yg dipakai 5.44 3,562 4,822 1,000 43Rata2 biaya langsung per provider 522 6,148 23,130 17,345 7,686

Rata2 biaya manajemen per unit kontrak USD 45 per voucher



/ BDCTotal biaya program per BDS yang dipakai 50 9,258 8,141 n.a. 161Total biaya program per provider 4,808 15,981 39,056 n.a. 28,685

*) Diluar BDC dari Phase 2 dan BDC yang aktif sebagai broker/perantara

Kesimpulan umum tentang kajian instrumen dukungan Setiap instrumen memiliki kekuatan dan kelemahan dalam rangka mengatasi hambatan spesifik pasar BDS:

Skema voucher merupakan instrumen biaya yang efisien untuk meningkatkan ke-mauan membayar BDS yang mendasar diantara UKM maupun perusahaan mikro. Pra-kondisi efektivitas ialah kecukupan ketersediaan BDS dengan biaya murah.

Hibah padanan (matching grants) dapat mendukung tahapan awal pengembangan pasar BDS yang lebih canggih, yang disediakan terutama bagi UKM yang lebih be-sar. Hibah ini sekaligus mengatasi mutu jasa (supply-side) dan kemauan rendah un-tuk membayar karena ketidak-jelasan manfaat jasa (demand-side). Namun demikian, karena terdapat risiko besar distorsi pasar BDS, skema hibah-padanan seyogyanya dipakai secara selektif dan di-desain secara teliti.

Pembiayaan program (‘duet system’) merupakan suatu mekanisme biaya-efektif untuk mengatasi beneficiaries yang tidak mampu membayar BDS dan untuk refokus lembaga-lembaga publik. Namun demikian, karena pembiayaan program secara signifikan membuat distorsi pasar BDS maka harus dipakai secara sangat selektif dan seyogyanya terbatas pada tujuan yang disebut diatas.

Pembiayaan modal awal dapat mendukung pendirian baru BDS provider dan men-dukung pengembangan komersiil berlanjut (spin-offs) lembaga-lembaga dukungan publik. Pembiayaan modal awal hanya akan menjadi efektif apabila terdapat permin-taan tersembunyi yang belum dipenuhi oleh BDS komersial. Risiko distorsi pen-yediaan adalah tinggi, oleh karena itu struktur pembiayaan dan insentif harus didesain secara teliti.

Bantuan teknis (training, konseling, pengembangan produk) bagi BDS providers dapat mendukung peningkatan kemampuan para provider. Bantuan teknis tersendiri (stand-alone) memerlukan usaha keras membangun hubungan kepercayaan dengan


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para provider yang dapat mengarah ke efisiensi biaya-murah. Efisiensi dan efektivi-tas dapat ditingkatkan apabila bantuan teknis merupakan suatu perangkat yang dirangkai (bundled) bersama instrumen lainnya seperti modal awal usaha atau hibah padanan dan disediakan sebagai suatu elemen integral dari penilaian usaha dan monitoring.

Networking BDS provider (forum, seminar, perangkat pertukaran lewat internat) dapat mendukung peningkatan kemampuan para provider, secara khusus dalam tahapan awal pengembangan pasar BDS, apabila timbul suatu struktur provider ko-mersial yang mendasar tetapi jaringan-kerja provider informal masih lemah. Net-working regional dapat mengurangi biaya tetap (fixed costs) dengan membagi – biaya – sumber (resource sharing) dan referensi klien bersama (mutual client refer-ral). Jaringan nasional dapat mengarah ke pertukaran produk dan peningkatan stan-dardisasi jasa-jasa.

Kunci sukses ialah meletakkan dasar dan penyesuaian seleksi intervensi dengan pengka-jian pasar BDS yang mendalam berikut semua hambatannya. Karena setiap instrumen dukungan memerlukan kemampuan spesifik, sangat direkomendasikan untuk men-yerahkan manajemen program ke lembaga-lembaga external yang kompeten. Jangka-waktu tahunan bagi semua intervensi membawa implikasi untuk menyediakan anggaran jangka-waktu menengah. Berdasarkan alasan ini, banyak negara mengalihkan pem-biayaan program pengembangan pasar BDS kepada lembaga-lembaga khusus, yayasan atau trust funds yang tidak terlalu tergantung kepada penentuan anggaran melalui parle-men.

Permintaan dan pemanfaatan BDS Survey TA yang mencakup sekitar 500 UKM di Medan (Sumatera Utara) dan Semarang (Jawa Tengah) menyajikan beberapa hal tentang permintaan dan pemanfaatan BDS:

Penggunaan BDS secara umum relatif masih rendah. Sebanyak 71% responden tidak memakai BDS selama 3 tahun terakhir. Tingkat pemakaian khusus BDS men-capai maximum 10% (Pajak, Iklan). Hanya 12% dari semua responden (42% dari pemakai BDS) yang pernah memakai BDS lebih dari satu kali. Tingkat pemanfaatan ini jauh lebih rendah daripada negara-negara sebanding seperti di Vietnam.

Sejumlah besar UKM mau membayar jasa BDS. Sejumlah 87% dari pemakai BDS membayar jasa-jasa BDS. Sekitar 90% UKM mau membayar jasa-jasa BDS apabila mereka berfikir bahwa jasa-jsa tersebut penting. Hanya 3% dari responden berpen-dapat bahwa BDS tidak penting dan tidak perlu dibayar.

Kemampuan membayar bukan hambatan besar. Hanya 13% dari semua respon-den berpendapat bahwa BDS terlalu mahal. Dalam kaitan kemampuan membayar UKM, perhatian tampaknya berpusat terutama pada untung-rugi pemanfaatan jasa BDS yang dipersepsikan dan bukan pada biaya jasa. Sejumlah 88% dari UKM yang tidak memakai jasa BDS merasa tidak memerlukan jasa BDS. (Figure S2).

Figure S2: Alasan UKM tidak memakai BDS – Hasil survey TA di Medan dan Sema- rang

Semua resp Non BDS users

Tidak memakai BDS selama 3 tahun terakhir karena .. 71% 100%Saya tidak pernah memerlukan BDS 64% 88%BDS terlalu mahal 13% 18%Saya tidak tahu dimana mendapatkan BDS 5% 7%BDS yang kompeten tidak tersedia 0,2% 0,3%Note: Jawaban multiple mungkin, oleh karena itu jawaban individual dijumlahkan lebih dari 100%.


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Pemakai BDS secara khas ialah:

UKM yang lebih besar dan/atau lebih tua, secara khusus yang dikelola oleh manager external dari universitas atau pewaris perusahaan. Perusahaan ini merupakan bagian terbesar yang membayar BDS mahal dengan omzet diatas Rp. 500 juta. Secara khusus mereka memakai jasa-jasa akunting, pajak, IT dan iklan, dan mencakup sekitar 10-15% dari semua hasil survey UKM.

Perusahaan yang muda dan dinamik (berusaha kurang dari lima tahun) yang didirikan dan dikelola oleh tamatan universitas dan sekolah menengah atas. Perusahaan UKM semacam ini terutama mencari bantuan biaya-murah dengan cara konseling tentang strategi bisnis, operasi bisnis, dan formalisasi perusahaan. Jumlah ini mencakup sekitar 20-25% dari semua hasil survey UKM.

Yang tidak memakai BDS secara khas ialah tidak berpendidikan universitas, berumur diatas empatpuluh tahun, mengelola UKM sendiri lebih dari lima tahun, dan/atau mem-punyai omzet kurang dari Rp. 50 juta.

Yang paling tidak tertarik memakai BDS ialah pengusaha laki-laki berumur 40-50 tahun dengan pendidikan hanya SD atau SMP. Jumlah ini mencakup sekitar 15-20% dari semua hasil survey UKM dan secara khas seringkali terdapat dalam bidang transportasi dan sektor manufaktur / kerajinan.

Usaha kecil dengan omzet kurang dari Rp.50 juta praktis tidak memakai BDS. Sejumlah 80% dari non-pemakai BDS merasa tidak memerlukan BDS. Namun demikian, sisa 20% mengeluh bahwa BDS terlalu mahal atau tidak tahu dimana mendapatkan BDS.

Banyak perusahaan menengah yang telah berjalan baik dikelola oleh pemilik yang berumur diatas 45 tahun dan tidak berpendidikan universitas tidak me-merlukan BDS karena mereka telah membangun kemampuan sendiri atau mem-punyai pendekatan khusus memperoleh klien, mengelola hal-hal pajak dan legal.

Sejumlah faktor external mempunyai dampak terhadap permintaan BDS:

Sejumlah 40% UKM yang memperoleh kredit bank cenderung memakai BDS. Ke-kurangan akses kredit berdampak secara khusus pada permintaan BDS dari pe-rusahaan sektor manufaktur, dan permintaan jasa IT.

Regulasi perpajakan, ketaatan, dan praktik implementasi membentuk permin-taan terhadap sejumlah jasa. Pemanfaatan BDS dapat naik 40% apabila cakupan pajak lebih baik dan praktik korupsi birokrasi dapat dibatasi.

Standardisasi publik dan industri seperti sertifikasi ISO 9xxx dapat merupakan suatu daya-dorong untuk memanfaatkan BDS. Namun demikian, karena usaha kecil pada umumnya beroperasi di pasar dengan standard rendah, dampak umum standardisasi terhadap permintaan BDS relatif rendah juga.

Internationalisasi sangat kuat mempromosikan permintaan jasa-jasa legal, infor-masi, korespondensi dan transportasi. Kebijakan proteksi lampau dan saat ini te-lah menyebabkan permintaan BDS yang rendah diantara UKM. Hambatan tran-saksi, secara khusus kewajiban klien untuk membayar pajak pendapatan atas nama BDS providers, juga dapat berpengaruh negatif terhadap pemanfaatan BDS.

Bagi sejumlah besar BDS, kepadatan jasa tidak mempunyai dampak terhadap peman-faatan BD, tetapi menunjukkan kekurangan penyediaan BDS yang produktif dan kinerja yang tinggi. Jasa bermutu tinggi yang ditawarkan provider individual dapat men-ciptakan permintaan tersendiri lewat referensi informal (dari mulut) dalam komunitas bis-nis lokal. Namun demikian, tingkat pemakaian BDS yang rendah saat ini membatasi dam-pak umum referensi informal tersebut.

Temuan komplementer tentang intervensi external Data survey menyajikan kesimpulan sebagai berikut:


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SC Voucher Program Jawa Timur telah berhasil meningkatkan pemanfaatan BDS oleh UKM. Sekitar 20-25% pemakai voucher tidak akan memakai BDS tanpa program voucher. Dengan suatu metode penentuan sasaran yang baik, program voucher telah mengatasi (i) hambatan kemauan membayar yang rendah untuk jasa BDS, serta (ii) kelangkaan informasi ketersediaan BDS dengan biaya-rendah, bagi beberapa usaha micro- dan usaha sangat kecil. Namun demikian, faktor-faktor tersebut hanya menghambat sekitar 12% non-pemakai BDS. Sejumlah 88% non-pemakai BDS merasa tidak memerlukan BDS, baik karena alasan obyektif yang terkait dengan lingkungan bisnisnya, maupun karena secara subyektif tidak sadar akan manfaat bantuan external sehingga jangkauan program tetap dibawah harapan.

Walapun keterlibatan TATP di Medan lebih kuat daripada di Semarang, tingkat UKM yang merasa bahwa jasa IT penting bagi perusahaannya, identik di kedua kota tersebut. Program TATP hanya menggairahkan permintaan terpendam tanpa meningkatkan kemauan UKM untuk membayar penuh untuk jasa IT di masa de-pan.

Penyediaan training bebas biaya oleh pemerintah atau donor tidak mempunyai dampak signifikan terhadap permintaan training UKM dan pemanfaatannya, kec-uali mendesak penyediaan jasa komersial dan mengikis kemauan membayar. Hal yang sama terjadi dengan jasa IT yang disediakan dalam program ‘vucer’ DepdikNas.

Harapan permintaan Secara umum, penggunaan BDS oleh UKM dapat diharapkan meningkat di masa depan:

Permintaan terpendam (latent) dan kemauan membayar kuat di semua bidang jasa. Rata-rata hanya 20% dari UKM yang merasa bahwa jasa itu penting telah memakai jasa tersebut di waktu yang lampau.

Pemanfaatan BDS akan meningkat dengan perubahan demografik: Sekitar 14% dari UKM akan mengalihkan manajemen ke generasi muda dalam sepuluh tahun yang akan datang. Kemungkinan besar manager muda yang lebih berpendidikan tetapi kurang pengalaman diharapkan akan menggunakan lebih banyak BDS dari-pada pemilik / manager saat ini. Karena alasan demografik, kecenderungan pendirian usaha baru saat ini mungkin berlanjut dan malahan meningkat, yang berarti akan terdapat permintaan kuat untuk bantuan BDS pasca pendirian.

Banyak perusahaan muda tampaknya tumbuh menjadi besar sehingga memer-lukan bantuan berlanjut agar dapat dikelola dengan wajar. UKM yang telah berusaha selama 2-5 tahun sangat tertarik pada jasa akunting, perbaikan mana-jemen, dan jasa komunikasi & korespondensi. Karena banyak perusahaan terse-but telah aktif memakai jasa BDS, perhatian mereka mungkin dapat diterjemahkan menjadi pemanfaatan BDS sesungguhnya dalam waktu dekat.

Kebijakan saat ini yang mengarah pada peningkatan cakupan perpajakan mau-pun kebebasan perdagangan sejalan dengan kesepakatan WTO dan ASEAN diperkirakan akan meningkatkan pemanfaatan BDS.

Namun demikian, permintaan tinggi yang latent untuk jasa BDS harus terkait dengan fakta bahwasanya 70% dari responden survey sanggup membiayai investasi untuk expansi perusahaan mereka. Apabila iklim umum bisnis menjadi buruk, dan akses kredit tetap sulit, banyak UKM akan mengkaji ulang harapan bisnisnya dan menye-suaikan pemanfaatan jasa BDS.


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Penyediaan BDS Dari segi kuantitatif, penyediaan BDS secara relatif sudah berkembang, setidaknya di-daerah kelompok urban besar di Jawa. Tetapi mutu jasa sangat beragam diantara daerah jasa dan provider:

Kelemahan umum yang mencakup banyak segmen diantara para provider ialah kekurangan pengalaman bisnis praktis. Dengan pendidikan akademi, dan ber-orientasi teknologi serta seringkali mempunyai latar belakang LSM, banyak pro-viders tampaknya sulit mencari landasan bersama (common grounds) dengan klien UKM yang lebih praktis dan ber-orientasi bisnis.

Dari segi pendekatan dan muatan (content), banyak pelatihan teknis, mana-jemen dan pendirian awal usaha tampaknya tidak memenuhi permintaan UKM untuk training praktis dilapangan yang dapat diberikan oleh instruktur yang ber-pengalaman.

Hanya sedikit providers yang sanggup memberikan bantuan bermutu tentang marketing dan strategi bisnis termasuk bantuan memperoleh kredit.

Kekurangan pelatihan akademik dalam beberapa bidang yang terkait BDS menambah permasalahan mutu jasa BDS.

Pemakaian dan pembayaran jasa BDS saat ini tampaknya cukup dilayani sekitar 2,000 BDS provider komersial kecil yang layak diseluruh Indonesia untuk semua sektor jasa. Banyak provider harus mencari klien diluar segmen UKM dan menjual kemampuan mereka secara lintas-sektor. Hal ini mengakibatkan fokus yang tidak jelas dalam pen-yediaan jasa dan produk. Biaya aktual jasa yang tidak jelas secara umum menambah masalah dalam manajemen strategik (perusahaan UKM).

Sponsor donor dan pemerintah secara luas telah ikut mendorong kekurangan:

Penyediaan training teknis dan manajemen bersubsidi telah memberikan isyarat biaya yang keliru kepada UKM dan berakibat pada biaya jasa yang praktis tidak memberi insentif untuk pengembangan produk dan penggunaan instruktur yang cukup terlatih.

Berkat bantuan sponsor, providers dapat bertahan dalam suatu pasar yang secara komersial tidak akan dapat hidup. Hal ini berlaku secara khusus untuk training dan jasa berorientasi teknologi, dimana penyediaan tampaknya melam-paui permintaan (setidaknya di Jawa).

Sponsor external mempromosikan suatu perilaku manajemen yang lebih ber-orientasi mendapatkan pendanaan pemerintah atau donor ketimbang mengem-bangkan dan memelihara suatu profil jasa yang unggul (distinct) dengan akibat menimbulkan kekurangan BDS provider dari aspek strategik dan managerial.

Terdapat indikasi bahwa kegiatan sponsor telah mengurangi insentif pengem-bangan produk dan inovasi.

Kekurangan sisi-penyediaan (supply-side deficits) diperkirakan telah mengakibatkan se-cara signifikan ukuran pasar yang kecil saat ini, secara khusus tentang jasa-jasa pening-katan produktivitas dan kinerja, dimana penyediaan jasa BDS seringkali tidak memenuhi permintaan UKM. Mutu jasa yang beragam dan tidak transparen menambah risiko bagi para pemakai BDS potensial di banyak sektor dan mungkin menyebabkan penggunaan jasa BDS yang rendah. Model Bisnis penyediaan BDS komersial yang layak bagi UKM secara khusus ialah:

Akunting dan jasa pajak dengan kombinasi BDS komplementer (legal / mana-jemen / keuangan);

Kombinasi penyediaan jasa-jasa yang terkait penjualan (Periklanan & promosi, marketing, informasi, korespondensi);


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Jasa-jasa IT (training, pengembangan sistem dan perangkat lunak, saran mana-jemen yang terkait dengan IT);

'Full service packages' secara sector-specific dengan fokus pada peningkatan produktivitas dan kinerja maupun bantuan marketing dan keuangan.

Pengembangan provider dan inovasi produk terhambat karena kekurangan akses modal kerja dan pendanaan untuk pertumbuhan maupun pajak pemotongan/pemungutan (income tax withholding), yang secara de facto merupakan pemaksaaan kredit jangka-pendek dengan bunga 0% bagi BDS provider (yang lebih muda) terhadap pemerintah. Investasi asing dalam sektor BDS terhambat oleh sejumlah hambatan peraturan.

Rekomendasi strategi Pasar BDS yang sukses harus dapat mengatasi masalah permintaan maupun penyediaan BDS. Suatu fokus sisi penyediaan BDS tidak akan efektif karena banyak hambatan sisi-penyediaan bersumber dari pemakaian BDS yang rendah oleh UKM yang membayar. Strategi orientasi-permintaan pada umumnya lebih menjanjikan:

Setiap tindakan dengan tujuan menghapus hambatan pasar dan mendorong per-saingan akan menguatkan permintaan terhadap jasa BDS. Perhatian khusus ha-rus diberikan pada (i) peningkatan akses UKM pada pembiayaan (investasi); (ii) penghapusan hambatan perdagangan internasional termasuk import, dan (iii) promosi registrasi dan formalisasi bisnis.

Peningkatan cakupan perpajakan dan kepatuhannya mempunyai dampak kuat terhadap permintaan jasa BDS. Dalam konteks ini diperlukan perhatian khusus tentang kemungkinan membebankan bebas-pungutan PPN secara parsial sesuai Ayat 16B dari UU-PPN bagi UKM yang saat ini dibebaskan dari PPN.

Agar dapat menjangkau UKM yang belum mengetahui manfaat BDS, diperlukan suatu pendekatan baru dengan pemaksaaan standardisasi publik. Dalam bidang kepentingan utama publik seperti pengamanan kebakaran, secara ber-tahap pemerintah seyogyanya mengenalkan sertifikasi reguler wajib dari expert in-dependen. Hal ini akan membebaskan pejabat pemerintah dari perincian ujian dan sekaligus menciptakan pasar baru bagi BDS provider yang dapat meningkatkan jangkauan kerja perusahaannya.

Walapun Indonesia relatif sudah maju dalam pemakaian sertifikasi suka-rela, dalam banyak hal sertifkasi masih dibuat oleh penguasa regulasi dan seyogyanya diserahkan saja kepada provider dengan akreditasi. Penerbitan sertifikasi 'halal' oleh BDS provider komersial yang telah mendapat akreditasi dari dan dengan pengawasan Majelis Ulama Indonesia (MUI) misalnya, akan sangat mendorong permintaan jasa BDS dan mengurangi biaya sertifikasi untuk perusahaan diluar Jakarta.

Penguatan penyediaan BDS Konsulen Pajak dan Akuntansi seyogyanya menjadi struktur bidang utama yang men-yediakan BDS diluar pusat perkotaan yang besar. Sebagai struktur bidang kedua, walau-pun kurang padat, penyedia jasa yang terkait dengan penjualan seyogyanya dipromosi. Di daerah klaster terdapat peluang potensial bagi para provider untuk menawarkan suatu rentang jasa-jasa lengkap bagi sektor khusus yang mencakup kombinasi training tek-nis, manajemen, produksi dan bantuan operasi, serta marketing & konsultansi investasi yang sector-specific. Provider sektor/specific-klaster tersebut didaerah pedesaan sering-kali mempunyai fokus agro-bisnis. Walapun tidak boleh ada diskriminasi terhadap para provider milik-pribadi, tampaknya sangat menjanjikan untuk mempromosi pengembangan jasa komersial oleh asosiasi bisnis lokal.


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Kelompok perusahaan urban yang besar dapat memberi peluang bagi service provider yang lebih canggih dengan spesialisasi termasuk penyedia jasa IT. Namun demikian, pada umumnya jumlah provider terlalu sedikit untuk justifikasi aktivitas yang spesifik.

Penyediaan BDS seyogyanya diperkuat dengan:

Peningkatan pendidikan akademik dalam bidang yang terkait dengan BDS. Dalam hal ini perlu promosi training berdasarkan studi kasus.

Promosi jaringan (networks) provider dengan penguatan organisasi profesional, membuat forum provider dan promosi pemanfaatan media electronika untuk pertu-karan informasi. Hal-hal bahan diskusi di forum provider ialah pertukaran model bisnis yang layak dan pendapat (ideas) jasa yang spesifik, maupun hal-hal mana-jemen dan pengendalian.

Penghapusan hambatan masuk dan transaksi serta pembatasan regulatif, secara khusus pembatasan bagi penanam modal asing maupun pajak pemoton-gan/pemungutan penyediaan BDS bagi klien korporasi.

Mendorong transparensi pasar dan penciptaan insentif mutu bagi BDS pro-vider dengan cara akreditasi dan sertifikasi provider. Disamping itu, diperlukan pengkajian suatu undang-undang tentang kewajiban provider (liability).

Sementara ini, penyediaan dana investasi dan modal kerja bagi BDS provider tidak perlu menjadi focus kebijakan spesifik. Lebih baik memberikan perhatian pada pening-katan akses UKM ke sumber pendanaan pada umumnya sejalan dengan rekomendasi strategi dari TA. Namun demikian, pengecualian ialah training teknis di sektor manufaktur. Kebutuhan investasi besar untuk pendirian pusat pelatihan teknis memberikan justifikasi keterlibatan pendanaan donor internasional.

Mengurangi Intervensi Dan Distorsi Pasar Oleh Pemerintah Dan Donor Agar dapat mempromosi pasar BDS secara efektif, penyediaan BDS oleh pemerintah dan donor seyogyanya seminimal mungkin dan terbatas pada:

Jasa-jasa yang terkait dengan fungsi publik, misalnya perlindungan hak intelek-tual (HAKI / IPR);

Jasa-jasa/program-program yang dilaksanakan dalam rangka tujuan yang le-bih luas seperti mengatasai kemiskinan, perlindungan konsumen atau lingkungan; dan

Jasa-jasa yang menunjang pembentukan kemitraan publik-swasta dan/atau mendukung reorientasi institusi-institusi publik yang terkait.

Untuk ketiga hal diatas perlu dipertimbangkan secara serius kemungkinan menyediakan jasa-jasa komersial dahulu sebelum merencanakan penyediaan jasa-jasa langsung oleh pemerintah.

Suatu daftar program pemerintah pusat yang seyogyanya di-privatisasi (divestasi), konsolidasi, dan/atau dikaji-ulang, telah disampaikan kepada Task Force dalam bulan Mei 2002 dan dilampirkan dalam Annex 2. Rekomendasi khusus ialah untuk divestasi program TATP dan mengkaji-ulang Program 'vucer' DepdikNas sesuai penjelasan diatas.

Untuk pengkajian program-program yang sedang berjalan serta pre-screening wajib (mandatory) usulan program-program baru, sebuah kelompok kerja inter-departemental dibawah Small Business Council (SBC) yang telah diusulkan, seyogyanya didirikan. Pengkajian-ulang seyogyanya mencakup juga program-program BUMN yang tidak terkait langsung dengan aktivitas usaha-inti mereka.

Pengkajian serupa diperlukan untuk lembaga-lembaga publik yang terlibat dengan pen-yediaan BDS. Misalnya untuk BPEN, TA telah merekomendasi agar merubah orientasi ke peran facilitator, sedangkan diseminasi informasi pasar export dan penyediaan training export diserahkan ke sektor swasta dan asosiasi bisnis. Untuk lembaga-lembaga lainnya,


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privatisasi komersial dan/atau divestasi mungkin lebih cocok. Kementerian tehnis seyogyanya saling ber-koordinasi untuk membuat suatu agenda terperinci untuk restruk-turisasi service provider dibawah pemerintah nasional. Komunitas donor seyogyanya menyumbang secara aktif dengan menghapus secara ber-tahap bantuan institusional untuk penyediaan BDS dan membantu restrukturisasi institusi-institusi publik.

Usulan program-program khusus Dibawah ini ialah usulan program-program untuk mendukung pengembangan pasar BDS:

Introduksi Program Voucher regional berlanjut disamping program-program yang telah dibuat oleh SwissContact. Secara ideal, program-program semacam ini seyogyanya dibangun dengan koordinasi beberapa kabupaten/kota. Walapun pada umumnya pembiayaan lokal bukan merupakan masalah, rekomendasi bagi pemerintah pusat ialah agar mendirikan fasilitas dukungan bagi program-program voucher lokal sebagai insentif kerja-sama antar-kabupaten/kota. Anggaran pemer-intah pusat sebesar Rp. 500 juta untuk tahun anggaran berikutnya diluar biaya staf dan perjalanan tampaknya cukup untuk maksud tersebut diatas.

Kemampuan diagnostik dan perencanaan strategik masih berkembang lemah di-antar para BDS provider, oleh karena itu diusulkan suatu skema hibah padanan (matching grant scheme) untuk mengembangkan kemampuan diagnostik bis-nis dan strategi bisnis. Hibah padanan tersebut sebesar 50% honor harian hingga Rp.2 juta (USD 200) untuk maximum 5 hari konsultansi. Diperkirakan seki-tar 50-60,000 UKM di Indonesia secara prinsipiil sanggup membayar Rp. 3-5 juta untuk BDS. Oleh karena itu skema tersebut mungkin terhambat karena kekuran-gan ketersediaan jasa dan kemampuan mengelola sub-proyek ketimbang ke-kurangan permintaan. Pengelolaan manajemen termasuk pengembangan suatu pedoman pelaksanaan penyediaan jasa memerlukan pengetahuan dan ketrampi-lan khusus, dan oleh karena itu direkomendasikan untuk meminta bantuan donor. Perkiraan kasar seluruh program ialah sekitar USD 3,5-4 juta, termasuk suatu dana hibah sekitar USD 2 juta, yang dapat melayani sekitar 4.000 – 5.000 sub-proyek selama suatu masa 3-4 tahun.

Sebagai kelanjutan skema DAPATI, diusulkan suatu skema hibah padanan (matching grant scheme) untuk meningkatkan produk dan proses serta kerja-sama LitBang (R&D). Untuk menambah jangkauan, skema baru juga akan men-dukung penelitian-bersama (joint research) dalam rangka kerja-sama kelompok UKM dengan lembaga-lembaga penelitian, para service provider yang ber-orientasi teknologi, atau pemasok peralatan dan komponen. Namun demikian, un-tuk kegiatan memperoleh sertifikasi ISO 9xxx, yang memberikan keuntungan nyata bagi UKM dan penyediaan jasa telah berkembang dengan baik, tidak perlu diberi dukungan lebih lanjut. Selanjutnya untuk spesifikasi dan pelaksanaan usulan skema diatas, direkomendasikan untuk mencari bantuan donor, dan secara khusus, dengan fokus baru dibidang kerja-sama penelitan.

Untuk meningkatkan keseluruhan mutu jasa informasi yang ditawarkan, diusulkan untuk membuat suatu skema hibah padanan untuk riset input dan output pasar yang dilaksana-kan oleh asosiasi bisnis. Hibah padanan hanya disediakan untuk penelitian awal dalam bidang yang belum diliputi oleh asosiasi yang bersangkutan, dan akan fokus secara khusus pada input riset pasar termasuk output, dan pemeriksaan (testing) peralatan dan komponen. Dalam rangka menilai aplikasi hibah, secara khusus akan diperhatikan konsep yang diajukan asosiasi untuk diseminasi temuan riset kepada para anggota dan fihak lain yang berminat. Kelayakan hibah ialah biaya bantuan external untuk riset, uji-coba, survey dan peningkatan diseminasi informasi. Sementara bantuan donor dapat membantu men-jabarkan dan membuat perincian skema lebih lanjut, skema tersebut sudah dapat di-uji-


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coba dengan pembiayaan dan manajemen domestik/lokal. Suatu dana hibah awal dengan rentang Rp. 0,5-1 milyar (USD 50,000 – 100,000) kiranya cukup untuk uji-coba tersebut.


1

1 INTRODUCTION

1.1 Background and Purpose

ADB Program Loan ‘Industrial Competitiveness and SME Development’ On March 28, 2000, the Republic of Indonesia and the Asian Development Bank signed agreement on an Industrial Competitiveness and SME Development Program Loan (Loan 1738-INO: ICSMED). The principal objective of the Program Loan is to promote a more diversified and efficient industrial structure through deregulation and the adoption of poli-cies that promote competition and provide a level playing field for all enterprises, including SME.

With reference to SME Development, the Program scope includes rationalizing assistance to SME by (i) improving policy coordination and implementation, (ii) removing regulatory and licensing barriers that restrict market access and growth; (iii) improving financial in-termediation and (iv) strengthening technical and business service support. Loan dis-bursement is linked to progress made in implementing policies that are apt to reach the Program’s objective. The general reforms envisaged are summarized in the Policy Matrix for Industrial Competitiveness and for SME Development.

SME Development Task Force and TA The Program is coordinated by the Indonesian Coordinating Ministry for Economic Affairs, assisted by a Program Steering Committee (PSC) comprising senior officials from main ministries concerned. For detailed elaboration of reforms related to SME Development, an Inter-ministerial Task Force for SME Development has been created. This Task Force is ex officio attached to the Ministry of Cooperatives and SME Development, and includes representatives of most relevant ministries as well as private sector stakeholders. The ADB SME Development Technical Assistance (TA) supports the work of the Inter-ministerial Task Force.

Report Context and Objectives Under the SME Development Policy Matrix' objective of "promoting commercially oriented technical and business support", the SME Development Task Force, supported by the TA, is inter alia to (1) review existing SME technical/business support programs, develop per-formance criteria, and evaluate selected major programs, (2) prepare an action plan iden-tifying opportunities for market based provision of services and private sector participation, and (3) consolidate and streamline technical / business support programs.

To this purpose, the TA has, among others,

1 established an inventory of major non-financial SME support programs of key line ministries, assessed the resources allocated to these programs and provided a num-ber of recommendations on how to improve program design, implementation and co-ordination (Background Report ‘Inventory and Resource Assessment of Non-Financial SME Support Programs’, July 2001),

2 developed performance criteria as part of a proposed evaluation framework for BDS (Internal TA Paper, April 2001, Annex 1), and as a basis to prepare for the evaluation / assessment of major support programs, and

3 assessed key government- and donor-sponsored activities for promotion of domestic and international trade (Background Report ‘Evaluation Of SME Trade And Export Promotion In Indonesia’, May 2002).

This report aims at complementing the a/m activities by


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Assessing and evaluating key government- and donor-sponsored programs for promotion of market based provision of support services for their impact on devel-oping markets for Business Development Services (BDS),

Relating assessment observations and findings to available information on SME's demand for and usage of BDS, and

Outlining, based on the study's findings, possible action lines for market based provision of BDS.

The findings presented hereafter have been synthesized with related TA findings pre-sented in the a/m reports into (i) a proposed action plan for enhancing market based pro-vision of services and private sector participation, as presented in the TA's Draft Final Re-port (January 2002) and its Policy Paper No. 10 "Action Plan for SME Development: Strategy and Recommendations" (April 2002) and (ii) a synopsis of recommendations on consolidation, streamlining and divestment of government-sponsored BDS programs (May 2002, Annex 2).

1.2 Approach and Methodology

The following programs have been assessed for their impact on BDS market develop-ment:

1 Swisscontact Voucher Programs East Java and Jabotabek area,

2 DAPATI - Technology Services Matching Grant Scheme (MoIT under World Bank funding);

3 'Technical Assistance and Training Program (TATP)' ICT Services Matching Grant Scheme (MoIT under World Bank funding);

4 'vucer' Program for technological assistance of the Ministry of National Education;

5 Swisscontact Business Development Center Project for start-up support to BDS pro-viders.

The programs were selected because they are

in terms of funding and / or outreach the most relevant programs for promoting BDS market development and leveraged BDS provision, respectively, that were on-going in early 2001; and

they represent a variety of approaches and instruments, and therefore allow for some cross-comparison with respect to the adequateness of specific instruments used.

Constraints encountered Program assessment was originally intended to be based on the evaluation framework as proposed by the TA in April 2001 (Annex 1). However, a number of constraints were en-countered during the assessment:

Assessment of outreach: Due to very specific (DAPATI) or very open (other pro-grams) definition of eligibility for support, the total size of the target group could only be estimated roughly. Moreover, all program statistics are based on the num-ber of services provided, not the number of SME supported, with several clients receiving more than one service under a specific program.

Efficiency: Information on total program costs per main component was not avail-able. No program evaluated had assessed the full cost contribution of participating SME (including transport, communication, staff and in kind contributions to sub-project etc.). Also, for government-sponsored projects, information on project management costs on behalf of the Government was not available. Finally, the


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Management Contractor for the TATP program refused to provide any breakdowns on grants disbursed.

Effectiveness: Program objectives and expected impacts were in most cases not specified by Objectively Verifiable Indicators (OVI). On the SME level, detailed evaluation of program impacts was only available for the DAPATI program. Except for the Swisscontact programs, no program had systematically monitored program impacts on participating service providers. While a number of programs had exe-cuted initial assessments of existing supply, these assessments were not detailed enough to allow for quantifying overall impact on the service market in terms of market penetration, service prices or new services established.

Program environment: The 1997/98 financial crisis, which substantially affected implementation of some programs, in particular the DAPATI program, made mean-ingful cross-comparison between programs by means of benchmarks difficult.

Impact Assessment Approach Selected Due to these constraints, impact assessment had to focus on determination of the follow-ing basic quantitative indicators, as far as information was available: Outreach:

Total number of services delivered under the program, Total number of service providers worked with.

Efficiency: Ratio service / program management costs, Total program cost per service provided / supported

In addition, based on available program documentation, as well as interviews with pro-gram management, and selected providers and SME beneficiaries, a qualitative as-sessment was carried out. This assessment considered, to the extent information was available form the aforementioned sources,

Impact on SME demand for commercial BDS, as signified by the ratio of first-time users among beneficiaries, as well as any indication on demand for additional BDS at full commercial terms triggered off by the program; and

Impact on service offer in terms of quality, service range, pricing, regional cover-age etc.

Project impacts on SMEs' business and performance could unfortunately not be evaluated systematically, as only for the Swisscontact Voucher Program and the DAPATI program some respective information was available.

Complementary analysis Even though, due to the aforementioned constraints, program impacts could only be as-sessed and not evaluated in detail, the review carried out provides valuable insights in the structure of the Indonesian BDS market. These insights have been complemented with available information on SMEs' BDS demand and usage gained from a survey of some 500 SME in Medan (North Sumatra) and Semarang (Central Java) carried out by the TA. In addition, external studies on the Indonesian BDS market and international experience with BDS market development instruments were considered. Based on this complemen-tary analysis, strategies for developing the Indonesian BDS market are outlined.


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2 IMPACT ASSESSMENT OF SELECTED PROGRAMS

2.1 Swisscontact Voucher Program

Objectives and approach In late 1998, Swisscontact introduced a BDS voucher scheme in order to promote the de-velopment of BDS markets. The objectives of the Program were twofold:

On the demand side, the BDS Voucher Program was expected to motivate a lar-ger number of SMEs to analyze their business and choose services they need most from the institutions they consider most appropriate. For this purpose, the voucher, which came along with a list of eligible BDS providers and services, granted a subsidy towards service purchase.

On the supply side, the Program was expected to increase competition among BDS providers, stimulate them to adjusting the range and content of their products to actual SME demand, and thus raise quality levels of their products. For this pur-chase, the Program included an initial provider survey and accreditation, as well as regular dissemination of voucher use information among all parties concerned.

In its first phase from 1999-2000, the Program was implemented in East Java. Vouchers, which entitled SME to obtain a discount of up to 50% (up to a maximum of IDR 50,000 / ~5 USD) per service used, were sold for an administrative fee of IDR 1,000 via a network of some 50 Wartels. Two kinds of vouchers were offered – regular vouchers for existing SME, and 'Junior Vouchers' for aspiring entrepreneurs intending to become self-employed. During the second phase, on-going since the start of 2001, the Program was extended to the Jabotabek area. The voucher value was increased to IDR 100,000, and the administrative fee (commission to the seller) raised to IDR 5,000. The division into regular vouchers and 'Junior Vouchers' was abolished.

Eligible services BDS providers were selected via a public tender. First screening was based on submitted company profile, service profile and business plan. In a second step, Swisscontact held talks with the providers, as well as with their former and current customers. Based on pre-defined criteria, 38 out of 100 applying providers were finally selected for the first phase in East Java. In Jabotabek, 28 providers were selected.

Figure 1: Services offered under the SC Voucher Program

Service Type Junior Voucher E. Java

Voucher E. Java Phase 1

Voucher Jabo-tabek

Accounting & Tax training 12 13IT Training 13 5Management Training 5 15 22Marketing & Sales Training 6 2Technical Training 11 9 47Financial & Management Consultancy 10 9Technical Consultancy 3 1Total 16 68 99

The initial idea of including only services where a sufficient level of competition existed (at least 4 providers offering the same services) was skipped, as it had resulted in exclusion of a large number of specific technical or sector-related services only offered by one or


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two providers. Therefore, the range of services eligible for voucher use is comprehensive, covering training on accounting, taxation and financial management, various kinds of ba-sic IT training, a broad range of management trainings, including management skills, sales and sector-specific trainings, technical training, in particular in agro-processing and vehicle maintenance, as well as financial, management and technical consultancy. The majority of services offered is training rather than consultancy-based. In several cases, the service price is higher than double the voucher value, meaning that the effective sub-sidy of the voucher is less than 50%.

Outreach The Voucher Program has been heavily advertised via radio, newspapers, brochures and posters, specific SME exhibitions, and a dedicated homepage. In addition, for the second phase of the program a call center has been installed to assist interested SME with spe-cific questions. In spite of these intensive promotion efforts, however, outreach has been below expecta-tions. While sales of Junior Vouchers in East Java were higher than expected, only 43 % of the expected sale of regular vouchers could be obtained in East Java. Even more strik-ing is the low usage rate of sold vouchers, which, depending on the program, ranged only between 57-72%. Finally, approximately one third of the vouchers claimed was rejected after checking, in particular because providers had offered the service without asking the client for own contribution.

Figure 2: Voucher sale and usage under the SC Voucher Program

Junior Voucher E. Java


Voucher Jabo-tabek (4-8/01)

Expected no. of vouchers financed 800 8,000 n.a.

Vouchers sold (% of expected)

1,156(145%)

3,412 (43%)

540

Vouchers used (% of vouchers sold)

836(72%)

1,954 (57%)

355(66%)

Vouchers accepted (% of vouchers used) (% of vouchers sold)

555(66%)(48%)

1,363 (70%) (40%)

n.a.

The limited distribution network may have contributed to voucher usage turning out lower than expected:

In East Java, 43 voucher distribution points were established. Most of these were Wartels in larger cities, in particular in Surabaya and Malang. In several Ka-pubaten, no distribution took place. There was, e.g. neither a distribution point in the Madiun area nor on Madura. In many other Kapubaten capitals, only one or two distribution points existed.

In Jabotabek, 38 distribution points have been established, 29 of which are in Ja-karta. There is only one distribution point each in the cities of Bekasi and Tanger-ang, and none in smaller towns in the Jakarta periphery except for Depok. In a provider meeting for the Jabotabek program, the distribution points were criticized for not being located strategically.

In addition, it is striking that, except for two cooperatives in the Jabotabek program, no business associations have been included in the distribution network.

However, service offer unbalanced with demand seems to have been a main factor con-tributing to lower than expected voucher usage in the East Java pilot program. While ser-vice offer was strongly focused on general training, the majority of services used under


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the SME Voucher program were business consulting, training related to improving access to credit, and technical consultancy, in particular for animal husbandry. Similarly, demand under the Junior Voucher program was strongly focused on specific technical training in animal husbandry, horticulture and handicraft.

Figure 3: Services used under the SC Voucher Program, by number of participants

Service Type Junior Voucher E. Java


Voucher Jabo-tabek (-9/01)

Accounting & Tax training 26 315IT Training 100 Management Training (incl. Financing) 387 459 48Marketing & Sales Training 193 Technical Training 444 182 56Financial & Management Consultancy 4 554 Technical Consultancy 442 Total 835 1956 419

According to Swisscontact staff, there has been a certain degree of regional mobility, e.g. SME from Surabaya attending specialized technical training in Malang. However, with a considerable portion of demand concentrating on specialized services only offered by a few providers, and therefore only available in certain locations, it can be assumed that a long distance to such a provider has reduced voucher usage considerably. This assump-tion is consistent with voucher sales statistics by city, which is closely correlated with ac-tual service use in that city.

Figure 4: Voucher sales in East Java, by City

Location Distribution points SME vouchers soldJunior vouchers soldTotal sold Blitar 5 1064 96 116025,2%Malang 9 639 412 105122,8%Surabaya 12 383 470 85318,5%Jombang 1 373 67 440 9,6%Jember 2 275 275 6,0%Kediri 3 210 56 266 5,8%Tulungagung 1 175 20 195 4,2%Trenggalek 1 88 88 1,9%Sidoarjo 1 41 31 72 1,6%Mojokerto 2 47 21 68 1,5%Pasuruan 1 45 45 1,0%Nganjuk 2 35 35 0,8%Probolinggo 1 33 33 0,7%Lumajang 2 25 25 0,5%Total 43 3433 1173 4606 100% It is noteworthy that relatively to the total population of SMEs voucher usage was higher in small cities, if local providers offered attractive services. This coincides with the fact that in East Java more than half of the voucher users came from rural areas. In the sample of voucher users surveyed for impact monitoring purposes, almost 40% of participating SME were active in agriculture or food industry. While it is still too early for conclusions, first re-sults from the Jabotabek program seem to indicate considerable differences in service demand compared to East Java, which may result from general differences between rural and urban areas.


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Program effects – demand side On the demand side, the East Java voucher program clearly reached the objective of stimulating SME's demand for commercial BDS. 78% of participants bought a BDS for the first time. A similar percentage stated to have not known the provider before, and received first information on the provider through the voucher program. Around three-quarters of participating SME were micro-enterprises, 18% were small enterprises (5-19 employees), and 4% medium-scale enterprises with more than 20 employees. This structure corre-sponds with the enterprise structure in East Java in general. Approximately half of the par-ticipants were less than 5 years in business, a quarter was less than 2 years in business. Almost 40% of respondents, however, were more than nine years in business. This dem-onstrates that the program also increased motivation to purchase commercial BDS within long established enterprises. In terms of the participants' education, university and high school graduates were, with 38% and 42% of respondents, over represented. What concerns customer satisfaction, however, the picture in East Java is less favorable. Only 34% of SME Voucher and 40% of Junior Voucher users were satisfied with the con-tent of the training / consultation. However, 60% of SME Voucher and 70% of Junior Voucher users rated the course fee as cheap or rather cheap, and a surprisingly high 72% reported to be ready to buy another service from the same provider. These results indi-cate that a secondary objective – promoting a 'critical consumer' attitude towards com-mercial BDS – has also been reached. The majority of participating SME seems to be clearly able to relate service quality to price. The picture emerging so far from the Jabotabek program is somehow different. Average satisfaction with training content and qualification of the trainer is higher, ranging around 60%. 75% of participants found the service price reasonable, and 67% thought the train-ing received was worth the money. It appears that doubling the voucher value to IDR 100,000 has had beneficiary impact on the quality of services delivered. On the other hand, a surprisingly high 53% of voucher users in Jabotabek indicated that they had learnt about the program from the provider itself. Four of the seven providers ac-tive so far had referred more than 50% of their service users to the voucher program. In one case – IWAPI – even 91% of users learnt about the voucher program from the pro-vider. This fact does not necessary mean that there is no demand-stimulating effect of the program – to the opposite, it may rather demonstrate a more active marketing approach of some BDS providers in Jabotabek, which have instantly integrated the voucher program in their client acquisition strategy. Still, 80% of voucher users in Jabotabek indicated to have used commercial BDS for the first time. Nevertheless, as also signified by user rates so far being rather low in Jabotabek, it seems that in large cities it is much more difficult to gain public attention for the voucher program via mass media than in smaller rural cen-ters, as in East Java.

Program effects – supply side Program effects on participating providers in East Java were mixed. Approximately half of the accredited providers remained inactive. One of the possible reasons for this phe-nomenon may be a smaller than expected demand for certain services (in particular train-ing courses), which resulted in training applications below the minimum participant num-ber deemed financially feasible by the provider. There is anecdotic evidence of some courses postponed several times because of low number of applications, up to the point that SME lost interest in the service. Temporary or permanent unavailability of services listed in the voucher brochure caused considerable irritation among participating SME, and is likely to be one of the prime reasons behind some 30-40% of sold vouchers re-maining unused. Some providers, on the other hand, used the service usage information regularly disseminated by the program management for adjusting and extending their ser-vice range. Over the 17 months of Program implementation, 10 participating institutions introduced 38 new services. The objective of stimulating providers to adjust their services


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to actual demand was therefore achieved, both in the form of providers introducing new low-cost services for SMEs, and in the form of providers retreating from the low-cost mar-ket segment. There is also more recent anecdotic evidence of the voucher program pro-moting provider networking, e.g. leading to individual BDS providers sharing resources with others, or two providers joining for a training program, when applications received by each provider where insufficient to cover costs. To which extent the quality of individual services was increased by the program in East Java remains questionable. The low voucher price proved to be more attractive to non-professional service providers such as NGOs and universities, than to professional BDS providers. SME feedback indicates, that service quality, though rather low, was in general regarded as adequate in relation to the service price. First experience from the Jabotabek program indicates that service quality is closely related to the service price.

Efficiency According to figures received from SC, total expenses of the Voucher Program East Java between May 1999 and December 2000 amounted to some IDR 1 billion (USD 100,000). Only one-tenth of the total expense was spent on the voucher subsidy itself. Some 19% of the total expense related to printing and program promotion. More than half of the total expense was for program administration including travel & accommodation. In this con-text, it has to be noted that the initial survey and screening of providers, which took place before May 1999, is not included in the expense calculation.

Figure 5: Expenses for the East Java Voucher Program (May 1999 - December 2000)

Position Expense (million IDR)

%

Voucher usage 104.4 10.9% Promotion 169.6 17.6% Design & Printing 10.0 1.0% Travel & Accommodation 85.2 8.9% Program Administration (staff, office running, other expense) 419.7 43.6% External resources (Impact Study) 172.7 18.0% Total 961.6 100%

With a relation of overheads to actual voucher subsidies of almost 9:1, the program does not look very efficient. Even when including printing and promotion costs, as investment into enhanced market transparency, the overhead ratio still stands at 1:2.4. However, it should be noted that program administration included a significant capacity building por-tion for BDS providers, in the form of regular information on service usage and discussion of the situation of the program. Monitoring of vouchers for potential fraud was intensive and costly, but, in view of the large number of vouchers rejected, obviously necessary in order to maintain discipline among providers and obtain the desired supply side effects.

Program costs amounted to some 330,000 IDR (USD 35) per voucher used. This is rather cost-efficient compared to other donor-financed programs. Nevertheless, program effi-ciency would surely benefit from economies of scale, i.e. higher voucher usage rates and more disciplined providers.

Summary and conclusion The East Java Voucher program proved to be a useful instrument for developing the low-cost segment of the market for commercial BDS provision to SME. 78% of voucher users had never used BDS before, and 72% of users indicated to be ready to use other services from the same provider. On the supply side, the program stimulated providers to adjust


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there services to actual demand. However, only half of accredited providers were active under the program, as the low voucher value did apparently not provide sufficient incen-tive to them to refocus their activities.

Outreach, although significant, remained below expectation. Possible program-level ex-planations for this phenomenon include a too sparse voucher distribution network, and the limited number of active providers. However, the low outreach encountered also pointed to eventual external constraints to SME's BDS demand, which shall be analyzed in more detail in Chapter 3 of this report.

2.2 DAPATI - Technology Services Matching Grant Scheme

Objective and approach The Dana Kemitraan Peningkatan Teknologi Industri (DAPATI) Project was a four-year project funded by a World Bank loan to the Ministry of Industry and Trade. It was started in September 1997 and closed by September 2001. DAPATI is one of the four compo-nents of the World Bank funded “Industrial Technology Development Project” that com-menced in 1995.

The main objective of DAPATI was the diffusion of good technology practices through a cost-sharing matching grant fund to finance the competitive provision of technology up-grading services to SMIs. Eligible services included developing new products and proc-esses, as well as improving product design, production workflow & management, and quality management / control. The cost sharing grants to SMEs were meant to offset the cost of engaging specialized service providers (SP). DAPATI grants ranged between 25-75% of the total service provider fee paid. 75% grant was given to small enterprises and enterprises outside Java, while larger enterprises only received 50% or 25% grant. The grant did not extend to supplementary costs such as material and energy costs for testing improvements proposed, or follow-up investment for implementing new solutions devel-oped. Eligible were consultancies by both public and private service providers.

Eligibility and outreach The prime target group of DAPATI was small and medium industries with a potential to develop into modern manufacturing and support industries. Originally, eligibility criteria were relatively broad. Annual turnover had to be in the range of 0.3 to 2 billion IDR, and applicants had to demonstrate (i) the ability to develop into modern, technology-oriented industry, (ii) absorption capacity to use and benefit from consultancy and (ii) ability and willingness to share cost. Priority sectors were (i) engineering, (ii) agro-based industry, and (iii) export oriented-industries with a minimum export value 20% of total sales. How-ever, the approach envisaged some flexibility to also incorporate applications from outside these priority sectors, provided they fit into the general scope of the project.

DAPATI could quickly build up a sizeable pipeline of applications. By the end of 1998, six-teen months after project start, 241 applications had been received. However, as a con-sequence of the 1997/98 crisis and the relatively low turnover ceiling, average grants ap-plied for only ranged around US$ 2,000-3,000, far below the USD 10,000 per average grant originally anticipated. This situation lead to a review of eligibility criteria and project approach. The upper turnover ceiling was raised to 5 billion IDR. SMI applicants as well as potential service providers were now requested to be incorporated. To ensure financial solidity, applicants had to provide tax returns or audited financial statements for the last three years which demonstrated their profitability over this period. The grant fund was re-duced from USD 6 million for 600 sub-projects to USD 2 million for 200 sub-projects to be financed.


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Review of eligibility criteria and subsequent change of the program management contrac-tor resulted in considerable processing delays for the initial applications. These delays lead to a number of application withdrawals, as well as to a significant reduction of new applications during the first half of 1999. Application numbers only picked up again by late 1999, when first DAPATI grants had been committed (see figure below).

Figure 6: Development of DAPATI applications and contracts, 10/97 – 07/01

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ContractsApplications

A total of 148 contracts were concluded under DAPATI. Upon project closure in Septem-ber 2001, 130 sub-projects were terminated and in the evaluation stage, while implemen-tation of 15 sub-projects was still ongoing. Three contracts were cancelled during imple-mentation as the SP could not provide the required deliverables. All contracts relate to SME on Java and Bali. As initial applicants from outer islands were in majority too small to be considered, it was during the intermediate project review decided to discontinue project operation on outer islands in order to reduce project management efforts and costs.

Figure 7: DAPATI applications by processing status and region

Classification Total % JabotabekW. Java E. JavaC. Java OthersTurnover outside eligibility range 86 15,4% 12 11 5 6 52SMI/SP lack registration / 3 years tax return 126 22,6% 23 39 15 49 -Rejected / postponed for formal reasons 212 38,0% 35 50 20 55 52SMI not ready / additional capital or marketing assis-tance required 51 9,1% 12 2 6 24 7SMI activity not in line with DAPATI priorities 10 1,8% 3 4 1 2 Withdrawal by SMI 123 22,0% 49 27 12 20 15Others (Force Majeure, SMI younger than 3 years) 6 1,1% 3 1 2 Rejected / postponed / withdrawn for SMI-related reasons 190 34,1% 67 34 21 46 22Remaining DAPATI duration too short for sub-project 8 1,4% 1 5 2 Total rejected /postponed / withdrawn 410 73,5% 103 89 41 103 74Projects cancelled 3 0,5% 2 1 Projects in Implementation Stage 15 2,7% 1 6 1 7 Projects in Monitoring and Evaluation Stage 130 23,3% 55 29 21 25 Total contracts committed 148 26,5% 56 37 22 33 0Total applications 558100,0% 159 126 63 136 74 410 applications, almost three quarters of the 558 applications received, were rejected, postponed, or withdrawn by the applicants. A key constraint was the inability of many ap-plicants to cope with formal eligibility criteria, in particular presentation of complete tax re-turns for the last three years. It should be noted in this respect that (i) individual taxpayers, i.e. SMI that are not incorporated but operate under the legal form of a 'sole trader' are under certain conditions exempt from filing a tax return, and (ii) SMI with a turnover of less than 600 million IDR may opt for simplified accounting and taxation under the 'net income


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calculation norm', i.e. estimating taxable income as a percentage of turnover. Although DAPATI tried to overcome this formal constraint by allowing applicants to replace tax re-turns by audited income statements and balance sheets, 82 applications (15% of all appli-cations) were rejected or postponed for lack of sufficient documentation on their financial standing and performance. Another prominent formal reason for rejection was turnover (as reported to tax authorities) below 300 million Rupiah (77 applications, 14% of all applications).

123 applications, 23% of all applications, where withdrawn by the applicants. Reasons for withdrawal were manifold. They included long delays in application processing, in particu-lar during the initial phase of the project, as well as internal and business-related factors. It appears that the 1998 financial crisis significantly impacted on a number of applicants, leading them to review their business strategies and subsequently withdraw or alter their DAPATI application. Some withdrawals may as well relate to applicants realizing that they will be unable to comply with formal DAPATI eligibility criteria such as demonstrating rea-sonable profitability during the previous three years, including the 98 crisis year.

No statistical data on the size of the DAPATI target group (tax-paying, incorporated SMI active in specific priority sectors with annual turnover between 0.3 and 5 billion IDR that have operated profitably during the financial crisis) could be found. Nevertheless, it is fair to assume that less than 25% of the roughly 19.000 medium and large manufacturing en-terprises registered in Java and Bali were in general eligible to DAPATI assistance. This assumption would yield a DAPATI outreach to some 3% of the eligible target group in terms of sub-projects implemented and of 5-6% of the eligible target group in terms of formally viable applications received. In view of the conceptual problems encountered dur-ing the project's initial phase and the relatively short period of effective project implemen-tation, this outreach is quite remarkable. It documents considerable interest in profes-sional technology-related BDS among larger manufacturing SME.

Program effects – demand (client) side The sub-projects funded under DAPATI covered a wide range of topics, including quality and productivity management, product development, skills development, ecological im-provement and maintenance (Figure 8). Main focus, however, was ISO 9xxx preparation and certification, with 63 projects (43% of all sub-projects).

Figure 8: DAPATI sub-projects by consultancy type and region (multiple answers possi-ble)

Type of Consultancy (multiple answers possible) Total

% of answers

% of projects Jabotabek W. Java E. Java C. Java

ISO 9xxx preparation & certification 63 24,6% 43,4% 36 8 9 10Production process, productivity 59 23,0% 40,7% 15 24 11 9Product quality, quality control system 40 15,6% 27,6% 7 22 1 10Design, product development, prototypes 40 15,6% 27,6% 7 16 6 11Training, skill development, safety 20 7,8% 13,8% 3 15 1 1Plant/machinery layout, production flow 15 5,9% 10,3% 3 5 7Overall production management 9 3,5% 6,2% 1 1 1 6Energy saving, pollution reduction, recycling 6 2,3% 4,1% 1 4 1Maintenance, equipment problems 4 1,6% 2,8% 1 2 1

Total answers 256 100,0% 176,6% 74 97 30 55

In terms of their size, DAPATI beneficiaries were relatively evenly distributed across the eligible turnover range. Regionally, companies from Jabotabek were slightly over repre-sented, and SME from East Java slightly under represented (Figure 9).


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Figure 9: DAPATI beneficiaries by turnover and region

Annual Turnover (Bill. IDR) Total % Jabotabek W. Java E. Java C. Java< 0,3 - 0,5 29 20,0 % 7 9 7 60,5 - 1,0 20 13,8 % 6 4 6 41,01 - 2,0 36 24,8 % 15 12 3 62,01 - 4,0 30 20,7 % 12 8 4 64,01 - 5,0 30 20,7 % 16 2 2 10

145 100,0 % 56 35 22 32Total Sub-Projects Implemented 38,6% 24,1% 15,2% 22,1%

For each of the completed projects, the Management Contractor has carried out an inter-nal evaluation. These internal evaluations concluded that sub-project objectives as de-fined during appraisal were reached for each sub-project evaluated. Unfortunately, DA-PATI did not assess the cost-benefit of each subproject evaluated. From a screening of evaluated impacts on the beneficiary, however, it appears that most completed sub-projects had positive economic impacts on the beneficiaries. Depending on the specific sub-project, such impacts may have been enabling the beneficiaries to secure new orders because of ISO 9xxx certification, or productivity gains / production cost reductions in the range of 3-10%.

It should be noted that upon project closure in October 2001, 15 sub-projects, which is 10% of all sub-projects, were still in the Implementation Stage. Although some of these projects may be expected to be finalized soon, it is likely that the majority of these 15 sub-projects have to be regarded as failures, which will not be completed successfully. Never-theless, even with a possible failure rate of some 10% of all sub-projects, and in the ab-sence of detailed cost-benefit assessments, DAPATI sub-projects appear to have in gen-eral benefited the participating SME and contributed to stimulating their competitiveness and modernization.

According to observations of the DAPATI management, project implementation was in general better for larger SME from 2 billion IDR upwards. Smaller companies were often found to lack managerial capacities and attitudes to absorb the consultancy input, result-ing in longer response periods to consultant proposals, and frequent alterations of the consultancy timetable. DAPATI management also reported of cases of smaller beneficiar-ies having cash-flow problems, which resulted in payment delays to the BDS provider, or delays in testing and implementing new products and processes proposed. It was also mentioned that some smaller beneficiaries proved to be unable to raise investment capital required to implement recommendations. However, strict eligibility screening seems to have contributed to such cases being an exception rather than the rule.

What concerns DAPATI's overall impact on SME demand for technology-oriented BDS on commercial terms, no formal internal assessment has been carried out by DAPATI. Ac-cording to DAPATI management, many larger SME are likely to have ordered BDS any-way, even in the absence of DAPATI matching grants. This concerns in particular ISO 9xxx certification, as most SME receiving such services had received clear signals from their clients about the need to obtain certification if business relations should be contin-ued.

However, DAPATI seems to have been instrumental in linking interested SME with ade-quate BDS providers, and structuring contract terms and scheduling in an adequate way. DAPATI management also reported several cases of DAPATI beneficiaries seeking infor-mation on appropriate BDS providers for further technological assistance, to be delivered on full commercial terms without DAPATI grant. It can therefore be concluded that DA-PATI has clearly helped to increase transparency for SME on technology-related BDS


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available. Unfortunately, DAPATI did not disseminate respective information to a wider public, e.g. by publicizing a list of BDS providers which successfully completed DAPATI sub-projects.

Program effects – supply (provider) side A distinct feature of DAPATI is the use of domestic service providers based on competi-tive bidding. To this end, DAPATI has established a data base containing the profiles of the service providers that meet the basic standards set by DAPATI. In total, DAPATI has screened some 200 providers, including research institutes, universities, NGOs and pri-vate consulting companies. Since the screening was based on applications received, DA-PATI management is unable to indicate to which extent it has covered the total supply of technology-oriented BDS. Nevertheless, the screening has shown the existence of a size-able number of providers with a differentiated service profile on Java. The majority of these providers is concentrated in the Jakarta area.

Figure 10: DAPATI - Screened Service Providers by Sector and Location (multiple an-swers possible)

SISC Jakarta Area W-Java C-Java E-Java Total

31 Food, beverages & tobacco 41 10 11 15 77 32 Textiles, garment & leather 41 8 9 12 70 33 Wood, rattan, furniture 32 8 13 11 64 34 Paper, printing, publishing 13 5 - 1 19 35 Chemicals 29 10 4 8 51

36 Non-metal mineral products, rub-ber, plastics

21 8 5 5 39

37 Basic metal industries 18 9 4 8 39 38 Fabricated metal products 34 16 10 11 71 39 Others 8 3 - 1 12 Total 237 77 56 72 442

Out of the screened providers, 84 providers carried out DAPATI sub-projects. Around two-thirds of the providers were private consulting firms, while the remainder consisted of vari-ous research institutes (balai, lembaga etc.), universities and polytechnics, and NGOs (Yayasan). A cross-comparison of the different provider types shows that public sector providers where slightly more likely to receive 75% grant funding, which may correlate with their stronger focus on small enterprises.

Figure 11: DAPATI – Provider Usage by Provider Type

Provider Type Private firm Research Institute

University, Polytechnic

Foundation, NGO Total

Number of Providers 54 10 13 7 84 64,3% 11,9% 15,5% 8,3% 100,0%Number of Sub-Projects 98 13 20 14 145 67,6% 9,0% 13,8% 9,7% 100,0%Avg. No. of Projects 1,8 1,3 1,5 2,0 1,7Avg. matching grant 59 % 65 % 65 % 60 % 61 % 29 providers carried out more than one sub-project. There were nine providers contracted for four or more sub-projects which, with one exception, were all private firms, mostly with focus on quality management and ISO 9xxx certification. Considering that contract award-ing was in most cases based on competitive bidding (except for very small contracts), pro-


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provider usage indicates a better adaptation of private BDS providers and NGOs to SME demand for assistance compared to universities and public research institutes. According to DAPATI project management assessment, private firms also tended to display a more professional attitude towards contract execution. This overall finding, however, has to be related to the fact that DAPATI has triggered off some 20 start-ups of private service pro-viders, which were mainly spin-offs from research institutes and universities, and therefore indirectly promoted resource drain from public institutions to the private sector.

DAPATI conducted initial capacity building through training and information seminars for screened providers. However, according to DAPATI program management, the impact of such activities on provider capacities was relatively low. In general, capacities of the pro-viders screened were found to be very weak, both what concerns technological expertise and project management and documentation standards.

Major capacity building, however, was brought forward during sub-project execution. DA-PATI sub-projects were structured into three phases, namely (i) problem identification, (ii) design and (iii) implementation. After each phase, the outputs produced by the BDS pro-vider were assessed by DAPATI management jointly with the beneficiary. Only when re-sult quality was deemed satisfactory, payment for the phase was released and work for the next phase commissioned. This phased approach, which was new to most providers, and the intensive discussions conducted at the end of each phase, are by DAPATI project management felt to have brought forward the most significant capacity building effects. Similar feedback was received from participating providers interviewed for the purpose of this evaluation. Remarks of external observers, which feel some participating providers have used DAPATI as instrument for training their junior staff, rather support than contra-dict this assessment.

What concerns the majority of service providers screened, service quality still seems to be far below acceptable standards. However, DAPATI project management estimates that around 35 providers have significantly benefited from participation in the project and will be able to deliver professional technology-oriented services to SME without further inten-sive coaching. Therefore, DAPATI is likely to have contributed to the emergence of pro-fessional providers of technology-oriented services. In view of the various capacity deficits encountered on provider level during DAPATI execution, however, it would have been de-sirable if DAPATI had placed a stronger focus on informing potential future clients on the specific strengths and quality levels achieved by participating service providers.

Efficiency The total volume of matching grants committed per June 2001 is USD 516,451, which re-lates to some 3,500 USD average matching grant per sub-project financed. The contract for the DAPATI management contractor amounts to USD 826,007, or 61,5% of total DA-PATI commitment. No information is available on additional project administration costs incurred with the MoIT and the World Bank, respectively.

Figure 12: Total Contracted DAPATI Expenses per June 01, in USD

Position Total Contract Amounts % Avg. per sub-project Matching grants 516,451 38.5% 3,561.73 Management Consultant 826,007 61.5% 5,696.60

Total 1,342,458 100% 9,258.33 What concerns individual matching grants, DAPATI remained far below the USD 10,000 per matching grant that were expected during project planning. Judged by the complexity of sub-projects funded, DAPATI sub-project seems to have been reasonably efficient. SMEs' obligation to provide own financial contributions and open tendering appear to have contributed to such efficiency.


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A reason for concern is the high ratio of project management to matching grant expenses which stands at roughly 2:1, not considering MoIT and World Bank project management expenditure. Though differing strongly depending on county size and disbursement ap-proach, other World Bank financed matching grant projects in developing countries have been able to obtain ratios of project management to matching grant expenses in the ratio of 1:2 or even lower1.

However, it should be considered that (i) substantial efforts during the initial project year were required to clarify project focus, approach and eligibility criteria among all parties concerned, (ii) individual matching grants were relatively low, which tends to increase the overhead ratio, and (iii) DAPATI included intensive monitoring and evaluation of sub-projects, which resulted in considerable capacity building of participating providers. Against this background, the program appears to have been reasonably efficient. With the concept clarified, and reasonable program management capacities within the MoIT devel-oped, however, follow-up projects should be able to lower overhead ratios in the range of 35-40% of total program costs.

Summary and conclusion The main objective of DAPATI was the diffusion of good technology practices through a cost-sharing matching grant fund to finance the competitive provision of technology up-grading services to SMIs. This objective was to a good extent achieved. After having overcome initial conceptual problems, the DAPATI matching grant scheme found consid-erable interest among eligible SME. DAPATI sub-projects appear to have in general bene-fited the participating SME and contributed to stimulating their competitiveness and mod-ernization. However, the approach seems to be more appropriate to larger SME with turn-over exceeding 2 billion Rupiahs, while smaller SME may lack sufficient management ca-pacities to absorb the consultancy input.

DAPATI's overall contribution to developing SME demand for technology-oriented BDS is relatively small and primarily restricted to enhancing transparency on available BDS sup-ply. Through its phased sub-project approach and intensive implementation monitoring and evaluation, however, DAPATI has significantly contributed to provider capacity build-ing. Overall impacts on BDS market development could have been enhanced by a stronger focus on publicizing provider information gained during implementation to inter-ested SME.

Outreach, although significant, remained below expectation. This is partly due to project implementation coinciding with the 1998 financial crisis. However, sustainable policies for promoting technological modernization and competitiveness of Indonesian SME will have to go beyond promoting individual, contract based R&D activities in order to also reach smaller enterprises. Nevertheless, the DAPATI approach of coupling matching grants with a sub-project phasing and intensive monitoring proved to be effective for 'on-the-job' pro-vider capacity-building.

2.3 Technical Assistance and Training Program (TATP) ICT Ser-vices Matching Grant Scheme

Objective and approach The Technical Assistance and Training Program (TATP) on Information and Communi-cations Technology (ICT) for SMEs in Indonesia is a three-year project funded by a World

1 See David A. Phillips: " Implementing the Market Approach to Enterprise Support – An Evaluation of Ten Matching Grant Schemes"; The World Bank, Europe and Central Asia Region, Private and Financial Sectors Development Sector Unit, 2001, p. 18 ff


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Bank loan to the Ministry of Industry and Trade, Directorate General of Small-Medium In-dustry and Trade. It has started in March 2000 and is scheduled to run until February 2003. AS DAPATI, TATP is one of the four components of the World Bank funded “Indus-trial Technology Development Project” that commenced in 1995. The total World Bank allocation to the project is USD 5.75 million, USD 3.5 million of which are designated to be used for matching grants to service providers.

The overall objective of the TATP is to facilitate development, dissemination and adop-tion of good information technology practices among SMEs. Secondary objectives are

(i) to encourage SMEs to use external expertise where appropriate to help overcome constraints to competitiveness,

(ii) to increase the quantity and quality of technical and related management consultancy services available in Indonesia

(iii) to strengthen MoIT capacity to enhance IT awareness among SME.

Expected results include

(i) a substantial increase in the number of SMEs active in high quality software develop-ment and IT support services;

(ii) a substantial increase in the number and quality of IT support services available to and affordable by SME in Indonesia;

(iii) a greater willingness of SMEs to use IT consulting services in future at full market costs.

The main instrument of TATP for reaching these objectives is offering a 75% matching grant towards SMEs' cost for usage of specialized ICT service providers. Element pur-chases (hardware and off-the-shelf-software) are not eligible for cost-sharing grant assis-tance. In-kind distributions are not eligible towards the SME's 25% of total costs. Eligible are services provided by both public and private service providers. The matching grants for SP usage are complemented by a short training course on consulting skills for all con-sultants wanting to operate under the program, and a specific 75% matching grant facility for SP's usage of another SP acting as IT trainer.

The process of applying to TATP, which depends on the type of project, is as follows:

Type 1: Where an SME has identified a requirement but has not yet identified a Service Provider (SP). TATP assists the SME to identify a suitable SP and pro-vides a 75% cost sharing grant to assist the SME to engage SPs as an IT consult-ant and/or trainer. SME completes and submits Grant Application Form to the Management Contractor (MC). Terms of Reference are then developed by the SME and MC. Selected SPs that are registered with TATP are invited to submit a proposal to undertake the work . Selection of the SP to be awarded the contract is performed by the SME and MC.

Type 2: Where an SME has identified a requirement and has also identified a suitable Service Provider (SP), also referred to as "duet". TATP provides a 75% cost sharing grant to assist the SME to engage the services of the SP. SME and SP jointly complete and submit a Proposal to the MC. SME must also complete a Grant Application Form and submit it along with the Proposal. If the SP has not registered with TATP, then it must also complete a Registration Form and submit it along with the Proposal.

Type 3: Where a small or medium-scale service provider (SMSP) has identi-fied a specialized training requirement. TATP provides a 75% cost sharing grant to assist the SMSP to engage the services of another SP acting as IT trainer. In this case, TATP will identify a suitable training provider. The SMSP completes and submits a Specialized Training Grant Application Form to the MC. Terms of


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reference are then developed by the SMSP and the MC. The MC then selects an appropriate SP from its database of registered SPs.

Eligibility and outreach Although the project documentation refers to SMEs as target groups, no specific definition of SMEs is included. Participation in TATP is in principle open to all legally registered enti-ties, including

a privately owned commercial enterprise (with over 50% of the equity owned by Indonesian entities);

a cooperative; a foundation; or a legally registered association of SMEs.

According to the TATP secretariat within MOIT, eligibility for TATP matching grants has been restricted to privately owned enterprises with less than 5 billion Rupiah (~USD 500,000) turnover, unless enterprises receive TATP assistance as members of coopera-tives or associations. There are no sector-related eligibility restrictions.

Figure 13: Number of processed TATP matching grant applications, per April 6, 2001

Applications re-ceived by MC

Forwarded by MC to MoIT

Approved by Super-vising Committee

Contracts con-cluded

Type 1 12 2,6% 1 0,6% 1 0,7% 1 0,8%

Type 2 432 92,5% 168 99,4% 149 99,3% 132 99,2%

Type 3 23 4,9% - - - - - -

Total 467 100% 169 100% 150 100% 133 100%Total matching grant volume (USD) 13.276.487 3.851.293 3.484.971 3.034.121

Source: Project Handout of TATP Secretariat within MoIT (undated)

TATP has been able to quickly build up and process a sizeable application pipeline. By April 6, 2001, after only being in operation for thirteen months, almost all available TATP matching grant funds were already committed to 133 sub-projects. Aside from low eligibil-ity thresholds, quick pipeline build-up and processing can mainly be attributed to the 'duet approach' of SPs applying together with beneficiary SMEs (Type 2 application). More than 90% of applications received and 99% of contracts concluded were of this type (see Fig-ure 13). Joint application by the SP together with the beneficiary SME speeds up applica-tion processing considerably, as no intermediate preparation of Terms of Reference and tendering of the work is required. It also appears that the 'duet approach' has motivated SPs to actively advertise the program among potential beneficiaries.

Extending eligibility for TATP matching grants towards cooperatives and enterprise asso-ciations has helped to enhance project outreach. More than two-thirds of the contracts awarded have not individual enterprises, but enterprise groups in various forms as benefi-ciary (see Figure 14). In total, through the 132 matching grants committed by July 31, 2001, some 638 SMEs are expected to be reached2.

2 "TATP – Indonesia's Technical Assistance and Training Program; Successes To Date"; P.T. Hickling Indonesia, Jakarta, August 2001, p.2. There is a slight difference in the number of total contracts awarded as quoted by the MC, P.T. Hickling Indonesia (132 contracts per July 31, 2001), and the TATP Secretariat within MoIT (133 contracts per April 6, 2001), pre-sumably related to contracting delays or contract cancellation during sub-project implementation.


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Figure 14: TATP contracts by type of beneficiary

Beneficiary type No. of contracts Percentage

Single Enterprise 38 29%Group of SMEs 38 29%Single Cooperative 27 20%Group of Cooperatives 17 13%Associations / Foundations 12 9%

Total 132 100% Regional outreach of TATP is relatively widespread and regionally balanced. Only 11% of matching grants go to the Jakarta area, while more than 45% are used for sub-projects outside Java. Contrary to what might have been expected, the average size per sub-project increases rather than decreases with the distance to Jakarta. This gives outer is-lands a 47,5% share in total matching grants contracted (Figure 15).

Figure 15: TATP contracts by region (as per April 6, 2001)

Region No. Of Contracts Contract Amount (USD) Avg. USD per Contract

Jakarta 16 12,0% 287.066 9,3% 17.942W. Java 10 7,5% 190.635 6,2% 19.064C. Java 22 16,5% 513.481 16,7% 23.340E. Java 25 18,8% 620.008 20,2% 24.800

Subtotal Java 73 54,9% 1.611.190 52,4% 22.071N. Sumatra 31 23,3% 751.657 24,4% 24.247S. Sulawesi 23 17,3% 588.944 19,1% 25.606Others (mainly Bali) 6 4,5% 124.469 4,0% 20.745Subtotal Non-Java 60 45,1% 1.465.070 47,6% 24.418

Total 133 100,0% 3.076.260 100,0% 23.130Source: Project Handout of TATP Secretariat within MoIT (undated), own calculations While disbursement speed and outreach in terms of regional coverage and the number of enterprises reached appears to be remarkable, it has to be related to TATP's loose eligi-bility criteria. Considering that, according to the 1996 economic census, there are around 1.3 million enterprise units with a turnover between 50 million and 5 billion IDR in Indone-sia, TATP has so far reached out to less than 0.05 % of potentially eligible SME. Smaller matching grant amounts and a 40-50% instead of 75% grant portion would have allowed for higher outreach.

Program effects – demand (client) side No initial analysis of SME demand for and current usage of IT services was carried out by the TATP. The TATP grant application form collects in a well-structured format a wide range of applicant's data, including current IT usage and capabilities, and intended future IT usage beyond the scope of services applied for under TATP. While statistical compila-tion of this data could provide valuable insights into SME's future demand for IT services, this data appears so far to not have been evaluated systematically by the Management Contractor. The Management Contractor denied a request for access to the basic data-base in anonym zed format for respective analysis, as he deemed all information received from applicants having to be held strictly confidential. As a result, no benchmark for measuring eventual TATP impact on SMEs' demand for ICT services exists so far.


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TATP clients cover almost all economic sectors, including agriculture, tourism, construc-tion and communication. Dominating, however, are trade with 41% of all beneficiaries, and industry (25 %). Training dominates the range of services supported with 66% of all sub-projects. Most training is either basic IT training or internet / e-commerce training. Only 27% of the sub-projects are geared towards system integration and development of spe-cific software applications (Figure 16). 7% of the sub-projects support homepage and website development.

Figure 16: TATP grants by type of activity supported (per August 2001)

Activity type Percentage

Basic IT training (including word processing and spreadsheets) 34%Internet / e-commerce training 30%Other software application training 2%Subtotal Training 66%Homepage / website development 7%System Integration 16%Financial / accounting software development 6%Manufacturing software development 3%Software development for supporting retail operations 2%Subtotal system integration & software development 27%Total 100%Source: "TATP –Successes To Date"; P.T. Hickling Indonesia, Jakarta, August 2001, own calculations

As implementation of many TATP subprojects is still on-going, no evaluations have yet been carried out by the Management Contractor. The MC was also unable or unwilling to share any assessments and insights gained from implementation monitoring with the au-thors of this study, and to provide more specific information on activities supported under each sub-project. The only information available were eleven 'success stories' published by the MC, and interviews with one service provider and two SMEs receiving TATP assis-tance.

Weak information base and lack of benchmarks do not permit final conclusions on TATP effects on the demand for and supply of IT services. Nevertheless, the following notes and observations can be made:

There appears to have been a tendency to enlarge sub-projects geared at system integration and software development in order to maximize the TATP grant amount. One 'success story' published by the MC, for example, is about improving the management capability of a construction services company through a bundle of unrelated IT services, including development of an accounting application, as well as training in project planning software, LAN management and basic internet and e-commerce applications. Another sub-project that was assessed by the au-thors of this study focused on developing an integrated order management, logis-tics and accounting system for a furniture exporter. Operating under Oracle, this system integrates operations carried out in various locations, namely headquarter and sales office in Surabaya, the manufacturing site in Central Sulawesi, as well as logging and Rotan extraction sites in Central Sulawesi. While the integrated so-lutions promoted by TATP may in general have enhanced the beneficiaries' effi-ciency and competitiveness, beneficiaries would under cost considerations in the absence of TATP matching grants rather have adopted a step-wise IT develop-ment approach. This observation leads to doubts about the replicability of TATP sub-projects geared at system integration and software development under commercial condi-


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tions, when no matching grant subsidies are available. In general, the 75% match-ing grant subsidy awarded by the TATP appears to be too high to bring forward sustainable stimulation of IT demand. Such a high subsidy sends wrong signals towards benefiting SMEs. It may lead them to advance IT service usage originally scheduled for later, thereby effectively reducing their future demand for IT ser-vices, or result in sub-projects which are not cost-efficient.

What concerns basic IT and e-commerce training, which are the majority of sub-projects funded under TATP, it must be doubted that matching grants can substan-tially increase demand. Compared to investment (computer purchase) and opera-tion (internet access) costs, IT training expenses are relatively small. Moreover, there are a number of external constraints to SMEs IT usage. Indonesia's commu-nication infrastructure is only weakly developed, in particular in secondary cities and rural areas. Dominance of state-owned telecommunication companies and lacking market liberalization results in high internet access costs. Until mid 2001, computers and telecommunication equipment were subject to 20% Sales Tax on Luxury Goods. Against this background, matching grant subsidies on basic IT training are rather unlikely to significantly influence SMEs' decision making on IT usage. Available market information (see Chapter 3 for details) indicates that, once SMEs have opted for IT usage, they are willing to use IT training at full commercial costs, provided they have not already acquired IT skills in University or in internet cafes.

While the TATP 'duet system' has helped to quickly build up a sizeable application pipeline, it bears the danger of funding sub-projects that already had been agreed between the IT provider and SMEs on commercial terms. No information is avail-able whether and how the Management Contractor has eventually attempted to control cases of sub-projects being proposed for TATP funding which would also have been carried out at commercial terms in the absence of TATP funding. Therefore, the additionality of TATP subprojects remains questionable and re-quires further evaluation, in particular what concerns basic IT and e-commerce training3.

In summary, the basic TATP design makes significant demand-stimulation effects, i.e. a greater willingness of SMEs to use IT consulting services in future at full market costs, rather unlikely. Of specific concern is the combination of (i) lacking initial market research and benchmarking, (ii) 75% matching grant subsidies, (iii) the wide range of eligible ser-vices, which covers not only 'strategic' IT services such as system integration and applica-tion development, but also basic IT and e-commerce training, and (iv) very open eligibility criteria for beneficiaries and the absence of any pre-defined criteria which can ensure ad-ditionality of the sub-projects funded.

All four aforementioned design characteristics are not in line with best practice for design of matching grant funds as recommended by the World Bank4. Best practice calls for (i) initial market and constraints analysis before designing interventions, (ii) matching grant subsidies in the range of 50% or less, (iii) focus on strategic services, and (iv) a set of carefully designed and clear eligibility criteria that targets (a) firms that require but are not willing to pay for services, (b) technologies most likely to generate spillover benefits and (c) assistance most likely to stimulate demand for local service provision.

3 See also David A. Phillips: " Implementing the Market Approach to Enterprise Support – An Evaluation of Ten Matching Grant Schemes" (The World Bank), p. 13 ff ,for a general discussion on reduced sub-project additionality brought forward by sub-project selection on first-come – first-served base.

4 David A. Phillips: " Implementing the Market Approach to Enterprise Support – An Evaluation of Ten Matching Grant Schemes" (The World Bank), p.22f.


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Program effects – supply (provider) side 133 service providers have been contracted for TATP sub-projects. All providers received only one contract. However, under the 'duet system', one contract could include assis-tance to several SMEs. 57% of the service providers contracted were private companies, with the remainder being associations / NGOs and public institutions, respectively (Figure 17). TATP grants per provider contract ranged from around USD 10,000 to USD 30,000, with an average of USD 23,000 per contract. The TATP Management Contractor did not provide any further details on the size distribution of contracts or the volume of individual contracts.

Figure 17: TATP contracts by type of Service Provider (per April 6,2001)

Beneficiary type No. of contracts Percentage

Private Company (CV, PT etc.) 75 57%

Cooperative / Association / NGO 42 31%

Public institution (University, research / training institute etc.) 16 12%

Total 133 100% Source: Project Handout of TATP Secretariat within MoIT (undated) The TATP included an initial short training program for interested service providers, de-tails on which, however, are not available. Provider registration is based on a question-naire, which covers provider capabilities, expertise and service areas, and client refer-ences. Provider capacities were primarily checked during the sub-project appraisal proc-ess. Interviews with selected service providers indicate that the MC also devoted consid-erable efforts towards reviewing the scope and terms of reference for individual sub-projects. As no formal evaluation of this review process is available, however, it has re-mained unclear whether such review has been conducted regularly and systematically or has been restricted to larger software development and system integration projects.

The TATP design includes a specific matching grant facility for capacity building of IT ser-vice providers ('Type 3' projects). While 23 applications for this facility were received by the MC, none of them was forwarded to the MoIT steering committee for approval.

The Management Contractor reported no difficulties in finding suitably qualified service providers on Java, where IT service supply appears to be well and broadly developed, and technical capabilities are in general adequate. Outside Java, however, providers were described to be primarily focusing on training, with higher level IT services (application development, system integration) only weakly developed. According to the TATP Secrete-riat within MoIT, several providers display management deficits, in particular lack of stra-tegic vision and an enterprise development concept. Moreover, providers have often been found to lack understanding of SMEs' needs and demands. Being primarily technically ori-ented, providers sometimes have difficulties to communicate adequately with SMEs. It does not seem that the TATP has developed any explicit strategy to deal with the a/m weaknesses.

The TATP appears to not have any systematic approach for sub-project monitoring, e.g. a mandatory phasing of sub-project implementation with evaluation of achievements after each implementation phase. The Management Contractor was unable to provide any monitoring information on the state and intermediate outputs of sub-projects under imple-mentation. The TATP is therefore unlikely to have brought forward significant provider ca-pacity building in terms of project management, product and strategy development, and improving communication with SMEs, during implementation monitoring.

There are a few cases in which TATP is likely to have successfully promoted development of new products. One example is the development of an electronic banking system for mi-cro-finance institutions, which has been implemented in 17 MPR (micro finance banks)


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with TATP grants. Notwithstanding a more detailed assessment of this sub-project, such a software system is likely to find future demand at full commercial terms, as the fact that most software development costs have already been covered by the TATP will allow for selling additional system implementations at lower costs.

However, in the majority of cases, the TATP is likely to have set wrong signals to service providers:

In spite of the project's strong focus on basic IT training, the MC did not develop standards for training products and approaches to be used for application ap-praisal and implementation monitoring. This is a missed opportunity for facilitating product development and standardization. Allowing SPs, in contradiction to current market practice, to charge for training on a cost-plus base and to include allow-ances for training carried out in the beneficiaries' enterprises, moreover appears to have promoted unrealistic price expectations among service providers. A rough es-timate indicates an average training fee including the beneficiaries' 25% contribu-tion of some 650 USD per trainee5. Comprehensive classroom-based basic IT training courses (including word processing and spreadsheet applications) are available from commercial IT training institutes at around 80 USD per trainee.

The same holds true for homepage and website development. With a minimum sub-project volume of USD 10,000, the services supported are unlikely to find sig-nificant future demand among SME if offered at similar fees without public subsi-dies.

As discussed extensively in the previous section, it is very doubtful whether TATP sub-projects for software development and system integration will be replicable in the absence of future public subsidies (except for a few standardized packages developed under TATP subsidies). This implies also, that service providers will in many cases not be able to in future successfully market the scope of respective services promoted under the TATP.

The TATP policy to exclude purchase of off-the-shelf software from funding ap-pears to have in some cases negatively affected supply. Two Indonesian manufac-turers of simple accounting packages, which received support under the Swiss-Contact BC program, reported to have been crowded out of their local market as they were unable to compete with individual application development subsidized by TATP matching grants. Instead of promoting development and distribution of low-cost standardized software applications for SMEs, the TATP appears to have promoted individual programming efforts, which are unlikely to sustain demand in the absence of future subsidies.

In summary, the TATP is highly unlikely to have obtained its expected effects:

There is no sign that the expected "substantial increase in the number of SMEs ac-tive in high quality software development and IT support services" has been achieved. As there exists already a strong provider base, any substantial increase in the number of providers is unlikely to take place unless the general environment for IT usage in Indonesia is improved. Current observations indicate rather a crowding-out of other providers by TATP-subsidized providers than promotion of new providers through the Program.

5 As no contract details were made available by the MC, this estimate was derived based on overall TATP financial in-formation available. Assuming that the 44 sub-projects geared at homepage development, software development and sys-tem integration received an average grant of USD 28,000, total TATP funding for such activities ranges around USD 1.188 million. This leaves a balance of USD 1.888 million TATP grants committed to subprojects for basic IT training. If assuming furthermore that all 3,800 persons TTATP claims to have trained received training within the sub-projects for basic IT train-ing (and none in the framework of software development & system integration), this leads to an average TATP grant per trainee of 497 USD. Adding 25% own contribution of beneficiaries results in a total average fee per trainee of USD 662.


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The TATP is also unlikely to achieve the expected "substantial increase in the number and quality of IT support services available to and affordable by SME in Indonesia". The specific matching grant facility for provider capacity building has remained unused. The focus on basic IT training, and lack of any activities geared at promoting respective standardization, is unlikely to bring about significant im-provements in service quality. Product and price wise, the TATP is sending wrong signals to service providers, and tends, with a few exceptions, to promote services that are unlikely to be demanded by and affordable to SME in the absence of matching grants. As key supply-side constraint, a provider culture that is primarily technology-oriented but lacks strategic vision and understanding of SMEs' re-quirements has been identified. By allowing providers to sell their services in a non-standardized way with low, subsidized prices as key sales argument, the TATP is rather cementing this cultural constraint than promoting effective orienta-tion of service providers on SME demand and requirements6.

Efficiency The total volume of matching grants committed as per April 2001 is USD 3,076,262. Pro-gram management expenses committed to third parties amount to USD 2,118,317, or 41% of total TATP commitment. Aside from the Management Contractor, such program management expenses include, among others, costs of the initial awareness campaign and a consultancy contract for developing and conducting initial training with interested service providers. No information is available on additional project administration costs incurred with the MoIT and the World Bank, respectively.

Figure 18: Total Contracted TATP Expenses per April 01, in USD

Position Total Contract Amounts % Avg. per sub-

project (133) Avg. per benefici-

ary (638) Matching grants 3,076,262 59.2% 23,310 4,822Program Management 2,118,317 40.8% 15,927 3,320

Total 5,194,579 100% 39,057 8,142 With 23,310 USD, the average matching grant per sub-project is relatively high. The au-thors assessed one sub-project, which dealt with development and implementation of an integrated order management, logistics and accounting system in three locations on Java and Sulawesi. Considering the complexity of the project and travel efforts necessary for implementation, this sub-project, at a total cost of some 38,000 USD, appears to be fairly cost-efficient. Lack of detailed costing information per sub-project does not allow for rating the efficiency of sub-projects for system integration and software development in general.

The cost-efficiency of sub-projects for basic IT training, however, is doubtful. A stronger orientation on classroom-based training instead of training within the beneficiary SMEs might have yielded similar results at a fraction of the costs incurred.

Average external project management expenses per TATP sub-project financed stands at nearly 16,000 USD, almost three times as high as for the DAPATI matching grant pro-gram. Even if considering that (i) the TATP operates five regional offices, (ii) almost half of 6 There are even rumors of some providers having offered TATP-financed services free of charge to SMEs. In the SME survey carried out by the ADB SME Development TA in Medan and Semarang, 14% of SMEs that received IT-related ser-vices during the last two years stated that they did not have to pay for such services. Both cities are major target regions of the TATP. It should be noted that (i) the TATP does not endorse any service provision without 25% cost contribution of the beneficiary, (ii) the TATP Management Contractor requires each applicant to certify that he will not engage in corrupt or fraudulent practice, and (iii) the MC is understood to carry out financial audits and control the beneficiaries' cost contribu-tion. However, any such audits are unlikely to uncover eventual reimbursement of a beneficiary's cost contribution in cash by the provider at a later point in time. With its high grant portion of 75%, fees established on a cost-plus base and not through public tender, and applications primarily generated through providers, the TATP is potentially vulnerable to such fraudulent practice.


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the sub-projects are carried out outside Java, and (iii) under the 'duet system', several beneficiaries were covered within one sub-project, such overheads appear to be exces-sive. This is even more so the case, as the TATP displays a lack of any systematic ap-proach to on-the-job provider capacity building during sub-project implementation.

Expenditure for external project management amounts to 41% of total third party ex-penses. In view of high average matching grant values, quick development of an applica-tion pipeline through the 'duet system', and largely standardized sub-projects, in particular what concerns basic IT training, overhead ratios of 30-35% of total costs might have been more adequate. Of specific concern in this respect is, that (i) the Management Contractor did not establish appraisal standards and pricing benchmarks for highly standardized ba-sic IT training services, and (ii) the TATP appears to lack any systematic approach to sub-project monitoring, e.g. by means of sub-project phasing and definition of progress indica-tors and milestones.

Since the program is still on-going, it is too early for final judgment. Currently, however, the TATP's efficiency leaves a lot to desire, both with respect to cost-efficiency of individ-ual sub-projects as well as what concerns program management.

Summary and conclusion By providing 75% matching grants towards SME's use of ICT services, the TATP aims at increasing SME's willingness to use IT consulting services in future at full market costs, as well as increasing the quantity and quality of respective services available in Indonesia. As the program is still ongoing, it is too early for any final evaluation.

A strong point of the program is its 'duet system', whereby providers may apply for sub-projects that address groups of SMEs. This approach has enabled the TATP to quickly build up a sizeable application pipeline and reach out into the segment of smaller SMEs, which are usually difficult to be addressed by matching grant schemes. With 638 SMEs expected to be reached, outreach appears to be relevant. However, due to very open eli-gibility standards, the program reaches out to less than 0.05 % of potentially eligible SME. Potential efficiency gains resulting from the 'duet system' appear to have not been capital-ized for lack of price benchmarking, and standardization of appraisal and monitoring pro-cedures.

The TATP's market development objectives are unlikely to be achieved. Current imple-mentation experience indicates an already well developed service supply, while service demand is primarily restricted by external factors such as high communication and hard-ware costs. The TATP is mainly supporting basic IT training, an area in which service de-mand and supply are already reasonably well developed. The high grant portion of 75% appears to have resulted in costly sub-projects that are unlikely to be replicated in the ab-sence of matching grant subsidies. The TATP lacks any approaches for sub-project stan-dardization and systematic implementation monitoring, which could bring forward provider capacity building. By sending wrong price signals, the program is even likely to negatively affect service providers' orientation on SME real demand and needs.

The TATP assessment points at a number of fundamental design failures that do not cor-respond with international best practice, namely (i) lacking initial market research and benchmarking, (ii) excessive matching grant subsidies of 75%, (iii) a wide range of eligible services that covers not only 'strategic' IT services such as system integration and appli-cation development, but also basic IT and e-commerce training, and (iv) very open eligibil-ity criteria for beneficiaries and the absence of any pre-defined criteria which can ensure additionality of the sub-projects funded.


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2.4 MONE – 'Vucer' Program for Technological Assistance

Approach and Objective Since FY-1993/1994, the Directorate General of Higher Education (DIKTI) of the Ministry of National Education (MONE) is operating a ‘vucer program’. The purpose of the “Vucer Program” is to enable students to acquire entrepreneurship skills at the ‘grass-roots’ by developing applied production technology for SMEs. The program is called 'Vucer' (de-rived from ‘voucher’) because it encompasses a standard IDR10 million (US$1,000) grant to each participating university/institution for sub-project implementation. Grant applica-tions are forwarded to MONE by eligible universities / educational institutions and as-sessed and approved by an external committee. The beneficiary SME receive the assis-tance free of charge. However, they have to provide staff, materials and equipment for testing and implementation, and to bear related operating costs, e.g. for electricity. Sub-projects are usually implemented by a team of two engineering students in their final uni-versity year under supervision of a qualified lecturer.

Eligibility and outreach No formal eligibility criteria for beneficiary SME exist. Projects are approved on a case-by-case base. The main evaluation criteria are that (i) the sub-project aims at developing a viable solution to improve production processes for small industry, and (ii) the applying university / public institution can prove that it has the capacity to successfully complete the sub-project.

Over the fiscal years 1993/94 – 1999/2000, 1,006 sub-projects were funded by MONE-DIKTI. The major target groups were:

Village / rural Industries 64% Urban Industries 25% New Entrepreneurs 11%

In line with the Program's prevailing focus on rural areas, the food and agro-processing sector dominated with 54% of all sub-projects, followed by the handicraft sector (Figure 19).

Figure 19: Sector Distribution of MONE 'Vucer' Program subprojects, 1993-2000

Sector ShareFood and agri-business 54%Handicraft and related products 23%Metals and electronics 11%Chemicals and building materials 9%Garment and leather products 3% For the fiscal year 2001, MONE/Dikti approved 250 sub-projects for funding, which were selected from 1,014 proposed projects.

With some 1250 sub-projects approved between 1993 and 2001, the MONE 'Vucer' Pro-gram is a significant source of technological assistance to small and medium industries. If assuming that beneficiaries normally have a turnover between IDR 50 million and 1 billion, the program has reached out to more than 1% of all Indonesian SME's in that turnover range7.

7 According to the 1996 economic census, there existed some 110,000 manufacturing enterprises with turnover between IDR 50 million and 1 billion in Indonesia.


26

Program effects – demand (client) side 59% of sub-projects implemented until 2002 focused on improving production technology and lay-out. Other areas of activity were product design and development of management software (Figure 20). 93% of the sub-projects were production-related, while 7% (pre-sumably primarily software development) related to improving the beneficiary's manage-ment and marketing.

Figure 20: Distribution of MONE 'Vucer' Program Subprojects by Service Focus (93-2000)

Project Focus ShareProduction Lay-out and Technology 59%Product Design 26%Management Software 15% Individual sub-projects appear to mainly focus on low-tech, simple improvements. Under the FY 2000 program, e.g., the Institute for Technology Surabaya (ITS) implemented two sub-projects geared at automating product cutting in the timber and pasta industries by introducing mechanized forward pushing of wood boards and pasta streams, respectively. No advanced features, however, such as numerical or photo-sensory control of the push-ing device, were implemented. Participating SME were described to in majority accept the solutions delivered as helpful. Since the services are delivered free of charge, they do not feel entitled to ask for modification or additional efforts on behalf of the implementing stu-dent/ lecturer team.

Each sub-project is evaluated by MONE for its technical completion. However, MONE-DIKTI has so far never made any serious assessment of benefits for the recipient SME, e.g. in terms of cost reductions and/or sales growth achieved and promoted, respectively. There is also no evaluation available on eventual multiplier and spill-over effects towards similar enterprises.

Discussions with participating universities indicate that, even though the program has al-ready been running for seven years, it is still rather difficult to identify SME interested in program participation. Most SME seem to be reluctant to having undergraduate students working on their equipment and management systems. Aside from insecurity on behalf of SME on the outcome and effects of a sub-project, communication problems and cultural differences between primarily practically oriented small entrepreneurs and academically trained students and lecturers appear as well to be frequent. Sub-projects are usually identified through personal networks among friends and relatives of participating students and the university's program officer in charge, respectively.

These observations lead to conclude that the 'vucer' program has hardly any effect on SME's overall demand for technology-related BDS. Although the service itself is provided free of charge, participating SMEs have to contribute significantly to the sub-projects, not at last by devoting considerable management time to focusing university trainees on the practical requirements of their enterprise. SME appear to be in general aware that the program's primary objective is educational, and adjust their expectations accordingly. Nei-ther the development of applications for program participation, nor the outputs delivered by the sub-projects, give reasons to assume that the 'Vucer' program is significantly crowding out commercial providers of technology services.

What concerns development of management software and IT-related sub-projects, the situation is likely to be different (see also Chapter 3.2.4 below). However, since such ser-vices only account for 15% of all subprojects, they have not been assessed in detail dur-ing the program assessment carried out.

Nevertheless, it should be envisaged to refocus the program onto a more facilitating role. Instead of just delivering low-tech solutions for direct implementation, sub-projects could


27

also focus on assisting interested SMEs in defining their medium-term technological strat-egy, and selecting adequate equipment suppliers and/or commercial technological con-sultants for implementing this strategy. MONE should review eligibility criteria and accord priority to sub-projects that favor commercial service and/or technology delivery, while re-stricting support to IT-related subprojects to cases where crowding out of commercial pro-viders is unlikely.

Program effects – supply (provider) side The voucher program is a nation-wide program and has so far involved some 58 institu-tions, i.e. 44 universities, 8 polytechnics and 6 Kopertis (MONE Regional Representative Institutions). For the FY 2001 program, applications from 66 public and private universities and polytechnics were received.

MONE has carried out an internal assessment of the program's effect on the entrepreneu-rial attitude and skills of participating undergraduate students. This assessment, however, is kept strictly confidential and was not made available to the authors of this study. ITS Surabaya reports that approximately 10% of engineering graduates start their own enter-prise, without, however, being able to quantify the respective impact of participation in the 'Vucer' program. In general, it is questionable whether practical exposure to SME's re-quirements through the 'Vucer' program is an adequate and sufficient strategy to promote entrepreneurship among university graduates. MONE and universities should investigate potential benefits of complementary approaches, including case-study based training, en-terprise management simulation games, and specific entrepreneurship skills development training using the CEFE-method.

Nevertheless, there is nothing wrong with promoting a more practical orientation of engi-neering students through exposure to enterprise practice via the 'Vucer' program. Unfor-tunately, there is no information available to which extent students which participated in the ''Vucer' program have been absorbed by small and medium industries and the consult-ing industry.

On the provider level, the program appears to have promoted a stronger orientation of universities and polytechnics on the requirements and demand of local SME. A point in case is ITS Surabaya, which has evolved into a relevant resource base for local policy makers, and during the recent years gained several contracts from the provincial and dis-trict governments in East Java for advising on SME development and technology policy matters. In 2001, third-party revenues of ITS' consultancy arm Lembaga Pengabdian Masyarakat (LPM / Institution to Serve the Community), increased by 84% compared to 2000. Funding under the MONE 'Vucer' program, which used to be LPM's main income source, now accounts for less than 20% of total revenues.

In spite of their prevailing low-tech approach, the more than 1,200 sub-projects funded so far under the program could be a potentially valuable reference to SMEs, researchers, lec-turers, technical consultants, and domestic machine-building enterprises, both with re-spect to their technological content and as reference point to engineers / institutions with experience in specific fields. However, so far there appears to be no systematic techno-logical evaluation, knowledge management and presentation of results. This concerns in-dividual universities / institutions, as well as MONE as program management institution. As a result, there appears to be multiple redundancy among sub-projects. Development of adequate fruit and vegetable drying technology, e.g., has been supported various times under the MONE 'vucer' program, as well as under other programs such as DAPATI.

A structured presentation of the implementing institution, key problem addressed and so-lution elaborated for each sub-projects ideally accessible via internet and supported by an adequate search facility, could greatly enhance transparency on applied technological know-how available in Indonesia, and would add legitimacy to public spending on the pro-gram. Furthermore, streamlined reporting standards for sub-projects that are geared at


28

facilitating publication of results could also enhance capacity building effects on participat-ing universities and students.

Efficiency With IDR 10 million (USD 1,000) funding per sub-project, the 'Vucer' program appears to be relatively cost-efficient, even if considering the low-tech character of most solutions de-veloped. Funding per sub-project is three times lower than the average matching grant disbursed under the DAPATI program (for more complex sub-projects), and, what con-cerns software development, only a very small fraction of respective TATP matching grants. This cost efficiency mirrors of course low staff costs resulting from the use of un-dergraduate students instead of professional consultants.

As no information on program management expenditure incurred with MONE is available, program management efficiency cannot be evaluated.

Summary and conclusion The MONE 'Vucer' program provides grants to universities for delivering technology ser-vices to SME. Although the program has so far reached out to more than 1% of small and medium industries, its main focus is on orienting academic research and training onto SMEs' requirements rather than on developing participating SMEs. The program is not very suitable for developing entrepreneurial skills of engineering students; other tools such as enterprise management simulation games and CEFE training appear to be more ade-quate for this purpose. Nevertheless, the program is a legitimate and relatively cost-efficient instrument for enhancing the practical orientation of technical education, and has promoted a stronger orientation of universities and polytechnics on the requirements and demand of local SME.

There appears to be hardly any program effect on SME's overall demand for technology-related BDS. Although the service itself is provided free of charge, participating SMEs have to contribute significantly to the sub-projects, not at least by devoting considerable management time to focusing university trainees on the practical requirements of their en-terprise. SME appear to be in general aware that the program's primary objective is edu-cational, and adjust their expectations accordingly. Neither the development of applica-tions for program participation, nor the low-tech and relatively simple outputs delivered by the sub-projects, give reasons to assume that the 'Vucer' program is significantly crowding out commercial providers of technology services. However, what concerns IT-related sub-projects, crowding out of commercial providers seems likely.

Therefore, MONE should review sub-project eligibility criteria and accord priority to sub-projects that assist SMEs in (i) defining their medium-term technological strategy and (ii) selecting adequate equipment suppliers and/or commercial technological consultants for implementing this strategy. Funding of IT-related sub-projects should be restricted to cases where crowding-out of commercial service provision is unlikely.

MONE-DIKTI has so far never made any serious assessment of benefits for the recipient SME, e.g. in terms of cost reductions and/or sales growth achieved and promoted, re-spectively. There is also no evaluation available on eventual multiplier and spill-over ef-fects towards similar enterprises. A structured presentation of the implementing institution, key problem addressed and solution elaborated for each sub-projects ideally accessible via internet and supported by an adequate search facility, could greatly enhance transpar-ency on applied technological know-how available in Indonesia, and would add legitimacy to public spending on the program. Furthermore, streamlined reporting standards for sub-projects that are geared at facilitating publication of results could also enhance capacity building effects on participating universities and students.


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2.5 SwissContact Business Development Center (BDC) Project (Phases 3&4)

Objective and approach By supporting the establishment of new Business Development Centers (BDC), the SwissContact BDC Project aims at improving the availability of qualified Business Development Services for SME. The general philosophy is that availability of BDS to SME can only be improved sustain ably, if the new BDCs work commercially and finan-cially self-sustainable. Commercial service provision shall help to ensure demand-orientation and efficient service provision. By focusing on promoting financial self-sustainability, it shall be ensured that services and providers still exists after donors have left. As it is assumed that an indigenous organization has generally a better knowledge of needs and demands of client groups, SwissContact's BDC project does not create new business centers on its own, but supports the establishment of BDC's by local counterpart institutions and individuals. The project has gone through several phases since its start in 1990. This assessment focuses mainly on Phases 3 (1997-99) and 4 (1999-2000), during which the core elements of the project strategy were developed, tested and implemented. Conceptual changes for the currently ongoing Phase 5, which started in autumn 2000, are briefly presented and discussed in the concluding section.

In its initial phase (1990-94), SC supported sectoral SME associations in building up a commercial BDS supply. This approach failed, as institutional responsibilities of the vari-ous partners remained unclear, and no targets for achieving financial self-sustainability were defined. Therefore, the second project phase 1995-96 focused on a clear institu-tional separation of counterpart institution and service provider, including separate incor-poration of the provider. A business plan for the service provider was introduced as core document for project planning, monitoring and evaluation, and SC made pre-defined fund-ing commitments, thereby also making clear to the partners that in case of unexpected difficulties they had to seek own solutions and could not expect further financial assis-tance from SC.

Although being more successful, the new model also showed some weaknesses. The fi-nancing scheme was found out to set wrong incentives. The counterpart's financial contri-bution proved out too low to ensure its commitment. SC's financial contribution was rather used as product subsidy than as opportunity to extend product development and market-ing efforts. Finally, it proved difficult to promote a more market-oriented attitude with the old managers that had been maintained from the first project phase8.

Consequently, SC from the third phase onwards developed a project concept that was based on open tender by interested counterpart organizations in SC support towards BDC establishment. The financing model was completely overhauled, with the new scheme ori-ented closer on a financial joint venture (Figure 21 on next page):

Investment costs (equipment, refurbishment, costs for BDC registration, pre-paid expenses such as rent etc.) were shared equally between the operator and SC. Unofficially, SC became a temporary share holder of the BDC. In case of success, SC was to transfer its shares to the BDC management after the end of the start-up phase. The SC contribution was effected in cash. The counterpart could contribute up to 80% in tangible assets.

Based on the business plan submitted for the tender, additional financial contri-butions required during the start-up phase (up to 24 months duration) were de-termined. SC covered 80% of these contributions, with the remainder to be con-tributed by the counterpart.

8 For a more in-depth review of the approaches and experiences of the first two project phases, refer to SC Indonesia, "BDS Market Development in Indonesia", p. 18 ff.


30

As incentive for quickly obtaining financial self-sustainability, SC was to pay back the operator's full financial contribution during the start-up phase if full self-financing was reached within 18 months after start-up. In case self-financing was reached within 19-24 months, 80% of the operator's financial contribution during the start-up phase was paid back. The incentive should be used for BDC activities, e.g. loan repayment or additional investment.

Figure 21: Cooperation Concept of the SC BDC Project (Phases 3-4)

COUNTERPART SWISSCONTACT

BUSINESS CENTER(BC)

Manager

Equity

Start-up subsidies

Training

Venture Scheme

Selection(CONTRACT)

BusinessPlan

COUNSELING

Investment Grant

MoU

In addition to the financial contribution, SC provided training and counseling to the BDC manager and staff, and organized three forums per year to promote networking and ex-change of ideas between the BDCs supported.

Eligible counterparts and services Participation in the project was in principle open to all kinds of counterpart institutions, in-cluding private enterprises, foreign and domestic NGOs, universities / training institutions (both private and public) and governmental institutions. Equally, the project was very open with respect to the character of the BDC proposed. Services to be offered by the BDC could include

training, counseling and advice, information, business linkage and brokerage, technology development and transfer, and/or professional economic advice and services such as accountancy or business

planning. No specific sector or service focus was defined from the outset or prioritized during tender evaluation.

Main evaluation criteria during Project Phase 3 were the quality of the business plan pro-posed as well as (implicitly) the ability and willingness of the counterpart to commit his project contribution, including selection of the prospective BDC manager. As experiences of Phase 3 suggested the importance of the BDC manager for success, for Phase 2 a two-phased selection process was introduced. During the first selection phase, the quality of the proposed manager and the business ideas for the BDC was screened, and up to 16 most prospective candidates selected. Following a training of all prospective managers, each of them had to prepare the detailed business plan for his proposed center. Final se-lection took place based on the quality of the business plan presented.


31

In the first tender 1997 about 50 organizations joined, 19 of which submitted a proposal. In the second tender 1999 over 100 organizations joined, 48 of which submitted a proposal. In each tender, four organizations were selected. The eight counterpart institutions se-lected in the two tenders comprise three NGOs, two universities, one school, one venture bank and one private accountancy firm. Phase 3 also included support under the new model to two BDC which already had been supported during Phase 2 of the project.

Figure 22: Service Focus of BDC created/ supported under the SC project

Service area / Focus BDC name & location

Project Phase / Start of

Operation Technical / sector-specific training &

counseling

Accounting / tax / business planning

Others

WPUB, Bandung

From Phase 2

Business plans & management consul-tancy for all sectors

WPUM, Malang

From Phase 2

Training of car me-chanics

Karmacon, Surabaya

Phase 3 Oct. 97

Training of shop supervisors

Accounting & finan-cial consultancy /

training (mainly re-tailers)

Entrepreneurship training, motivation

training

Sentra, Batu-Malang

Phase 3 Sept. 97

Training in hotel & res-taurant management

Benefita (PBB), Jakarta

Phase 3 Apr. 98

Training in environ-mental management

Centrama, Surabaya

Phase 3 Aug. 97

Sector-specific start-up and technical training (mainly crafts & agri-

business)

Business plans, fa-cilitating credit ac-

cess (secondary activity)

Narida, Semarang

Phase 4 June 99

Trade brokerage for craft products

SBK, Bandung

Phase 4 June 99

Accounting services &training, business plans, facilitating

credit access

Detro, Jepara

Phase 4 June 99

Accounting & tax ad-vice & training, busi-

ness plans (mainly furniture)

MPP (UNIKA), Semarang

Phase 4 May 99

Training for female micro-entrepreneurs

Micro-credit (NGO funding, no SC

support) Bee-Pro, Yogyakarta

Phase 5 August 01

Accounting & tax ad-vice & training

MMU, Jakarta

Phase 5, March 01

Accounting & finan-cial consultancy &

training

Entrepreneurship training, marketing

consultancy Each selected BDC had a different range of envisaged services. Nevertheless, two major service foci emerged (Figure 22):

Training and counseling targeted at productivity and process improvement. Four BDC supported had this focus. The services proposed were very much ori-ented on specific sectoral and functional needs such as car repair, hotel manage-


32

ment, establishment of crafts micro-enterprises, shop supervision, and environ-mental management.

Finance-related services, including accounting and tax training and advise, im-plementation of (computerized) accounting systems, business planning, and assis-tance in obtaining credit. Four of the BDC supported during phases 3 and 4, and the two first BDC that were selected for phase 5, had this focus. Some BDC offer-ing finance-related services had a sectoral focus, e.g. on the furniture industry or medium-sized retailers.

However, differences between these two major service lines were not always clear-cut. Some BDC intended to combine productivity / process-related services with finance-related services in order to be able to deliver a full service package to clients from specific sectors, or offered additional services such as entrepreneurship or motivation training. Moreover, the BDC project supported also the establishment of a handicraft trade broker, and a micro-credit broker targeting specifically female micro-entrepreneurs in retail and agro-processing.

Program effects The BDCs' development during the start-up phase did usually not take place as envisaged in the business plan. Figure 23 on the following page illustrates how planned and actual revenues and costs differed in the case of a specific provider9.

Typically, turnover development during the first few months came relatively close to ex-pectations. However, revenues quickly tended to stagnate instead of continuing to grow as expected. On the other hand, with business picking up quickly, the BDC usually re-duced or postponed promotion and HRD investment envisaged for the first moths. This resulted in lower overhead costs than expected. Consequently, the actual loss during the first few months was similar to the loss anticipated in the business plan. Since Swisscon-tact filled the financial gap with the pre-determined start-up subsidies, overall cash flow was still positive.

After 6 to 9 months, however, sales often continued to stagnate, or even suffered from seasonal demand decreases (e.g. Ramadan), which usually had not been anticipated in the business plans. As a consequence, losses remained constantly high and surpassed those expected in the business plan. With SC funding, which was based on the business plan, decreasing, the BDCs' cash flow started to come under pressure.

The BDCs usually reacted by reducing their current expenditure, in particular staff, travel and administration costs, in order to bring overall expenditure more in line with revenues. In addition, many BDCs intensified efforts to develop additional services and income sources not envisaged in the business plan. Quite often, such additional services resulted from client contacts established in the core business. Some BDCs with focus on product & process improvement training, e.g., received orders for preparing investment analyses and business plans from some of their training clients. A provider of accounting training and services embarked on development of computerized accounting systems for some training clients, as well as occasionally providing recruitment services. Other BDCs gained contracts for custom-tailored in-house training from large enterprises.

In other cases, however, BDCs temporarily or even fundamentally changed their profile. One BDC temporarily focused on trying to gain income from office and photocopying ser-vices, equipment rent, and agricultural ventures, before returning to its original training focus. MPP Semarang, which had intended to provide training and financial brokerage services to female micro-entrepreneurs, developed into a dedicated provider of micro-finance.

9 For reasons of confidentiality, the provider is not identified by name, and the timeline has been standardized.


33

Figure 23: Planned And Actual Business Development Of A Selected BDC During The 18-months Start-up Period

Turnover

02468

1012141618

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Mill

ion

Rp.

Planned Turnover Other Actual SalesActual Sales Standard Products

Costs

02468

1012141618

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Mill

ion

Rp.

Planned Direct costPlanned OverheadActual Direct costActual Overhead

Margins / Profit / Loss

-10-8-6-4-202468

10

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Mill

ion

Rp.

Planned Profit/Loss Actual Profit/LossPlanned Contribution Margin Actual Contribution Margin

All but two BDC that were supported during Phases 3 and 4 managed to fulfill the pre-defined self-financing criteria and secured SC's bonus payment. This in itself, however, is no indicator for financial and technical sustainability of the centers supported:

As indicated above, full self-financing towards the end of the start-up phase was in some cases obtained by partly sacrificing the BDC's original service focus;

Judged by the financial monitoring data received from SC, some BDCs appear to have deferred and/or referred expenses in order to achieve full self-financing at the end of the start-up phase. In the case of one BDC, e.g., administrative expenditure almost doubled two months before the end of the start-up phase and then peaked again after receipt of SC's bonus payment. This BDC furthermore reduced travel expenses strongly towards the end of the start-up phase, and deferred deprecia-tion for newly acquired equipment until the SC bonus was received.


34

Nevertheless, the project clearly succeeded in promoting a business-oriented manage-ment style of the BDCs, whether signified by advanced cash-flow and cost management skills, efforts to capitalize on initial equipment investment received, or - more in line with the project's overall purpose - successful development of new products in line with market demand.

Aside from the project's specific funding approach, BDC managers interviewed highlighted the important role that monthly financial reporting to and monitoring by the project man-agement had played for improving their financial management skills. The project provided a spreadsheet-based controlling and management information system to each BDC that, in the opinion of one BDC manager interviewed, was more valuable to the center's devel-opment than any financial support received from the project. Some BDCs continue to regularly send their financial reports to the project and ask for comments, even though formal support has ended several months or even years ago.

In total, 36 major service types were offered by the ten BDCs supported during project phases 3 and 410. A service type may include several individual services, e.g. several modules of management training.

The project contributed significantly to the development of the service range of some BDC's. The BDC forums organized regularly by the project served for cross-fertilization and exchange of product ideas and concepts. This effect was most pronounced for ser-vice providers with a similar product focus that, due to their different regional base, were not competing with each other for clients. In addition, the project assisted some BDCs in case of specific needs, e.g. with respect to product design, organizational development, marketing strategies and reviewing their overall strategic orientation and focus. Such sup-port appears to have been particularly intensive for BDCs that temporarily lost their strate-gic focus under financial pressure. Finally, a BDC manager mentioned that the 'SwissCon-tact-supported' label helped him to gain new clients and position his center as a provider of quality services.

As far as financial and sales data is available (which is not always the case, as some BDCs stopped reporting to SC after the project support ended), it appears that seven of the ten BDCs supported during Phase 3 and 4 of the project have developed into finan-cially self-sustainable providers of commercial BDS to SME. Three of them, all with a fo-cus on process-improving (technical) training, however, have their service focus partly moved away from SME towards other client groups such as individual students, large en-terprises or donors. Two BDC appear to have finished operation as institutions, although former staff-members are reported to continue service provision on a part-time or free-lance base. One BDC, finally, has moved from BDS provision to providing micro-finance.

Efficiency and Outreach SCs total financial contribution per BDC supported in Phases 3 and 4 varied between IDR 20 million and 100 million, depending on the initial investment and extent and duration of financial support during the start-up phase. In USD terms, SC contributed in average some 8,000 USD per BDC11. Reported program management costs are around 7,000 SwF per month for monitoring, specific support and three BDC forums per year. This relates to some 210,000 USD total program management costs over Phases 3 and 4 or 21,000 USD average program management costs per provider supported12. Total project costs

10 Including the two BDCs supported during Phase 2 that continued to receive support under the new model in Phase 3.

11 This figure does not include the two BDCs already funded in Phase 2 which continued to receive support during Phase 3, investment into which was considerably higher. The strong Rupiah devaluation in 1998 and 1999 makes an exact calcula-tion of the SC contribution in USD terms difficult, but lead in principle to lower USD costs per BDC during Phase 4 compared to Phase 3.

12 Program management cost figure of SwF 7,000 per months taken from SC Indonesia, "BDS Market Development in Indonesia", p. 29. Conversion into USD was effected at an assumed average exchange rate of SwF 1.6 / USD


35

per BDC therefore range around USD 29,000. This is very cost-efficient compared with projects for supporting BDC establishment in other countries13.

To the extent possible, the number of BDS each BDC sold during its support by the Pro-gram was determined from the monitoring files supplied by SC. In some cases it was diffi-cult to determine whether several payments by one client related to one BDS delivered over several months, or to different services. In such cases, it was usually assumed that payments related only to one service. What concerns training programs, there was usually only information available about the total number of trainees. Therefore, each trainee was calculated as BDS provided. For the two centers engaged in brokerage activities, the number of services provided could not be determined for a lack of sufficiently detailed data. Also excluded were the two BDCs that already had started in Phase 2 and received ongoing support during Phase 3.

The remaining six BDCs sold in total 1,066 BDS during the duration of SC's support. BDCs with a focus on finance-related services sold around 50-60 BDS per center. BDCs engaged in training sold much more services, up to 650 BDS in one case. Though, in view of the total number of SME in Indonesia, the outreach of the program is relatively limited, it compares reasonably well with the outreach obtained by other BDS market development projects.

Figure 24: Efficiency Indicators For The SC BDC Program (Phases 3 & 4)

Total USD USD per Provider USD per BDS delivered

Number of providers / BDS 6 1,066 Total financing of activities (USD) 46,114 7,686 43.26 Program Management Cost (USD) 126,000 21,000 118,20 Total Cost (USD) 172,114 28,686 161.46 Program Management/ Total Cost 73,2% Excluding BDCs in brokerage and BDCs supported already during Phase 2

What concerns average total costs per BDS provided during the support phase, there is considerable variation depending on the service focus of each BDC. For finance-related services, the average total program cost per BDS provided ranged around USD 500, while for training, it could be as low as USD 50. With in average some USD 160 total program cost per BDS provided, the Program has in general been very cost-efficient (Figure 24).

Summary, conclusion and outlook The SwissContact BDC Project supports the establishment of financially self-sustainable Business Development Centers through financial contributions to initial investment and start-up losses combined with counseling. Seven of the ten BDCs supported during Pro-ject Phases 3 and 4 have developed into financially self-sustainable providers of BDS to SME. The quality of the BDC's business concept and management proved to be keys to success. SC's intensive financial monitoring based on a standardized financial controlling system contributed significantly to developing commercial management capabilities for the Centers. Product and strategy development benefited from regular BDC forums, as well as individual counseling and assistance in case of specific need.

The program is very cost-efficient with respect to total program cost per BDS established as well as in terms of total program costs per BDS provided. With more than 1,000 BDS

13 The European Union's PHARE and TACIS programs for support to transition economies in Eastern Europe and the former USSR, e.g., invested up to EUR 1 million or more into creation of a new Business Support Center. However, due to differences in the institutional and political environment and in the scope of the Centers supported, the projects are not di-rectly comparable.


36

provided by the centers during their period of SC support, outreach to SME is quite re-markable, although still rather small in relation to the total number of Indonesian SME.

The Project's main achievement is to have demonstrated that it is possible to establish commercial and financially self-sustainable providers of BDS to SME in Indonesia. The low number of Centers funded, however, limits the overall impact on the development of BDS supply. Limited outreach on the other hand implies a low risk of the Project having crowded out providers that did not receive financial assistance.

In order to enhance outreach and impact on BDS supply, activities of the on-going Project Phase 5 center around three new challenges, namely

Implementing the approach outside Java, Reducing SC's financial contributions in favor of investment funds provided by lo-

cal venture capital companies (with a view towards eventually transferring the whole project towards such local institutions), and

Developing a sustainable model for product development assistance and counsel-ing to BDCs that can replace SC's current case wise support.

First experience indicates that it will not be easy to meet these challenges. Finding moti-vated and qualified counterparts in South Sulawesi, the new project region, has been de-scribed to be cumbersome. The envisaged venture capital partner, Bahana Arta Ventura, suffers from on-going discussions about the future strategy and role of its mother, the state-owned Mitra Ventura. Support requirements of each BDC are so specific that sup-port and counseling approaches can hardly be standardized. It seems a long way to go until SC's involvement as foreign donor can be terminated in favor of local institutions.


37

3 SPECIFIC POINTS OF INTEREST

3.1 Funding Instruments for BDS Market Development

Cross-comparison of programs assessed Figure 25 below compares outreach and cost-efficiency of the five programs / projects as-sessed. The voucher program clearly has obtained the highest outreach in terms of the average number of BDS deliveries supported per project year, and is, with some 50 USD total cost per BDS delivery supported, also the most cost-effective instrument. Quite sur-prisingly, the SC BDC Project, although primarily geared at improving BDS supply, ranks second in terms of service delivery outreach and total costs per BDS supported. The most costly instruments in terms of total costs per BDS delivery financed are the DAPATI and TATP matching grant schemes. All projects / programs have a high ratio of overhead costs to total costs. This ratio is lowest for the TATP with 40,8%. However, with nearly USD 16,000 administration costs per sub-project, TATP cannot be regarded as particu-larly efficiently managed.

Figure 25: Comparison Of Outreach And Efficiency Indicators For The Programs / Pro-jects Assessed (in USD)

Program SC

Voucher Program

DAPATI(WB / MoIT)

TATP (WB / MoIT)

MONE 'vucer'


Base and time period East Java, 1999-2000

Contracted,9/97-6/01

Contracted 03/00-07/01

FY 93/94- FY 2000

Phases 3&4,1997-2000*)

BDS deliveries financed/ supported 1,918 145 638 1,006 1,066Average no. of BDS per project year 959 36 213 155 267Providers financed / actively participating 20 84 133 58 6Total financing of activities / providers 10,440 516,451 3,076,262 1,006,000 46,114Program management cost 85,720 826,007 2,18,317 n.a. 126,000Total program cost 96,160 1,342,458 5,194,579 n.a. 172,114Program Management/ Total Cost 89% 62% 40,8% n.a. 73%Avg. direct cost per BDS delivered 5.44 3,562 4,822 1,000 43Avg. direct cost per provider 522 6,148 23,130 17,345 7,686

Avg. management cost per contract unit USD 45 per voucher



/ BDCTotal program cost per BDS delivered 50 9,258 8,141 n.a. 161Total program cost per provider 4,808 15,981 39,056 n.a. 28,685*) Excluding BDCs taken over from Phase 2 and BDCs active in brokerage

Simple comparison of outreach and efficiency indicators may be misleading. Each funding instrument requires specific management structures, which reflect on cost efficiency and outreach, but as well on project effects and impact. The specific strengths and weak-nesses of the instruments assessed in the previous chapter can, in line with international experience, be generalized as follows14 (see also the Synopsis provided in Figure 26):

Voucher schemes Voucher schemes can be a useful and very cost-efficient instrument for developing the low-cost segment of the BDS market. By providing SME with information on available

14 See also "Developing Markets for Business Development Services: Designing and Implementing More Effective Inter-ventions", SED Issue Paper No. 5, Swiss Agency for Development and Cooperation, Bern, June 2000


38

BDS and a fixed financial incentive to use them, voucher schemes primarily address demand-side constraints, namely information problems and low willingness to pay for BDS resulting from skepticism about their usefulness. Voucher schemes, however, do not address fundamental supply-side weaknesses. They therefore require a basic level of BDS supply, in terms of the number of existing providers as well as broadness and qual-ity of BDS available, to become effective. In such a supply structure, well-designed voucher schemes can stimulate some provider networking and adjustment of services to actual demand.

Voucher schemes are standardized and indiscriminate, i.e. it is not possible to adjust funding criteria and amounts to specific user groups, capabilities and requirements. This enhances potential outreach and disbursement efficiency, and reduces the risk of fund misappropriation by nepotism and 'kick-backs'. It implies on the other hand, that voucher schemes should be primarily targeted at standardized BDS with broad potential de-mand from SME and micro-enterprises, but are hardly suitable for promoting demand for more complex, custom-tailored services.

Matching grant funds Similar to voucher schemes, matching grant funds provide financial incentives to SME for BDS usage. However, matching grants are discriminate and non-standardized, i.e. awarded on a case-by-case base, with the grant amount depending on the total service price. This makes them more suitable for complex, custom tailored BDS. Such BDS are primarily requested from medium-scale enterprises.

As individual appraisal and monitoring of each sub-projects is costly, individual grants have to be relatively high if reasonable management efficiency shall be achieved. High individual grants and extensive sub-project administration only allow for funding a limited number of sub-projects and usually result in relatively low outreach. On the other hand, individual sub-project appraisal and implementation monitoring can bring forward sub-stantial provider capacity building in terms of service quality and delivery techniques.

There is considerable risk of market distortion – consumers get acquainted to low prices, providers expect unrealistically high fees, and existing non-subsidized transactions are damaged. Furthermore, matching grants do often not stimulate additional (new) BDS consumption. In view of these risks, matching grants should be used rather selectively. Addressing both demand-side (low willingness to pay) and supply-side (low service qual-ity) constraints, they are best suited and least risky for very early stages of service development.

Program (activity-based) funding Under program funding (activity-based funding) financial incentives for BDS delivery are not given to SME, but to providers. Funds are awarded on a case-by-case base upon in-dividual appraisal of funding proposals forwarded by providers. They can be awarded as lump-sum per individual beneficiary (as in the case of the MONE 'vucer' system) or as partial contribution towards the total service cost (as under the TATP 'duet system'). Combining funding of several BDS deliveries by a provider in one 'program' increases administrative efficiency. This allows for funding less costly services and reaching out towards smaller SME than with matching grant funds.

Program funding can have significant impact on the service range offered. However, less intensive sub-project monitoring implies weaker effects on service quality and deliv-ery techniques than can be brought forward by matching grant funds. Possible effects on provider culture are ambiguous. While providers' marketing efforts towards SMEs can be increased, they may tend to focus on subsidized prices as sales argument, thereby neglecting service quality.


39

Program funding distorts BDS demand by setting wrong price signals to service users and limiting their possibilities to choose among providers. Therefore, program funding should only be used (i) if inability rather than unwillingness to pay for BDS is a major de-mand-side constraint, or (ii) as instrument to gradually enhance the market orientation of budget-financed institutions by replacing structural with program funding.

Supply-side instruments The SC BDC project combines several supply-side instruments:

Seed finance is provided to enable establishment of new BDS providers. Finance is provided for covering the start-up investment as well as operational losses during the start-up phase. The initial business planning and selection process and intensive financial monitoring during the start-up phase can have significant positive impact on the man-agement capacities of the providers supported.

Due to intensive appraisal and monitoring requirements, the number of providers sup-ported is usually relatively low. This restricts potential outreach and overall impact on BDS supply. If the financial contribution is provided as a grant, it may distort supply struc-tures, if supported providers use the grant to crowd out commercial providers via partly subsidized prices. Oversized grants may also result in excessive overheads which are un-sustainable under commercial conditions. Therefore, seed finance has to be carefully structured and should be used rather selectively.

As seed finance is not directly addressing demand-side constraints, it is most effective in case of a latent and unsatisfied demand for commercial BDS, where provision of seed finance can create pioneer BDS providers that stimulate followers. Seed finance can also be helpful to stimulate spin-off of commercial providers from public institutions and NGOs, thereby supporting institutional restructuring and refocusing. However, such spin-offs may run into governance problems, if responsibilities and incentives of the manage-ment vis-à-vis the owning institutions are not adequately structured. If inability rather than unwillingness to pay for BDS is a major demand-side constraint, seed finance - eventually in combination with program funding – may be a relatively cost-efficient instrument to sub-sidize BDS provision to such target groups.

Technical assistance to BDS providers can take a variety of forms such as training, counseling, or (assistance in) product development, and aims at overcoming technical (product-related), managerial and/or marketing deficits of BDS providers. Technical assistance does not directly affect provider income or service prices and is therefore po-tentially less market distorting than financial instruments. Nevertheless, ill-designed technical assistance still carries the risks associated with external interventions, namely promoting services and capacities that are commercially not sustainable, and crowding out other commercial service providers, including those who might sell assistance to BDS providers on commercial terms (e.g. marketing, IT or financial consultants).

As demand-side constraints are not addressed directly, technical assistance to BDS pro-viders is most effective in case of a latent and unsatisfied demand for commercial BDS. It furthermore requires trust, commitment and 'ownership' of the supported providers. Stand-alone technical assistance has to invest considerable efforts into building trust rela-tions with providers, which often leads to low cost-efficiency in relation to provider turnover and BDS market development effects achieved. Such risks can be contained, if the TA is transactional, i.e. clearly defined in terms of scope, time, and required contribution of the beneficiary. Efficiency and effectiveness can be improved, if the TA is bundled together with other instruments such as seed finance or matching grants, and provided as integral element of respective appraisal and monitoring.


40

Figure 26: Comparison Of Market Development Instruments

Instrument / Feature

Voucher schemes Matching grant funds Program funding

Seed finance Technical assistance BDS provider networking

Support mechanisms

Indiscriminate (untargeted)

subsidies for BDS usage

Discriminate (targeted) subsidies for BDS usage

Discriminate (targeted) subsidies for

BDS provision

Start-up funding (grant, loan or equity)

Counseling, product development,

training

Information provision & exchange,

Forums / seminars Beneficiary SME including micro Larger SME BDS Providers,

(indirectly SME including micro)

BDS Providers BDS Providers

BDS Providers

Constraints addressed

• Low willingness to pay for BDS (inexperienced users)

• Low information on available services

• Low information of pro-viders on actual de-mand

• Early stage of service market development

• Low willingness to pay for BDS (unclear benefit)

• Service quality insufficient / not transparent

• Low ability to pay for BDS

• Weak commercial & SME orientation of public institutions / NGOs

• Underdeveloped BDS sup-ply

• Weak commercial & SME orientation of public institu-tions / NGOs

• Low ability to pay for BDS

• Insufficient service qual-ity & range

• Management & market-ing deficits of providers

• Low information of providers on actual demand

• High product devel-opment and marketing costs

• Providers' capacity constraints

• Insufficient advocacyOutreach to SMEs

+++ + ++ ++ No direct outreach No direct outreach

Total costs Low to medium, depend-ing on voucher value

Medium to high, depending on the services financed

Low to medium, de-pending on the ser-

vices financed

Low to medium, if financing model is well-structured.

Medium to high for providers of technical training

Depending on scope of assistance and geo-

graphic coverage

Low to medium, de-pending on the geo-

graphic scope

Overheads High overheads for mar-keting & monitoring (>

70%)

Considerable overheads for appraisal and monitoring

(30-50%)

Relatively low over-heads, if efficiently managed (<35%)

Considerable overheads for appraisal, monitoring and

counseling

100% (no direct financial contri-

bution)

100% (no direct financial

contribution) Cost- effi-ciency

High in relation to out-reach

Low in relation to outreach. May be high in relation to

benefit for BDS-user

May be relatively high, depends on the ser-

vices financed

Medium to high in relation to outreach

Strongly varying. 'Over engineering', may lead to very low cost efficiency in relation to effects on pro-

vider turnover

Unclear (has so far been never monitored

separately)


41

Instrument / Feature

Voucher schemes Matching grant funds Program funding

Seed finance Technical assistance BDS provider networking

Potential de-mand-side impacts

+ Increased willingness to pay

+ Better supply knowl-edge

+ Supply offer & quality more transparent

- Users may get unrealistic price expectations

+ Subsidies enable low-income users to use BDS

- Users may get unreal-istic price expecta-tions

- Users may get unrealistic price expectations, if grants are used to subsidize ser-vice prices

+ Improved marketing may enhance transparency on BDS supply and benefits

+ Improved marketing may enhance trans-parency on BDS supply and benefits

Potential supply-side impacts

+ Improved demand in-formation stimulates service development & adjustment of BDS range offered

- Less visible providers may be overlooked by program and crowded out of demand

+ Improved service quality + Development of service

standards - Providers may get unreal-

istic revenue expectations & build up capacities that are not sustainable under commercial conditions

+ Development of ser-vice standards

+ Public institutions refocused on SME requirements

- Providers may build up capacities that are not sustainable under commercial conditions

- Crowding-out of commercial providers that are not supported

+ Improved availability of BDS+ Improved financial man-

agement skills of providers + Restructuring of public insti-

tutions supported - Providers may build up ca-

pacities that are not sus-tainable under commercial conditions

- Crowding-out of commer-cial providers that are not supported

- Governance problems, if incentives and responsibili-ties of managers vis-à-vis owners are not adequately structured

+ Improved service range and quality

+ Improved management & marketing skills of pro-viders

+ Development of service standards

- Providers may build up capacities that are not sustainable under com-mercial conditions

- Crowding-out of com-mercial providers that are not supported

+ Cost reductions through resource sharing

+ Improved service range and quality

+ Development of ser-vice standards

+ Improved policy en-vironment for BDS sector

Pre-conditions for effectiveness

• Ability to pay for BDS • Developed supply of

low-cost BDS

• Latent & unsatisfied BDS demand

• Developed commercial provider base


• Developed provider base



• Developed commercial provider base

• Provider commitment and 'ownership' of the assistance provided

• Developed commer-cial provider base


42

BDS provider networking aims at promoting resource sharing, collaborative action, in-novation transfer and joint exchange among BDS providers. Main instruments include provider forums and seminars, as well as promoting communication by means of newslet-ters, directories and through the internet. As provider networking does not directly affect provider income or service prices and is usually open to all providers, it is not distorting markets. Regional networking may reduce fixed costs through resource sharing, e.g. by several providers joining training courses in case of low participant numbers, or by draw-ing on each others expertise instead of providing it in-house. It may also reduce each pro-vider's marketing costs by drawing on client referral from other providers. National net-works may lead to product exchange and standardization, thereby reducing product de-velopment efforts and stimulating innovation transfer.

Intervention costs are moderate albeit significant, in particular what concerns venue and travel expenses for national forums/seminars. Cost efficiency has so far been seldom monitored. As demand-side constraints are not addressed directly, provider networking is most effective in case of a latent and unsatisfied demand for commercial BDS. Anecdotic evidence suggests that provider networking may in particular become effective and ef-ficient during the early take-off stage of the BDS market, when a basic commercial provider structure has emerged but informal provider networks are still weak. Provider networking can also effectively complement and be integrated into voucher schemes (re-gional networks), seed finance (assisting networking of new entrants) and matching grants (promoting national exchange and product standardization).

Intervention design and management Each of the market development interventions described above requires professional and competent management to address specific technical challenges:

Voucher schemes require a sophisticated marketing, voucher distribution, moni-toring and reimbursement infrastructure. The SC voucher scheme also included a telephone hot-line for information about the scheme and reception of complaints.

The effectiveness of Matching Grant Schemes and Program Funding depends strongly on the quality of sub-project appraisal and monitoring. This requires spe-cific technical know-how in the service area addressed by the scheme.

In Seed Finance, adequate financial appraisal skills, coupled with knowledge about BDS markets and the micro-economics of BDS provision are indispensable

Technical assistance and provider networking requires knowledge and under-standing about BDS markets and the micro-economics of BDS provision. In-depth knowledge of specific services is advantageous. Indispensable for success is the Program Management's ability to build up trust relations with BDS providers.

Due to these specific skills required, it is strongly recommended to outsource program management to competent external institutions. Such outsourcing also reduces the risk of corruption and nepotism, in particular for those interventions which are based on substan-tial funding of providers and BDS users, respectively, namely matching grants, program funding and seed finance.

The time horizon of each intervention varies, but is multi-annual for all interventions. Matching grant schemes, which are best suited to support the early phase of market de-velopment, should be termed for a period of three to five years in order not to create a subsidy mentality. Provider networking, seed finance, voucher schemes and program funding (addressing beneficiaries unable to pay for BDS) may require longer time horizons to become effective. Regular monitoring and evaluation in intervals of two to three years is strongly recommended in order to examine whether the program rationale is still valid.

Multi-annual time horizons for all interventions imply the need to secure medium-term budgets. For this reason, many countries have transferred funding of BDS market devel-


43

opment programs to specific agencies, foundations or trust funds, which are less depend-ent on annual parliamentary budget decisions.

The key for success is to base and align intervention selection and design with in-depth assessment of the BDS market and its constraints. Therefore, the following sections will summarize general findings on the situation and constraints of BDS supply and demand in Indonesia that have emerged from the program assessment carried out, in order to assist policy makers in designing adequate interventions.

3.2 SME's Demand for BDS

3.2.1 Attitudes towards BDS One of the most striking findings of the impact assessments was the relatively low out-reach of all programs assessed. What are the reasons for this phenomenon ? Is it due to design and management weaknesses of the programs assessed, or does it relate to a low willingness or ability of SME to pay for BDS ?

Ability and willingness to pay The SME Development TA carried out a survey of some 500 SME in the cities of Medan (North Sumatra) and Semarang (Central Cava) to gain additional insight on SME's de-mand for and use of BDS15.

Figure 27: SMEs' BDS usage and willingness to pay for BDS – Results from the TA's sur-vey in Medan and Semarang

Service area Used service

within last 3 years Paid for service*) Willing to pay for

service**)

Advertisement / promotion 10.4% 96% 94%Tax advice 10.4% 94% 89%IT services 5.8% 86% 92%Management training 4.4% 66% 91%Legal advice 4.1% 100% 81%Accounting 3.9% 95% 93%Marketing advice 2.9% 86% 89%Technical training 2.7% 46% 85%Information services 1.9% 89% 89%Transport-related BDS 1.5% 100% 89%Communication & correspondence 1.2% 83% 88%Financing advice 1.2% 50% 88%Management advice 0.6% 100% 86%Production & operation assistance 0.6% 66% 89%(Average of) All services 29% 87% 89%No service / No answer 71% 3%*) Of those respondents who used the service. Non-payment also includes respondents which did not remember how

much they paid. Actual payment rates are therefore likely to be higher than stated in the table. **) Percent of those respondents rating the service as one out of the three services they think are most important.

15 SME for this survey were defined as enterprises between 5 and 19 (small) and 20 –99 employees (medium), respec-tively. Additional information on the survey and its result can be found in the TA's Policy Paper No. 5 "SME Constraints and Needs with Special Focus on Gender Issues", Jakarta, July 2001.


44

Main survey findings are:

While some SME use BDS, the overall usage rate is still relatively low. 71% of respondents in the survey did not use any BDS during the last 3 years. Usage rates for specific BDS reach at maximum 10% (Taxation, Advertisement), and range in most cases only around 1-4% of all respondents (Figure 27on previous page). Only 12% of all respondents (42% of BDS users) have used more than one service. In average, every SME surveyed has used 0.51 BDS during the last three years. BDS usage in Indonesia is substantially lower than in comparable countries. According to a recent survey, 93% of registered private SMEs in Vietnam's major cities have used BDS. Usage rates for specific BDS in Vietnam reached up to 45-50% (advertisement services, internet information). In average, every SME sur-veyed in Vietnam had used 2.5 BDS16.

The vast majority of SME is willing to pay for BDS. 87% of BDS users paid for the services. Payment rate was lowest for management training, technical training, production & operation assistance and financing advice. Around 90% of SME, in-cluding those which did not use any BDS, are willing to pay for services if they think such services are important. Willingness to pay is lowest for technical training (85%), a service often provided free of charge by the government or donors, and highest for advertisement, accounting and IT services (92-94%). Only 3% of re-spondents do not think any BDS is important and worth being paid for (Figure 27).

Ability to pay is no major constraint, Only 13% of all respondents are of the opinion that BDS are too expensive (Figure 28). As this opinion is shared by 15% of respondents with annual turnover of between 0.5 and 1.5 billion IDR, but only by 5% of respondents with annual turnover of 50-75 million IDR, concerns appear to center primarily around the perceived cost-benefit of BDS usage and not on the service price in relation to the SME's ability to pay.

Figure 28: SMEs' reasons for not using BDS - Results from the TA's survey in Medan and Semarang

All respondents Non BDS users

Have not used BDS during the last three years because .. 71% 100%I never needed BDS 64% 88%BDS are too expensive 13% 18%I don't know where to find BDS 5% 7%Qualified BDS not available 0,2% 0,3%Note: Multiple answers possible, therefore individual answers sum up to more than 100%.

According to the survey, the prime reason for SME's low usage of BDS is not a lack of ability or willingness to pay. 88% of non-users simply felt so far no need to use BDS (Figure 28). Why is that so? Are SME unaware of the potential benefit of BDS? Are there external factors in the SME's business environment that make BDS usage not worthwhile? Or does this feeling point at supply-side weaknesses, i.e. the fact that attractive BDS are not offered at reasonable prices?

16 A. Miehlbradt, "Business Development Services in Vietnam - A Study to Assess the Market for BDS among 1,200 Small and Medium Enterprises in Ha Noi, Ho Chi Minh City, Da Nang, Hai Phong Dong Nai and Binh Duong", for GTZ and SwissContact, Hanoi / Ho Chi Minh City, June 2002. This survey for Vietnam targeted in general larger enterprises than the TA's Indonesian Survey, up to 300 staff and more. Nevertheless, it concludes that enterprise size has only minor impact on BDS usage in Vietnam: "Although a slightly higher percent of smaller enterprises do not use BDS, almost 90% of SMEs with less than 10 employees have tried BDS at least once" (p. 14).


45

Enterprise-related patterns of BDS usage The TA's SME survey yields the following patterns of BDS usage:

Actual service usage and payment is in general related to the SME's turn-over. BDS usage rate increases with enterprise staffing and turnover. While only one out of ten enterprises with less than IDR 30m turnover seeks commercial as-sistance, more than one-third of medium-scale enterprises with more than 20 staff or more than IDR 200m turnover do so. Medium-scale enterprises seek in particu-lar accounting, tax and legal advise, and management training. The rate of me-dium-scale enterprises that have used advertisement or IT services is similar to the rate of small enterprises. However, medium-scale enterprises using accounting, tax, IT or advertisement services pay significantly more for these services than smaller enterprises. Interestingly, service usage is highest for SME with 200-500 million IDR turnover. Some SME with more than 0.5 billion IDR turnover appear to have built up in-house capacities in areas such as accounting, tax and advertise-ment, for which smaller SME still seek external assistance (Figure 29).

Figure 29: BDS payment in relation to enterprise turnover – Results from the TA's survey in Medan and Semarang

0% 5% 10% 15% 20% 25% 30% 35% 40%

<75

75-200

200-500

>500

Turn

over

(m

illio

n ID

R)

BDS payment in turnover class

<200.000 IDR 200.000 - 500.000 IDR 500.000 - 1.000.000 IDR >1.000.000 IDR

There is hardly any relation between usage of paid BDS and business per-formance. 47,5% of BDS users report a positive business development during the last two years, compared to 47,2% of non-users, and there are only slightly more BDS non-users that report negative business development (22%) than BDS users (20%). However, of those SME that paid more than 1 million IDR for BDS, signifi-cantly more report better business development (58%) than the average of all re-spondents (47 %). This indicates on one hand that demand for assistance in busi-ness turnaround and performance improvement is relatively low. On the other hand, it also indicates low effectiveness of low-priced BDS (Figure 30).

Figure 30: Relation between BDS usage and business performance - Results from the TA's survey in Medan and Semarang

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

> 1m IDR BDS payment

Paid for BDS

No BDS payment

All respondents

BD

S pa

ymen

t / u

sage

Share of respondents reporting business going .. during last two yearsWorse Constant Better


46

Young enterprises use BDS more often. Enterprises that have been 2-5 years in business used, with 35% average usage rate, BDS over proportion. The average BDS user with 2-5 years in business has used 2.4 services during the last three years, compared to 1.7 services used by all BDS users in average. Young enter-prises request a broad variety of services, and are in particular over represented among users of Tax, IT and legal assistance, and market development services (advertisement, marketing, information & correspondence services, transport-related BDS). However young enterprises paid less than average per service. A prime driving force in BDS demand appears to be the need for (post-) start-up as-sistance by means of brief counseling on business strategy and operation and on enterprise formalization (Figure 31).

Figure 31: BDS usage by enterprise age group - Results from the TA's survey in Medan and Semarang

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Promotion, advertisement

Management consultancy & training

Legal services

Techincal consultancy & training

IT services

Accounting & Taxation

Marketing, information, finance

Correspondence, transport

% of SME in enterprise age class that have used a service

<2 2 - 5 5 - 10 > 10Years in business

SME's prime motivation for BDS usage is intrinsic. Prime reason for using BDS is a perceived lack of own skills (66% of BDS users), in particular in IT and tax matters. 49% of BDS users felt their business development or business events made external assistance necessary. This reason is in particular prominent among users of technical and management training and of legal advice. 3% of BDS users did so proactively in order to expand sales (legal advice, advertisement) or to save their time and internal resources by outsourcing tax and promotion services. Ex-ternal motivation for BDS usage is less common. 13% of BDS users followed a re-spective advice of (business) friends, primarily for legal and tax advice and man-agement training, and 4% used BDS (in particular advertisement services) be-cause a competitor used the same provider. Only 1% used BDS because they were free (primarily technical training) . (Figure 29).

Figure 32: Motivation for using BDS - Results from the survey in Medan and Semarang

All respondentsBDS users

Have used BDS during the last three years because .. 29% 100% Lack of own skills 19% 66% Business development required external assistance 14% 49% Friends advised me to use BDS 4% 13% Competitor used the same provider 1,2% 4% Used BDS to expand sales 0,4% 1,4% Don't have time to do it myself 0,4% 1,4% Provider helps to deal with bureaucracy 0,2% 0,7% Service was free 0,2% 0,7% Note: Multiple answers possible, therefore individual answers sum up to more than 100%.


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Education is the key factor that influences use of external service providers. 60% of users of paid BDS are university graduates. High school graduates account for 31% of BDS users. While just 4% of managers that left after primary school have used commercial BDS, 43% of university graduates did so. Moreover, university graduates are much more willing to pay higher service prices. They account for nearly three quarters of SMEs that paid more than 1 million IDR for BDS (Figure 33). Only 9% of university graduates think that BDS are too expensive, compared to 14% of managers that did not visit university. Moreover, while 10% of managers with primary or secondary education stated problems in finding BDS providers, only 2% of university graduates did so.

Figure 33: BDS usage by education of manager - Results from the TA's survey in Medan and Semarang

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Primary

Secondary

High school

University

Educ

atio

n of

Man

ager

BDS payment in education group

<200.000 IDR 200.000 - 500.000 IDR 500.000 - 1.000.000 IDR >1.000.000 IDR

Education is strongly related with manager age. Primary and secondary school education is particularly frequent among managers that are 40-50 years old, pre-sumably because the economic situation in the mid-1960s to 1970s did not allow for higher education. University education is in particular common for 30-35 year old managers. A good part of managers that are younger than thirty years have fin-ished high school but not visited university – presumably in reaction to the 1997/98 crisis. Consequently, BDS usage and reasons for non-usage are also related to the age of managers, with (university –educated) 30-35 year old managers being more likely to use paid BDS (31%), and most (primary and secondary school-educated) managers aged between 40 and 50 feeling no need for using BDS (Fig-ure 34).

Figure 34: BDS usage and reasons for non-usage by age of manager - Results from the TA's survey in Medan and Semarang

0%

10%

20%

30%

40%

50%

60%

70%

80%

<30 31-35 36-40 41-45 45-50 51+Age of manager

Never neededBDS

BDS too expensive

Don't know whereto find BDS

Used paid BDS


48

Typical BDS users and non-users In summary, typical BDS users are:

Larger and/or older SME, in particular those managed by university-educated external managers or heirs of the enterprise founder. These enterprises ac-count for the majority of high-priced BDS above 500 million IDR. They use in par-ticular accounting, tax, IT and advertisement services as well as management training, and account for some 10-15% of all SME surveyed.

Young and dynamic enterprises (less than five years in business) that are founded and managed by younger university and high school graduates. Such SME primarily look for low-cost assistance by means of brief counseling on business strategy (marketing, finance, information services), business operation (IT, correspondence, production & operation, transport) and enterprise formaliza-tion (accounting, tax and legal matters). They account for some 20-25% of all SME surveyed and are in particular frequent among trade and service enterprises.

The typical non-user of BDS has no university education, is older than forty years, has been running his own SME for more than five years, and/or has an annual turnover of less than 50 million IDR.

Least interested in BDS are 40-50 years old male entrepreneurs with only pri-mary or secondary school education. This entrepreneur type accounts for some 15-20% of all SMEs surveyed and is in particular frequent in the transport and manufacturing / crafts sectors. Less than 2% of such entrepreneurs did not use BDS because they did not know where to find them, and they are also strongly un-der represented among SME that find BDS too expensive. They primarily feel they do not need BDS - although they are strongly under performing in terms of re-ported past business development, business expectations as well as access to bank finance. Being unaware of their underperformance, this group of SMEs is unlikely to be reached by any direct external intervention, including subsidized or free of charge BDS provision.

Small enterprises with less than 50 million turnover hardly use BDS – only 12% of them used paid BDS. 80% of such non-users feel they do not need BDS. However, the remaining 20% complain about BDS being too expensive or not knowing where to find BDS. These remaining 20%, accounting for some 4-5% of all SMEs surveyed, is relatively likely to be reached by market interventions (in-cluding improved information on available BDS supply) such as voucher schemes.

Finally, there is a particular group of well-established and successful medium-scale enterprises (>0.5 billion IDR turnover) managed by the owner who is older than 45 years and not university-educated. These enterprises do not need BDS, either because they have built-up respective in-house capacities, or have developed specific approaches towards client acquisition and handling tax and legal matters17. This group, accounting for some 6-8% of all respondents, is unlikely to react to financial incentives for BDS usage.

In total, at least 40-45% of the SMEs surveyed display a rational and educated attitude towards BDS and use them if required and available. These 40-45% include those me-dium-scale enterprises that have found specific approaches to issues usually dealt with by external service providers. Some 25-30% of SMEs appear to be unaware of the need for and potential benefit of external assistance. But is this impression really right, or do these SME as well act rational, as their business environment renders BDS usage ineffective? And what about the remaining 30-35% of SMEs?

17 Note worthily, registration and tax compliance rates among medium-scale enterprises that are longer than ten years in business are relatively low.


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3.2.2 BDS awareness and demand When asked which services they regarded as most important, 96% of all respondents to the TA's survey were able to select up to three priority services from a list of 14 services proposed. Moreover, in average 89% of respondents stated to be willing to pay for the services selected (see Figure 27 on p.43 above). This indicates a high awareness of the potential need for and usefulness of commercial BDS.

Figure 35: SMEs' awareness of and latent demand for BDS – Results from the TA's sur-vey in Medan and Semarang

Service area Think service is important *)

Used service within last 3

years Market pene-

tration **)

Know pro-vider in

city

Marketing 42.3% 2,9% 7% 52%Financing 35.9% 1,2% 3% 50%Advertisement / promotion 34.6% 10,4% 30% 56%Accounting 21.6% 3,9% 18% 43%Information 20.3% 1,9% 9% 37%Management advice 18.7% 0,6% 3% 28%Transport 18.3% 1,5% 8% 34%Tax 18.0% 10,4% 58% 47%Technical training 17.6% 2,7% 15% 34%Legal 16.8% 4,1% 24% 48%Management training 15.4% 4,4% 29% 38%Production & operation 12.7% 0,6% 5% 25%IT 10.4% 5,8% 56% 33%Communication & correspondence 7.1% 1,2% 17% 22%Average of all services 21% 3,7% 20% 39%No service / No answer 4% 71,4% 14%*) Percent of respondents rating the service as one out of up to the three services they think are most important. **) Rate of respondents that have used a service in relation to the rate of respondents that think the service is important.

Figure 35 above displays for each service are the rate of respondents that feel this service to be important. When interpreting this table, caution is required. Due to the open formula-tion of the survey question, some respondents may have interpreted 'service' in a wider sense. This concerns in particular the following service areas (marked in yellow in Figure 35):

High interest in marketing services from the trade, restaurant and hotel sector (49%) suggests that some respondents have understood such services to include booking services (travel agencies) or informal client referral by taxi drivers, hotel staff etc.

What concerns financing services, it is quite likely that a number of respondents referred to financial services (banks, insurance etc.).

Transport services may in many cases have been understood to include physical transport services by road, air or sea, including business travel and public trans-port for employees. Some respondents may also have referred to truck or car rent-ing services.

Because of the low rate of respondents that could name a respective service pro-vider in their city, it is unlikely that telecommunication services (including Wartels) or postal services were understood to be included in communication & corre-spondence services. However, a certain correlation between the interest in IT and in communication & correspondence services suggests that some respon-


50

dents may have referred to internet provision and internet-based services (mail-boxes, forums etc.) as communication & correspondence services.

What ever has been each respondents' understanding of the aforementioned services, more of 90% have named at least one of the remaining 'typical BDS' as important. In addi-tion to those 4% that did not find any service important, only 8% of that feel certain ser-vices to be important are not willing to pay for any of them. The remaining 82% of respon-dents are in general aware of the relevance and potential usefulness of BDS, and willing to pay for such services. However, the high priority accorded to marketing and financing services signifies that many SME expect BDS to produce short-term, visible effects such as increased sales or access to credit, but are reluctant to invest into more strategic services such as adver-tisement, training or technical / management consultancy. Some 14% of respondents have accorded priority to only one 'typical' BDS that is not as unclear and misunderstand able in meaning as financing, marketing and transport services. In total, the two groups of (i) SME not interested in / unwilling to pay for BDS, and (ii) SME that are primarily interested in BDS that produce short-term visibly effects, account for roughly one-third of all respondents. They are in particular common in the manufacturing sector, where they account for almost half of all enterprises (Figure 36), and consist pri-marily of typical BDS non-users as described above, i.e. enterprises more than five years in business managed by a low-educated owner, and/or very small SME with less than 50 million IDR turnover.

Figure 36: SMEs with low interest in paid BDS by sector –Results from the TA's survey in Medan and Semarang

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Manufacturing

Services

Trade, Restaurants, Hotels

Transport & Communication

Sect

or

Rate of enterprises willing to pay for

No service Marketing, finance & transportMarketing & finance, no transport Transport & marketing or finance

The remaining two-thirds of survey respondents seem to be well aware of their specific support requirements. Aside from marketing, financing and advertisement services, ser-vice priorities are relatively evenly distributed across the various service areas. While cer-tain sector patterns and demand clusters are visible, many respondents have opted for quite individual and specific combinations of priority services (Figure 37 on next page). In view of this high awareness of the potential need for external support, the relatively low usage rate of many services in relation to expressed demand is astonishing (Figure 35 on previous page). There are only two services, namely IT and tax services, which have been used by more than 50% of respondents that find these services important. The low usage of accounting services in relation to latent demand is partly due to strong interest from young and growing enterprises that may only recently have reached the size where they see a need for external assistance. However, it is striking that only 30% of SMEs that feel advertisement and promotion services to be important have used them. A number of ser-vices, namely information services, management advice, technical training and production & operation advice, have been used by less than one-sixth of SME that feel them to be important. These services are marked in Figure 35 on previous page in orange color.


51

Figure 37: Relation between demand for specific services – Findings from the TA's survey in Medan and Semarang

Service area

Marke-ting

Finan-cing

Trans-port

Adver-tise-ment

Infor-ma-tion

Comm. & corres-

pon-dence

IT Legal

ad-vice

Tax Ac-

coun-ting

Manage-ment. advice

Manage-ment

training

Techni-cal

training

Produc-tion &

operation

No ser-vice

Service is important 42,3% 35,9% 18,3% 34,6% 20,3% 7,1%10,4% 16,8%18,0% 21,6% 18,7% 15,4% 17,6% 12,7% 2,9%Marketing 37,8% 17,6% 6,6% 13,7% 8,1% 1,0% 1,5% 1,9% 2,7% 4,6% 5,2% 3,7% 4,6% 4,4% Financing 17,6% 31,5% 5,8% 10,0% 6,4% 1,2% 0,8% 1,9% 2,9% 4,4% 2,7% 2,7% 3,5% 3,1% Transport 6,4% 6,0% 16,2% 2,7% 3,7% 1,9% 0,4% 3,3% 2,5 1,5% 0,6% 1,0% 1,9% Advertisement / promotion 14,1% 10,6% 2,7% 32,6% 6,2% 2,1% 2,9% 2,5% 3,3% 4,1% 5,6% 4,6% 3,5% 2,7% Information services 7,7% 6,4% 3,3% 6,0% 18,0% 1,7% 0,8% 1,9% 1,0% 1,0% 1,9% 1,5% 1,2% 1,7% Communic. & correspondence 1,2% 1,2% 1,9% 2,1% 1,7% 6,2% 1,0% 0,6% 0,2% 0,2% 0,8% 0,6% 0,4% 0,4% IT services 1,5% 0,6% 0,4% 2,9% 0,8% 1,0% 9,5% 1,2% 1,7% 2,9% 1,2% 1,7% 2,1% 0,8% Legal advice 1,9% 2,3% 3,1% 2,5% 2,1% 0,6% 1,2% 13,7% 5,0% 3,9% 1,5% 1,0% 1,9% 0,4% Tax advice 2,7% 2,9% 2,5% 3,1% 1,0% 0,2% 1,7% 5,2%16,0% 5,4% 1,5% 2,1% 2,5% 1,2% Accounting 4,6% 4,4% 1,2% 4,1% 1,0% 0,2% 2,9% 3,7% 5,4% 20,1% 5,4% 2,9% 2,3% 1,9% Management advice 5,2% 2,7% 0,6% 5,4% 2,1% 0,8% 1,2% 1,5% 1,5% 5,4% 16,0% 2,3% 2,1% 1,2% Management training 3,7% 2,9% 4,6% 1,5% 0,6% 1,7% 1,2% 2,1% 2,9% 2,3% 13,9% 3,5% 0,8% Technical training 4,1% 4,1% 1,0% 3,3% 1,2% 0,4% 2,1% 1,9% 2,3% 2,1% 2,1% 3,3% 14,9% 1,7% Production & operation ass. 4,1% 3,1% 2,1% 2,7% 1,9% 0,4% 0,8% 0,4% 1,2% 1,7% 1,2% 0,8% 1,9% 11,2% No service / No answer 3,7% 2,9% 1,9% 2,1% 1,5% 0,8% 0,8% 2,3% 1,7% 1,2% 2,5% 1,5% 1,5% 1,0% 2,9%

Legend: Each cell indicates the share of respondents that find the service in the column important and are willing to pay for the service in the line. For ex-ample, 17.6% of all SMEs surveyed find marketing services important and are willing to pay for financing services. A difference between corre-sponding fields indicate SMEs that find both services important, but are only willing to pay for one of them. For example, 6.6% find transport ser-vices important and are willing to pay for marketing services, but only 6.4% find marketing services important and are willing to pay for transport services. This means that 0.2% find both marketing and transport services important but are only willing to pay for marketing services, presumably because they expect the provider of marketing services (e.g. broker) to cover transport costs.

Blue shading marks larger numbers of SMEs interested in a combination of two services. Service clusters, e.g. legal / tax / accounting / IT ser-vices and management advice, or technical & management training, are marked by dotted red circles.


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3.2.3 External influence factors on BDS demand and usage A number of external factors influences SMEs' usage of BDS:

Access to finance With 36%, BDS usage of SME that have received bank credit is significantly above aver-age, and almost 50% higher than for SME that did not receive bank credit (26%). More-over, BDS users that have received bank credit have in average used two BDS, while BDS users without credit only used 1.7 BDS in average. Although part of the difference can be attributed to the fact that typical BDS users, namely young, dynamic SME and me-dium-scale enterprises, are more likely to receive bank credit, BDS usage is clearly posi-tively influenced by access to external finance. While the interest in specific services dif-fers slightly between the SME that received credit and those that have not, these differ-ences are minor compared to differences between the two cities, between sectors or relat-ing to enterprise age.

Access to credit does not only relate to usage of pre-investment services such as market-ing and financial consultancy, but influences service usage across all service areas except legal services (Figure 38). The difference is particularly prominent for post-financing ser-vices such as management consultancy & training, taxation services, IT services and ad-vertisement.

Figure 38: BDS usage in relation to access to bank credit - Results from the TA's survey in Medan and Semarang

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

Promotion, advertisement

Management consultancy & training

Legal services

Techincal consultancy & training

IT services

Accounting & Taxation

Marketing, information, finance

Correspondence, transport

% of SME that have used a service

SME without bank creditSME with bank credit

SME with bank credit tend to pay less than average for specific BDS – this may reflect better bargaining skills, or a certain financial pressure induced by the credit. The only ex-ception from this rule is IT services - here, 66% of the users that received bank credit paid more than 400,000 IDR, compared to 21% of the users that did not receive credit. Some respondents appear to have used the bank credit for developing or upgrading their IT in-frastructure.

Several BDS providers that were interviewed during the impact assessments mentioned insufficient credit access of SMEs as a major factor that impeded demand for their ser-vices. According to the TA's survey, manufacturing enterprises seem to have particular financing problems, among others because of insufficient collateral. 32% of all manufac-turing enterprises surveyed reported rejection of their credit application, another 41% feel a need for credit but did not apply as they fear their enterprise does not qualify. Against this background, many manufacturing enterprises may be rational when not using BDS, because implementation of advice received is not possible without additional financing. With 22%, BDS usage in the manufacturing sector is the lowest among all sectors sur-


53

veyed. Difficult credit access may also partly explain why so many manufacturing enter-prises accord priority to marketing and financing services.

Tax regulation, practice and compliance Tax regulation, compliance, and implementation practice shapes demand for a number of BDS, most notably of course for tax advice. Low tax compliance affects the quality of SMEs' accounting systems, thereby impacting on the demand for accounting services, (financial) management consultancy and accountancy-related IT services. Moreover, low tax compliance also reduces an SME's desire to be visible, thereby impacting on demand for advertisement and promotion services, as well as for strategic marketing services.

Indonesian taxation regulation includes a number of allowances and simplifications for small enterprises, the most important of which are VAT exemptions for several sectors and for enterprises below a certain turnover18, and simplified profit calculation following the net income calculation norm for income tax purposes. All enterprises, however, are liable for income tax withholding on behalf of their employees if salaries exceed non-taxable in-come. A rough estimate based on sector, turnover and staffing yields that roughly 40% of respondents to the TA's SME survey should be liable for VAT, and some 65-75% should be liable for income tax and income tax withholding on behalf of their employees, respec-tively. Against this background, ratios of only 10% of respondents using external tax ad-vice and only 18% feeling tax advice to be important are very low – even more so, if one considers that 45% of all SME surveyed stated to know little or nothing about tax regula-tions.

The obvious explanation for this discrepancy is low tax compliance. Only 42% of respon-dents to the TA's survey paid income tax, meaning that around two out of five SME liable for this tax evaded taxation. Anecdotic evidence suggests that compliance with the obliga-tion to withhold income tax on behalf of employees (which was not asked for in the TA's survey) is even lower. Tax payment is strongly correlated with the education of the man-ager. While only 14% of managers with primary education pay income tax, 57% of univer-sity-educated managers do so. This, however, is not due to university-educated managers feeling they have a better tax knowledge. It rather seems that managers with university degree prefer to have their relations with the government in order. Usage of tax advice is one of the main factors leading to the higher BDS usage rate of university-educated man-agers.

Taxation practice, i.e. the extent to which tax administration allows for tax evasion or even covers it corruptly, is equally relevant. Some 20% of respondents to the TA's survey do not pay income tax because they do not know they have to, and another 15% think they should pay income tax but do not, as they have obviously never been approached by tax officials.

Even more enlightening is a comparison of the two cities of Medan and Semarang (Figure 39). Corrupt bureaucratic practices seem to be much more common in Medan, as signi-fied by 42% of Medan-based SME paying illegal levies and 21% paying more taxes than they think they have to, compared to 13% and 10%, respectively, in Semarang. The effect of such corrupt practice is striking: With 8%, tax advice usage in Medan is some 40% lower than in Semarang (13%). 19% of SME in Medan that think tax advice is in general important are not willing to pay for such advice – presumably as they expect it for free from public officials in exchange for illegal levies paid to them. In Semarang, only 6% of SME that think tax advice is important are not willing to pay for it. Tax evasion and corrupt

18 VAT exempted sectors include most social, educational and health services, as well as hotels. Many agricultural and food products are VAT exempt on the primary and trade levels, including food and beverages served in restaurants. Most retailers are allowed to opt for 2% lump-sum VAT payment on turnover instead of proper VAT accounting. Finally, manufac-turing enterprises with less than 360 m IDR (180 m IDR until 2001) and service enterprises with less than 180 m IDR (90 m IDR until 2001) can opt for VAT-exempt status.


54

bureaucratic practice also appears to impact on advertisement and promotion. Use of re-spective services is some 20% lower in Medan than in Semarang, presumably because some SME prefer to remain invisible in order to reduce illegal levies and over taxation.

Figure 39: Impact of the business environment on BDS usage and demand – Comparison of results from the TA's survey for Medan and Semarang

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Pay more taxes than I think I have to pay

Pay protection money / illegal levies

Tax advice

Advertisement services

Tax advice


Tax advice


MedanSemarang

Business environment

Service usage

Service is relevant

Not willing to pay for service

By significantly improving tax coverage and reducing corrupt taxation practices, usage of tax advisory services could at least be doubled. This would also trigger off additional de-mand for other services, most notably accounting services & training, management con-sultancy and IT services (financial controlling systems) and, by reducing disincentives for enterprise visibility, advertisement services and marketing consultancy. In aggregation, the average number of BDS used per SME during three years could be expected to rise by some 40% from 0.51 as determined in the TA's survey to around 0.7 (Figure 39).

Figure 40: Estimated impact of improved taxation practice on BDS demand.

Possible in-crease

BDS Current usage

Influenced by

by to

Rationale (figures according to the TA survey)

Tax advice / ser-vices

10% Corrupt bureaucratic practice

3% 13% 13% tax advice usage in Semarang

Low tax coverage 7% 17% approx. 35% of SME not covered by tax administration, 20% of which will seek external advice

Tax services aggregated 10% 20% Accounting ser-vices

4% Trigger effect of tax services

3% 7% 30% of potential tax advice users willing to pay for accounting services

IT services 6% Trigger effect of tax services

1% 7% 9% of potential tax advice users will-ing to pay for IT services

Management consultancy


1% 2% 8% of potential tax advice users will-ing to pay for management consul-tancy


10% Less disincentives for visibility

2% 12% 12% usage rate in Semarang (less corrupt practice)

Marketing ser-vices

3% Less disincentives for enterprise visibil-ity

1% 4% High latent service demand (42%), 15% of tax advice users willing to pay for marketing services

Financial consul-tancy


1.5% 2.5% High latent service demand (36%), 16% of tax advice users willing to pay for marketing services

Other services 16% No effects -- 16% Total 51% 19.5% 70.5%


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This estimate does not include possible effects of simplified tax regulations and overall improved bureaucratic practice on business formalization and respective BDS demand. Even though (post-) start-up consultancy is a major driving force for BDS demand, a 35% BDS usage rate among young enterprises is still relatively low in international comparison. 25% of all SME surveyed – all of which have at least five staff - operate in the shadow economy without formal registration.

Public and industry standards The BDS market development programs assessed demonstrated a certain relevance of public and industry standards as driving force for BDS usage:

43% of subprojects financed under the DAPATI program concerned (preparation for) ISO 9xxx certification;

Under SC's Boucher Program for Jabotabek, by the end of August 2001 61% of all vouchers were used for training on bookkeeping for cooperatives according to the new cooperative law.

There are a number of other public and/or industry standards in Indonesia that regularly induce demand for BDS, such as public and religious (halal) food health certificates, eco-labels or FSC certification for wood production and processing.

However, the TA's SME survey indicates that the overall impact of standards on BDS de-mand is still relatively low. Only 2% of respondents used advisory services related to im-proving production, operations and enterprise management. It appears that most existing standards are primarily geared at and reach out, respectively, to large and medium enter-prises, while small enterprises mostly operate in lowly standardized markets.

Internationalization Worldwide experience indicates that internationalization of business relations induces demand for BDS. In Indonesia, according to the Indonesian Statistical Office BDS pay-ment in the wood and rattan furniture industry rose from 2% to 4% of all input costs be-tween 1990 and 1995, in line with the sector's export progress.

Both cities surveyed, Medan and Semarang, are international seaports and house some export-oriented industries. However, Medan for its proximity to Malaysia and Singapore is likely to be more internationalized, in particular what concerns import of production inputs and commodities for wholesale and retail trade.

A comparison of the usage of (foreign) trade related BDS (Figure 41 on next page) in the two cities reveals some differences. In Medan, usage of legal services (contract drafting, business registration as pre-requisite for foreign trade operations) is fifty percent higher, and usage of information services double as high as in Semarang. For transport- and communication-related BDS, on the other hand, usages rates in Semarang are higher19. However, overall usage rates for most foreign-trade related services are too low in both cities to allow for final conclusions.

The difference between the two cities becomes much more pronounced when looking at the rate of SMEs in both cities that feel trade-related services (legal, communication, in-formation and transport-related services) to be relevant and interesting for their enterprise. This rate is in average some 70% higher in Medan than in Semarang. In Medan, more than one quarter of all BDS named as relevant are (foreign) trade related – in Semarang it is only one out of six. Notably, legal services only rank third in priority – information ser- 19 What concerns communication and correspondence services, the higher usage rate in Semarang may relate to target markets that require the use of English language, while Medan-based enterprises may correspond with Malayan counter-parts in Bahasa Indonesia / Malaysia.


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vices and transport services including transport-related BDS such as freight brokerage are even more felt to be relevant in future.

Figure 41: Impact of internationalization on BDS usage and demand – Comparison of re-sults from the TA's survey for Medan and Semarang

0% 5% 10% 15% 20% 25% 30%

Legal services

Communication & Correspondence

Transport-related BDS

Information services

Legal services

Communication & Correspondence

Transport services

Information services

MedanSemarang

Service usage

Service is relevant

The difference between SME that find trade-related services important and actual users of such services is quite large. There are several possible explanations for this discrepancy:

The interest in trade-related services has only developed recently in reaction to fuel price increases (transport-related BDS), trade liberalization, stronger fluctua-tion of the Indonesian Rupiah after the 1997/98 financial crisis, and reduced eco-nomic growth rates of regional trade partners such as Singapore and Malaysia;

Some SME may have understood 'important services' relatively widely. Transport-related services felt to be important may, e.g. for some respondents also include physical transport services or vehicle rent, while reported actual service usage, as the respective survey question was formulated more specifically, only referred to transport-related advisory and brokerage services.

The latent demand for trade-related services cannot be satisfied due to insuffi-cient service supply. This issue is analyzed in more detail further below.

Incorporated BDS users are obliged to withhold income tax for BDS payment on behalf of the BDS provider used. While the majority of SME are not incorporated but operate in the legal form of a 'sole trader', many SME involved in foreign trade operations can be assumed to be incorporated in order to reduce personal liability of the owners / shareholders. The tax withholding obligation increases adminis-trative efforts and makes BDS usage less attractive, in particular for smaller incor-porated SME that otherwise are VAT exempt and qualify for simplified profit calculation for income tax purposes, a group that is particular frequent among SME that find trade-related BDS interesting for their enterprise.

In any case, the analysis carried out confirms the relevance of internationalization in driv-ing SMEs' demand for BDS. As signified by the strong interest of trade, transport and even service enterprises in trade-related BDS, it is not only export, but as well import and even intellectual and cultural exchange with foreign countries that drives service demand. Past and recent protectionist policies have surely contributed to the low level of BDS us-age among SME.


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Summary In summary, there are a number of external factors in SME's business environment that impact on their BDS demand:

SME that have obtained bank credit are 40% more likely to use BDS. This con-cerns pre-investment services such as financing advice, as well as post-investment services such as management consultancy & training, taxation ser-vices, IT services and advertisement. Insufficient credit access impacts in par-ticular on BDS demand from manufacturing enterprises, and demand for IT ser-vices.

Tax regulation, compliance, and implementation practice shapes demand for a number of BDS. Aside from tax advice, tax compliance also impacts on the use of accounting and IT services, management consultancy (financial controlling) and, via removing disincentives for enterprise visibility, advertisement and marketing services. BDS usage could be some 40% higher if tax coverage would be better and corrupt bureaucratic practice were contained.

Public and industry standards such as ISO 9xxx certification can be a relevant driving force for BDS usage. However, since small enterprises mostly operate in lowly standardized markets, the overall impact of standards on BDS demand is relatively low.

Internationalization is strongly promoting demand for legal, information, corre-spondence and transport-related services. As signified by the strong interest of trade, transport and even service enterprises in trade-related BDS, it is not only export, but as well import and even intellectual and cultural exchange with foreign countries that drives such service demand. Past and recent protectionist policies have surely contributed to the low level of BDS usage among SME. Transaction barriers, in particular the client's obligation to withhold income tax on behalf of BDS providers, may also have negatively influenced actual BDS usage, which is low in relation to latent service demand.

3.2.4 Supply-induced demand effects

Provider density and knowledge Knowledge of BDS providers is some 50% higher in Semarang than in Medan. SME from Medan could in average name BDS providers for 4,25 services, while those from Sema-rang in average knew providers for 6,64 services. 20% of respondents from Medan could not name any BDS provider, compared to only 8% in Semarang. This seems to indicate a higher density of BDS providers in Semarang than in Medan.

It might be assumed that a higher provider density results in higher BDS usage, as ser-vices become easier accessible. At first sight, this appears to be the case: In Semarang, 31% of all respondents have used BDS, compared to 26% in Medan. In average, each SME in Semarang has used 0.55 BDS over the last three years, compared to 0.49 in Medan.

However, a closer look reveals a more complex picture (Figure 42 on next page):

As discussed above, lower usage rates of tax advice and advertisement / promo-tion services in Medan are likely to be primarily related to the local business envi-ronment and not to a lower supply density there. Since these two services have the highest usage rate among all BDS, they account for most of the lower BDS us-age rate in Medan.


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Figure 42: Service usage and provider knowledge by city –Results from the TA's survey in Medan and Semarang

0% 1% 2% 3% 4% 5% 6%

Marketing servicesAccounting services

Management trainingTechnical training

Communication & correspondenceTransport-related BDS

Financing advice

Medan paidMedan freeSemarang paidSemarang free

Service usage

10% 20% 30% 40% 50% 60% 70%

Marketing servicesAccounting services

Management training

Technical trainingCommunication & correspondence

Transport-related BDSFinancing advice

MedanSemarang

Know provider in town

In several BDS areas, namely legal, information and marketing services, paid ser-vice usage is higher in Medan than in Semarang, although provider knowledge is substantially higher in Semarang. There are, e.g. 66% of SME in Semarang that can name a provider of marketing services, compared to 37% in Medan. However, 3,4% of respondents from Medan have paid for marketing services, compared to only 1,7% in Semarang.

To a good extent, differences in BDS usage between the two cities are related to free-of-charge service provision, presumably by the government or donors. This concerns in particular technical and management training. The rate of SME that actually paid for technical training is even higher in Medan; payment rates for pro-duction & operation assistance and management advice are equal in both cities. However, even though more SME from Semarang participated in free manage-ment training, usage of paid management training is still slightly higher in Sema-rang with 3.3% compared to 2.5% in Medan. What concerns paid BDS in general, usage rates are only slightly higher in Semarang than in Medan. Nevertheless, it cannot be assumed per se that free service use is not related to actual service supply, therefore a certain impact of supply density on supply usage may be pos-sible.

Service areas for which a relation between service usage and supply density seems plausible are management and technical training, communication & corre-spondence services, transport-related BDS and accounting services. For account-ing services, however, the lower usage rate in Medan may also relate to a less fa-vorable taxation environment there. All aforementioned services account for 22% of BDS usage in Medan and 30% in Semarang.

It can be concluded that for most BDS, service density does not impact on BDS us-age. BDS usage is primarily determined by SME's business environment and overall atti-tude towards BDS usage. If a certain minimum supply density is given, which appears to exist in Medan, SME interested in BDS are able to find adequate service providers.

An exception are productivity- and performance-enhancing BDS such as manage-ment and technical training. Here, provider density impacts on BDS usage. This impact is


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probably less stemming from a higher provider density per se, but rather from higher sup-ply density implying a broader range of BDS offered, which is better adapted to sector-specific needs. This corresponds to findings from the assessment of SC's voucher pro-grams and its BDC project, which have demonstrated that training and technical consul-tancy services are mainly interesting for SME if they are sector-specific and custom-tailored to specific sectoral needs and constraints.

Referral mechanisms Informal referral mechanisms for BDS start to develop, but are still weak. Only 13% of BDS users mentioned a (business) friend's advice as reason for their BDS usage. Such external referral is particularly important for legal services, where 35% of users followed a friend's advice. This referral took primarily place in Medan, and may have contributed to the fact that interest in and usage of legal services is considerably higher there than in Semarang (see Figure 41 on p. 56 above). It appears that high quality services offered by individual providers can create their own demand via informal referral (word of mouth) within the local business community. An indirect referral mechanism is imitation of com-petitors. 10% of users of advertisement and promotion services followed their competitors. However, for other services, imitation of competitors is hardly relevant.

3.2.5 Effects of public interventions and BDS market development programs

The survey data allows for some assessment on the impact of public interventions in gen-eral and some of the BDS market development programs assessed on BDS usage and demand:

SC Voucher Program It is worthwhile to compare results from SC's analysis of voucher users in East Java with the results of the TA's survey:

The Voucher Program also extends towards micro-enterprises and individuals, while the TA survey only covers small (2-19 staff) and medium (20-99 staff) enter-prises. Furthermore, the Voucher Program for East Java covers large urban cen-ters (Surabaya, Malang) as well as smaller cities and rural areas, while the TA sur-vey was restricted to large cities (Medan and Semarang). Are there, in spite of the differences in terms of target group and regional coverage, common patterns that allow to generalize some survey results also for smaller cities and rural areas?

The objective of the Voucher Program was to motivate a larger number of micro-enterprises and SMEs to use BDS, by addressing in particular demand-side con-straints related to willingness to pay and insufficient supply knowledge. Has this approach been successful in the light of the results of the TA's survey.

In order to allow for reasonable comparison, to the extent possible only data from the TA survey that referred to the use of paid BDS at a price of less than 200,000 IDR was con-sidered. Comparison between the two sets of data yields the following results:

With more than 75% of users being micro-enterprises the voucher program reached out deeply into the micro-enterprise segment.

In terms of enterprise age, new starters less than two years in business were over represented among voucher users compared to the TA's survey (Figure 43). This may be due to the fact that many of such new starters have less than five staff and were therefore not included in the TA survey. A second difference is, that there are only few voucher users with 5-9 years in business. This probably relates to the fact that service demand from such enterprises according to the TA survey mainly


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relates to accounting and tax services, which were only partly eligible for support under the voucher program.

Figure 43: BDS users by enterprise age– Comparison between the TA's survey in Medan and Semarang and SC's Voucher Program East Java Phase I

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

SME Survey (BDS payment < 200m IDR)**)

SC Voucher ProgramEast Java *)

BDS users by years in business <2 2-5 5-9 >10

*) 4% did not indicate years in business, presumably because they were individuals / enterprise staff **) Excluding legal, correspondence and advertisement services (not covered by the Voucher Program).

Different regional coverage impacts on the sectoral structure of users. 48% of voucher users came from the manufacturing and craft sectors, and 12% from agri-culture. With 19% and 12%, the trading and service sectors were strongly under-represented among voucher users compared to the TA's survey, where these sec-tors account for some 80% of all BDS usage.

The age structure of Voucher users in East Java is almost identical with the one yielded by the TA survey (Figure 44). This indicates that, in spite of differences in terms of enterprise age and size and business sector, general BDS usage patterns are to a certain extent identical for voucher users and SME surveyed by the TA.

Figure 44: Age structure of BDS users – Comparison between the TA's survey in Medan and Semarang and SC's Voucher Program East Java Phase I

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

SME Survey (BDS payment < 200m IDR)

SC Voucher ProgramEast Java

BDS users by age <30 30-39 40-49 50+

While only 22% of voucher users had used BDS before, the rate of repeat users, i.e. BDS users that used more than one service, among survey respondents was 42%. It can there-fore be concluded that the voucher program has been successful in increasing SME's us-age of BDS, and at least some 20-25% of voucher users would not have used the service without the program.

Data analysis suggests two main reasons for this success:

Overcoming low willingness to pay: Around 18% of survey respondents with less than 50 million IDR annual turnover have not used BDS because they found them to expensive. Only 6% of voucher users stated to have an annual turnover of more than 60 million IDR. By providing subsidies for service usage, the voucher program is therefore likely to have, in a well targeted manner, addressed the low willingness to pay for BDS of some micro- and very small enterprises.

Overcoming information problems: According to the TA's survey, 7% of BDS non-users complained about not knowing where to find BDS. Such problems are in particular common for low-educated managers with only primary or secondary


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school education, and are one of the key factors that contribute to their low BDS usage rate. By providing information on available low-cost BDS, the voucher pro-gram seems to have contributed to overcoming this constraint. Although managers with only primary or secondary school education are with 20% still under-represented among voucher users, this share is significantly higher than the 14% share yielded by the TA survey (Figure 45).

Figure 45: Education background of BDS users – Comparison between the TA's survey in Medan and Semarang and SC's Voucher Program East Java Phase I

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

SME Survey (BDS payment < 200m IDR)

SC Voucher ProgramEast Java

BDS users by education of manager

Primary schoolSecondary schoolHigh school degreeUniversity degree

However, in aggregation the two groups reached by the Voucher Program, namely (i) small enterprises with low willingness to pay for BDS, and (ii) low-educated entrepreneurs not knowing where to find BDS, only account for some 8% of all survey respondents (12% of respondents that have not used BDS). 88% of non-BDS users see no need for BDS, either for objective reasons related to their business environment, or because they are subjectively unaware of their under-performance and the usefulness of external assis-tance. This explains the relatively low outreach obtained by SC's Voucher Programs so far.

TATP matching grants for ICT services With 31 sub-projects and 24,4% of the total grant volume committed, North Sumatra has been a major target region of the TATP. Due to the Province's population and enterprise structure, TATP grants to North Sumatra are likely to have strongly concentrated onto Medan TATP commitment for Central Java is considerably lower with only 22 sub-projects and 16,7% of total grant volume, and is likely to be spread more evenly across the prov-ince and only partly absorbed in Semarang. Although not all TATP sub-projects had been implemented when the TA's survey took place in May and June 2001, the survey is likely to reflect the different intensity of TATP involvement in both cities and allow for conclu-sions on its impact on demand for IT services.

Figure 46: SME's usage of and interest in IT services – Comparison of results from the TA's survey for Medan and Semarang

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12%

Payment / Usage

Service is important

Payment / Usage


Med

anSe

mar

ang

SME that have used IT services for .. Free < 0.4 m IDR0.4 - 0.9 m IDR >0.9m IDR


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Analysis of survey data yields the following (Figure 46)

With 7.6% of all respondents, the usage rate of IT services in Medan is almost double as high as in Semarang (4.1%);

IT service users paid in average more than three times as much in Semarang (910,000 IDR) than in Medan (300,000 IDR). The most likely explanation for this difference between the two cities is a substantially higher share of TATP benefici-aries in Medan. While 60% of users in Semarang paid more than 0.4 million IDR for IT services, only 27% of users in Medan did.

In spite of much stronger TATP involvement in Medan compared to Semarang, the rate of SME that think IT services are important for their enterprise is, with slightly more than 10%, almost identical in both cities.

This confirms that the TATP is unlikely to obtain its objective of increasing SMEs' willing-ness to use IT services in future at full market costs. The main constraints for IT service usage are external. Such constraints are in particular high hardware and telecommunica-tion costs and insufficient access to credit, respectively (see also chapters 2.3 and 3.2.3 as well as Figure 38 above). Since SME interested in tax and accounting services are over proportion willing to pay for IT services as well, low tax compliance and weakly de-veloped accounting systems are also likely to constrain the demand for IT services.

The TATP appears to have primarily activated latent demand in a service segment in which usage is relatively high in relation to service demand. Since most latent service de-mand has already been saturated, the TATP is likely to result in lower instead of higher demand for IT services in Medan in the years to come.

Free service provision by donors or the government 17% of IT services in Medan and 10% in Semarang were provided for free. Since no other government- or donor-financed programs active in the field of IT services have been iden-tified, these free services have either been provided under TATP funding, with the service providers fraudulently reimbursing service fees to the users, or relate to IT projects im-plemented under MONE's 'vucer' program. Such free service provision appears to have only started recently. It has not yet eroded the willingness to pay for IT services, which is with 92% still relatively high in comparison to other services. Nevertheless, since free pro-vision of IT services crowds out commercial provision without having positive demand ef-fects, it should be terminated. This concerns also IT services provided under MONE's 'vucer' program (see also Chapter 2.4).

A look at the effects of free provision of management and technical training yields similar conclusions (Figure 47 on next page). In spite of much more SME receiving free training in Semarang than in Medan, the rate of SME that deem such training to be relevant and are willing to pay for it is almost identical in both cities or even slightly higher in Medan. The only significant impact of free training provision is a higher rate of SME in Semarang that believe such training to be important, but are not willing to pay for it.


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Figure 47: SME's usage of and interest in management and technical training – Compari-son of results from the TA's survey for Medan and Semarang

Management Training

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

Payment / Usage


Payment / Usage


Med

anSe

mar

ang

Share of all SME Free < 0.1 m IDR 0.1 - 0.6 m IDR >0.9m IDR Willing to pay Not willing to pay

Technical Training

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

Payment / Usage


Payment / Usage


Med

anSe

mar

ang

Share of all SME

At least for the vast majority of users of free training, willingness or ability to pay was no constraint. 71% of users of free management training and 30% of users of free technical training were medium-scale enterprises with more than 20 staff. Only one user of free technical training mentioned, aside from a lack of own skills, the fact that the training was free as reason for him to participate. It can be concluded that free service provision by the government or donors has no significant impact on SMEs' demand and usage of BDS, except for crowding out commercial service provision and eroding the willingness to pay for BDS.

However, it should be noted that the survey supports these findings only for SME with more than five staff, not for micro-enterprises. It is also worth noting that the free training reported in the survey has not necessarily been provided by the government or donors, but may also have come from business partners such as large clients, equipment suppli-ers or franchisers (e.g. car repair, photo studios, restaurant chains).

3.2.6 Synthesis and outlook

BDS usage and demand From the above analyses, it can be concluded that SMEs' awareness of the potential need for and benefit of BDS is high, as is the willingness to pay for such services. Cur-rent BDS usage, however, is relatively low. Main user groups are young enterprises inter-ested in post-start-up assistance related to enterprise formalization and updating their business strategy, and larger SME.

Due to weak tax coverage and corrupt taxation practices, around 30% of SME operate in the shadow economy. This reduces the demand for various services, including tax, ac-counting and advertisement services, considerably. It is estimated that improved tax cov-erage and reducing corrupt bureaucratic practice could increase BDS usage by some


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40%. Tax evasion and lack of business registration are found across all turnover classes. Since university-educated managers tend to be registered and to strive for tax compli-ance, they account for more than 60% of BDS users. The typical non-user of BDS is low-educated and manages his own enterprise that either operates in the shadow economy or has, as well-established medium-size enterprise, developed specific informal approaches towards client acquisition and handling tax and legal matters.

Credit access impacts significantly on BDS usage, in particular what concerns accounting, tax, IT and advertisement services, as well as management consultancy and training. Some 43% of SMEs surveyed feel their enterprise development to be restricted by diffi-cult access to credit. This feeling is particular strong among manufacturing enterprises. Consequently, around one-third of SMEs are primarily interested in BDS that produce short-term visibly effects, such as marketing and financing services.

Internationalization is strongly promoting demand for legal, information, correspondence and transport-related services. As signified by the strong interest of trade, transport and even service enterprises in trade-related BDS, it is not only export, but as well import and even intellectual and cultural exchange with foreign countries that drives such service de-mand. Past and recent protectionist policies have surely contributed to the low level of BDS usage among SME. Transaction barriers, in particular the client's obligation to with-hold income tax on behalf of BDS providers, may also have negatively influenced actual BDS usage, which is low in relation to latent service demand. Public and industry stan-dards such as ISO 9xxx certification can as well be a relevant driving force for BDS us-age. However, since small enterprises mostly operate in lowly standardized markets, the overall impact of standards on BDS demand and usage is relatively low.

For most BDS, service density does not impact on BDS usage. Informal referral mecha-nisms for BDS start to develop, but are still weak and primarily confined to advertisement and legal services. Nevertheless, only 5% of respondents stated to not have used BDS because they did not know where to find an adequate provider. If a certain minimum pro-vider density is given, which appears to exist in Medan and Semarang, SME interested in BDS are in most cases able to find adequate service providers. Very low usage rates in relation to service demand, however, suggest insufficient supply of productivity- and performance-enhancing BDS such as information services, technical training, and ad-vice related to enterprise management and production & operation.

Transaction-level interventions have at best limited, at worst no positive impact on BDS demand and usage:

The SC Voucher Program East Java has reached, in a well-targeted manner, two specific groups, namely (i) small enterprises with low willingness to pay for BDS, and (ii) low-educated entrepreneurs not knowing where to find BDS. However, both groups together only account for some 8% of all survey respondents (12% of respondents that have not used BDS), while 88% of non-BDS users see no need for BDS. This explains the relatively low outreach obtained by SC's Voucher Pro-grams so far.

TATP matching grants for usage of IT services have only activated latent de-mand. Since external constraints, in particular insufficient access to credit (for IT investment) and low tax compliance, were not addressed, the TATP could not in-crease SMEs' willingness to use IT services in future at full market costs.

Free provision of training by the government or donors has no significant impact on SMEs' training demand and usage, except for crowding out commercial provi-sion and eroding the willingness to pay. The same applies to IT services provided under MONE's 'vucer' program.


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Demand outlook In general, SMEs' usage of BDS can be expected to rise in future. Latent demand and willingness to pay is strong across all service areas. In average only 20% of SMEs that find a service important have used it in the past. Even though interest in a specific service does not necessarily mean that this service will be used in the future, the current low level of demand penetration makes further growth in BDS usage highly likely.

BDS usage is furthermore promoted by demographic change: In some 14% of SME surveyed, the manager was older than 50 years. Most of

these enterprises will over the next ten years transfer management into younger hands, either inside the family or externally. As these new managers are likely to be better educated but less experienced, they should use more BDS than the cur-rent owners / managers. This holds in particular true for medium-scale enterprises recruiting external managers to replace aged owner-managers, since the owning family is likely to insist on external accounting and auditing services.

As more than 50% of the Indonesian population is younger than 25 years and youth unemployment is strong, the current trend towards enterprise start-up (30% of the SME surveyed were younger than five years) is likely to continue and even intensify. This implies further strong demand for (post -) start-up assistance. Since such new entrants will in average be better educated, they are also likely to display a more open attitude towards BDS than managers that are older than 40 years.

While young enterprises up to five years in business have so far mainly used tax, IT, legal, advertisement and information services as well as management training, many of them appear to have grown into a size that requires further assistance to be managed adequately. SME that have been 2-5 years in business are far over proportion interested in accounting services, management advice and communica-tion & correspondence services (Figure 48). Since many such enterprises have in the past been active BDS users, their interest is likely to translate into actual ser-vice usage in near future. To a certain extent, the same may apply to the strong in-terest in technical training from enterprises that have been 5-10 years in business and now feel they are not up to date anymore with new technology trends.

Figure 48: Relation between enterprise age and interest in selected BDS – Results from the TA's survey in Medan and Semarang

0% 5% 10% 15% 20% 25% 30% 35%

Accounting

Management advice

Technical training

Communication &correspondence

Rate of SME that find service interesting and have been in business for ..

<2 years 2-5 years 5-10 years >10 years

Nevertheless, SMEs' future demand for BDS will primarily be shaped by their business environment. Current policy moves towards increasing tax coverage as well as ongoing trade liberalization in line with WTO and ASEAN agreements should promote further BDS usage. However, the high latent demand for BDS has to be related to the facts that 60%


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of survey respondents expect their business to grow in future, and 70% are willing to in-vest into expanding their enterprise. Should the overall business climate deteriorate, and access to credit remain as difficult as it was at the time of the TA's survey, many respon-dents will review their business outlook and adjust BDS usage accordingly.

Finally, latent BDS demand will only become effective if there is adequate service sup-ply in terms of service range, quality and pricing. Availability of such supply is in particular questionable with respect to productivity- and performance-enhancing BDS such as in-formation services, technical training, and advice related to enterprise management and production & operation. This issue is analyzed in more detail in the following chapters.

3.3 BDS Supply

3.3.1 Supply structure So far, there exists no comprehensive survey and analysis of the structure of BDS supply in Indonesia. However, in the framework of BDS market development programs, some data on regional or service-specific supply has been collected and analyzed. This data indicates the following patterns:

Regional distribution BDS providers appear to be regionally concentrated:

Supplier density on Java seems to be considerably higher than on outer islands. According to the TA's SME survey, provider knowledge in Semarang was some 50% higher than in Medan, which indicates a higher provider density in Semarang (Chapter 3.2.4). SC reports severe problems in finding adequate candidates for their new BDC project in South Sulawesi. The TATP management contractor men-tioned as well difficulties in identifying adequate providers and sub-projects outside Java.

Within Java, providers appear to be strongly concentrated in the Jakarta area. Out of the technical service providers screened by the DAPATI program, some 54% were located in the Jakarta area (Figure 10 in chapter 2.2). In spite of East Java having more than double the population, SC received nearly as many provider ap-plications for inclusion in the Jabotabek voucher program than for Phase 2 of its East Java program20.

On Java outside Jakarta, BDS providers seem to concentrate in the major eco-nomic corridors, while smaller cities and rural areas are comparatively under-served. A provider screening carried out by SC in preparation of the East Java Voucher Program yielded that 71% of providers in East Java came from the central North-South corridor (Surabaya –Malang agglomeration), although only 55% of the province's SMEs are located in that region21.

The strong concentration on Jakarta and Java is exemplified by the regional distribution of individual members of the Management Accountant Compartment of the Indonesian Ac-counting Institute, which is the self-organization and standard-setting body of the Indone-sian accountancy profession. 79% of all IAI members that are practicing publicly reside in Jakarta, and another 14% are located in other Javanese provinces and Bali Outer islands only account for 7.5% of all IAI members with public accounting practice and are very dis-

20 Peter Bissegger / Johannes Schwegler / Mohamad Nurwathoni / Etih Suryatin / Nunuk Wilujeng (SC): " Draft Report on the Progress Implementation of the Voucher Program, Period April 2001 - March 2002", Jakarta, 2002; p. 4

21 Peter Bissegger: "The BDS Market in East Java, Indonesia (Market Assessment and Application of Performance Measurement Framework)", Presentation for the International Conference on "Business Services for Small Enterprises in Asia: Developing Markets and Measuring Performance" in Hanoi, Vietnam - April 3-6, 2000; Table 3


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persed. The only sizeable population of public accounting practices on outer islands is found in North Sulawesi (Medan). Management accountants employed by academic insti-tutions and, to a lesser extent, the public sector may as well provide some services to the private sector. This may slightly improve service supply in some regions, in particular on Sumatra, where a relevant number of management accountants is working in academic institutions (Figure 49).

Figure 49: Individual membership in the Management Accountant Compartment of the Indonesian Accounting Institute (IAI), by province and occupation of member

Provincial Branches Public Practices

Aca-demic

Mana-gement

Public Sector Other Total

Jakarta 1056 78.9% 137 924 913 669 3699 64.4%West Java 49 3.7% 16 30 103 10 208 3.6%Central Java & Yogyakarta 29 2.2% 30 14 255 2 330 5.7%East Java 93 6.9% 28 54 118 60 353 6.1%Bali 12 0.9% 0 3 50 1 66 1.1%Java & Bali w/o Jakarta 183 13.7% 74 101 526 73 957 16.7%North Sumatra 29 2.2% 4 10 72 45 160 2.8%Other Sumatra 41 3.1% 68 61 341 80 591 10.3%Kalimantan 10 0.7% 5 7 117 1 140 2.4%Sulawesi & East Indonesia 20 1.5% 9 3 167 0 199 3.5%Outer islands 100 7.5% 86 81 697 126 1090 19.0%

Total 1339 100% 297 1106 2136 868 5746 100% 23% 5% 19% 37% 15% 100% Source: IAI homepage, own calculations.

It has to be noted that only some 20% of registered Indonesian accountants are IAI mem-bers. However, many of the non-members may work in the public sector in provinces without IAI chapters (IAI has only 20 provincial chapters), reside abroad, or work in man-agement positions on tasks only loosely related to accounting. Moreover, the number of IAI members in management positions from other islands is surprisingly low, if one con-siders the number of large domestic and international companies that are active in mining and resource extraction. In general, IAI's membership structure appears to display the re-gional concentration of accounting services supply to SME reasonably well.

Ownership Aside from privately owned BDS providers, government agencies, educational institutions, NGOs and cooperatives / associations play significant roles in BDS provision. The rele-vance of each ownership type varies according to region and service focus (Figure 50):

Private firms dominate accounting and advertisement services and play a major role in most other service areas. They primarily serve larger urban centers and ag-glomerations.

Government agencies and research institutes (balai, lembaga) are primarily ac-tive in technology-related advice and training, where they may account for some 10-15% of supply.

Educational institutions such as such as universities and polytechnics provide a broad range of services that covers training and advice on managerial as well as technical issues. In these areas, they appear to account for some 15% of supply.

NGOs, business associations and cooperatives play a strong role in BDS provision across many service areas. Business associations are relevant BDS providers in larger cities and in particular Jakarta. NGOs play a dominating role in BDS supply


68

for rural and peripheral areas, as is among others signified by the much higher share of NGOs applying for participation in the East Java Voucher Program in rela-tion to the Jabotabek Voucher Program.

Figure 50: Ownership status of BDS providers applying for / participating in market devel-opment programs

Program

Private firm (incl. financial institutions)

Government Agency/

Research Institute

Educational institutions

NGO, Cooperative, Association, Foundation Total

29 1 14 35 79SC Voucher East Java Phase 1, first screening 36,7% 1,3% 17,7% 44,3% 100%

44 8 15 67SC Voucher Jabotabek, provider applications 65,7% 0,0% 11,9% 22,4% 100%DAPATI, used providers 54 10 13 7 84 64,3% 11,9% 15,5% 8,3% 100%TATP, used providers 75 16 42 133 56,4% 12,0% 31,6% 100%

6 52 58Mone 'Vucer', used providers 10,3% 89,7% 100%

Turnover and funding According to a provider survey carried out by SC in preparation of the East Java Voucher Program, some 35% of applying BDS providers have an annual turnover of less than IDR 60 million, and another 20% of IDR 60-120 million. Only 5% stated an annual turnover in the range of IDR 200 million or above. 40% of screened providers had more than 15 cus-tomers per month, but 35% tried to make their living from less than ten customers per month22.

Analysis of financial data of the BDCs that were supported under SC's BDC Program has yielded that an annual turnover in the range of 200 million IDR is required for break even of a BDS provider with more than one professional staff. This suggests that the majority of BDS providers screened in East Java is not commercially sustainable.

Figure 51: Average service fee in IDR per hour of providers participating in SC's Voucher Programs, by provider ownership / institutional type

0

10.000

20.000

30.000

40.000

50.000

Private Association University NGO

Category BDS Provider

Jabotabek East Java

Service Price per Hour

50% of BDS providers that were screened by SC in East Java obtained contributions from sponsors of more than 60% of total cost for their services. Such sponsoring appears to be

22 Bissegger: "The BDS Market in East Java, Indonesia ..", section 3.3.7. Figures were recalculated into IDR by using a conversion rate of IDR 7,000 / USD.


69

in particular common for government agencies, educational institutions and NGOs, but also applies to a number of private firms23. Comparison of average service prices and ser-vice fees per hour, respectively, indicates that in particular NGOs, but also some associa-tions and educational institutions use these sponsorships to partly subsidize their service fees (Figure 51 on previous page)24.

In this context, it should be noted that service prices around 38,000 IDR per hour, as charged by private providers for services supported under SC's voucher programs, are anything but exaggerated. Under the realistic assumptions that (i) at least 30-35% of ser-vice income are required to cover the costs of office operation, support staff, communica-tion and depreciation and (ii) at best 50% of an advisor's / trainer's time can be charged to clients, while the remaining time is spent on curricula development, training preparation, client acquisition and the like, a fee per hour of 38,000 IDR rate translates into a monthly income of some 2 million IDR (approx. USD 200) for a professional advisor / trainer. This is less than earned by many taxi drivers or minibus operators.

However, the above findings relate primarily to low-cost services as supported under SC's voucher program. Certain service areas such as e.g. advertisement or complex account-ing services are not covered. The findings are probably less relevant for large cities, where private firms dominate BDS supply, than for medium-sized cities and rural areas. Nevertheless, it can be concluded that external sponsorship heavily distorts BDS supply, in particular what concerns provision and pricing of low-cost training and advisory services outside major urban centers.

3.3.2 Commercial Feasibility

Market volume Based on information on BDS expenditure collected by the TA's survey, and data from the BPS enterprise census 1996, is it possible to estimate the total market volume for BDS provision to SMEs (Figure 52 on following page). In this context, the following is worth not-ing:

To account for inflation, which was in particular high in 1998, the turnover classes of the 1996 BPS enterprise census have been upwardly adjusted by 50% before applying average BDS expenditure per SME and turnover class as determined from the TA's survey.

The BPS enterprise census excluded agricultural enterprises, the number of which may be estimated around 40 million. BDS demand from agricultural enterprises is not considered in the market volume estimate presented.

The survey does not yield information on BDS expenditure of micro-enterprises with less than five staff. Therefore, BDS expenditure of enterprises in the lowest turnover class (< 25m IDR acc. to BPS, < 38 m IDR adjusted) had to be estimated. The estimated 14,000 IDR BDS expenditure per enterprise in this turnover class were derived by assuming that 10% of such enterprises use BDS, and pay in av-erage 0.75% of their annual turnover of in average 19 million IDR. This estimate may be overly optimistic.

The TA's survey has documented each respondent's BDS expenditure up to IDR 1 million in relative detail, in 100,000 IDR expenditure classes, which allows for a relatively precise determination of average BDS expenditure per enterprise turn-

23 One privately-owned BDC that received support from SC, for example, now reports to gain substantial income from an USAID contract for free-of-charge service provision to small metal processing enterprises.

24 Figure taken from SC's "Draft Report on the Progress Implementation of the Voucher Program, Period April 2001 - March 2002", p. 7. See also Bissegger: "The BDS Market in East Java, Indonesia ..", section 3.3.6.


70

over class. However, larger BDS expenditure has only been recorded in classes of 1-3 million IDR and above 3 million IDR. For the estimate, an average BDS pay-ment of 2 million IDR for the '1-3 million IDR' class and of 5 million IDR for the 'above 3 million IDR' class has been assumed. Variations of the two figures affect the calculation considerably. At 7 million IDR average payment in the 'above 3 mil-lion IDR' class, the estimated market volume would be some 10% larger. At 1.5 million IDR average payment in the '1-3 million IDR' class and 4 million IDR aver-age payment in the 'above 3 million' class, the estimated market volume would be some 10% smaller.

The BPS census data includes some 10,000 large enterprises with more than 100 staff). Since such large enterprises are likely to spend more on BDS than medium-scale enterprises, the market volume in the largest turnover class (>= 1 bn IDR acc. to BPS, >= 1.5 bn IDR inflation adjusted, marked in orange in Figure 51) may be considerably underestimated.

Figure 52: Estimation of BDS market volume (excluding services to agriculture), by enter-prise turnover class

Turnover class (million IDR)

according to BPS enter-prise census 1996 Inflation adjusted

No. of enterprises

according to BPS enter-

prise census 1996

Avg. BDS expenditure

per enterprise, in IDR (acc. to

TA survey)

Market volume

(billion IDR)

Supported providers

@ 0.2 bn IDR turnover/ provider

< 25 < 38 13,865,940 14,000 194 50% 97125 - 49 38 - 74 1,259,506 24,000 30 8% 15150 - 99 75 - 149 641,492 85,000 55 14% 273100-499 150 - 749 509,988 140,000 71 18% 357500-999 750 - 1449 91,490 220,000 20 5% 101> = 1000 >= 1500 58,517 345,000 20 5% 101

Total / Average 16,426,933 23,778 391 100% 1,953excluding Micro (< 25 / 38 m IDR turnover) 2,560,993 76,716 196 50% 982

While the aforementioned comments imply that a certain caution is required with respect to absolute figures, the estimate allows for the following conclusions:

The overall volume of the Indonesian BDS market is, with some 400 billion IDR (40 million USD) plus/ minus 20%, still relatively small. Under the assumption that 200 million IDR turnover is required for cost-recovery of a small-scale BDS provider with more than one professional staff, only some 2,000 professional small-scale BDS providers are supported.

Micro-enterprises with less than 38 million IDR annual turnover may account for around half of the market. However, low individual BDS payment makes such en-terprises commercially difficult to serve.

Aside from micro- and large enterprises, the most attractive client group is not me-dium-scale enterprises, but small enterprises with 75-750 million IDR annual turn-over. These enterprises account for almost two-thirds of BDS purchase from SMEs (excluding micro). Although medium scale enterprises above 750 million IDR an-nual turnover pay in average more for BDS, their absolute number is relatively small. Moreover, some medium-scale enterprises have built up in-house capacities in areas where smaller enterprises seek external assistance, such as tax and ac-counting services (see also section 3.2.1 above).

Commercially interesting are in particular those clients that pay more than 1 million IDR for BDS. According to the TA survey, such clients account for some 25% of BDS users, but more than three quarters of total BDS payment (Figure 53). While proportionally more


71

medium-sized enterprises have used high-priced BDS, in absolute terms it is SME with 75,000 – 750,000 IDR annual turnover that account for 73% of survey respondents that paid 1-3 million IDR for BDS and 56% of all respondents paying more than 3 million IDR. Only one SME with less than 75 m IDR annual turnover (0.6% of all respondents in that turnover class), however, stated in the TA survey to have paid more than 1 million IDR for BDS.

Figure 53: BDS payment according to the TA survey in Medan and Semarang, by pay-ment classes

Share of total BDS payment if average payment in >3 m IDR class is ..

BDS Payment (in million IDR,

over last three years) Share of all SME

Share of users of paid

BDS 4 m IDR 5 m IDR 7 m IDR < 0.1 4.8% 19% 1% 1% 1%

0.1-0.2 4.2% 17% 2% 2% 2%0.2-0.5 5.2% 21% 7% 6% 5%0.5-1 4.4% 18% 13% 11% 9%1-3 3.1% 13% 24% 22% 18%>3 3.4% 13% 52% 57% 65%

Feasible business models The total BDS payment as recorded in the TA survey and presented in Figure 25 above does not necessarily relate to a single BDS purchase. In many cases, high BDS expendi-ture has been brought forward by repeat purchase over the past three years (e.g. ac-counting services, tax advice) or sequential purchase of several services. Experience from SC's BDC program suggests that the feasibility of commercial BDS provision is to a good part depending on the extent to which a provider can exploit possibilities for repeat service sales and cross-selling of several services to one client.

More than 80% of all BDS payment reported by respondents to the TA survey in Medan and Semarang relates to only five services, namely advertisement / promotion, account-ing, tax, legal and IT services. Marketing services and management training account for another eleven percent, while the remaining seven service areas, which in particular in-clude productivity and performance-enhancing services, together only make up for some 9% of all BDS payment (Figure 54 on next page). Even though BDS pricing and payment is partly distorted by subsidized or free service provision, these findings suggest that cur-rent demand hardly allows to provide certain services stand-alone to SME in a commer-cially feasible manner. Instead, commercial providers are well advised to offer a range of related services, thereby exploiting cross-selling potentials among individual services offered.

The following business models appear to be particularly interesting in this respect (see also Figure 37 on p. 51 for more detailed information on cross-selling potentials):

Accounting and tax services combined with complementary BDS (legal / management / finance): Accounting and tax services make up for 31% of all BDS payment recorded by the TA survey. With 25% of potential users of accounting services willing to pay for tax advice, and 30% of potential tax advice users willing to pay for accounting services, cross-selling potentials between the two service segments are high. Additional strong cross-selling potentials exist with legal ser-vices (28% of potential tax advice users are willing to pay for legal services) and with management advice (25% of potential users of accounting services are willing to pay for management advice). However, it depends on the educational back-ground of a provider's senior staff, whether these complementary services can also be offered. In any case, providers of accounting and tax services are well po-


72

sitioned to also offer financing advice – 20% of potential accounting service users and 16% of potential tax advice users are willing for financing advice / assistance.

Combined provision of sales-related services: Advertisement, promotion and marketing services account for almost 30% of all BDS payment recorded by the TA survey. With 40% of potential users of advertisement services willing to pay for marketing advice / assistance, and 33% of potential users of marketing services willing to pay for advertisement & promotion services, cross-selling potentials be-tween the two services are very high. Good cross-selling potentials exist with in-formation services, for which 18% of potential users of advertisement or marketing services are willing to pay. Communication and correspondence services may be offered complementary. Since 16% of potential users of advertisement and promo-tion services are willing to pay for management advice and 13% for management training, there may be as well be some scope for adding sales training as well as advice on sales management & controlling to the service portfolio.

Figure 54: Average service prices and market volumes by service segment – Calculations based on the TA survey in Medan and Semarang

Service segment Sectors that used the service

Avg. service price paid (m

IDR)*)

Share of SME that

used service within last 3 years

Avg. Exp. per SME

('000 IDR, over 3 years)

Estimat. Market volume

(bill. IDR, excl.

micro)

Supportedproviders@ 0.2 bn

IDR turnover/provider

Accounting all except transport 1.40 3,9% 55.2 19.1% 37.6 188Tax advice all 0.34 10,4% 34.9 12.1% 23.7 119Legal advice all 1.04 4,1% 43.3 15.0% 29.5 147Financing advice*) Service, trade, accomm. 0.14 1,2% 1.8 0.6% 1.2 6Subtotal Tax / Legal / Accounting 135.2 46,8% 91.9 460Advertisement / promotion all 0.63 10,4% 65.5 22.7% 44.5 223Marketing*) all 0.53 3,3% 17.6 6.1% 12.0 60Information*) all 0.21 1,9% 3.8 1.3% 2.6 13Comm. & correspondence Service, trade 0.21 1,2% 2.6 0.9% 1.8 9Subtotal Sales-related services 89.5 31,0% 60.9 305IT services *) all but manufacturing 0.56 5,8% 32.4 11.2% 22.0 110Management training*) all 0.34 4,4% 15.0 5.2% 10.2 51Management advice Service, accommodation 1.33 0,6% 8.3 2.9% 5.6 28Transport-related BDS all 0.25 1,5% 3.6 1.2% 2.4 12Technical training*) mainly service, transport 0.10 2,7% 2.8 1.0% 1.9 10Production & operation*) Transport only 0.35 0,6% 2.1 0.8% 1.5 7Subtotal productivity & performance - enhancing services 31.8 11,0% 21.7 108Total 288.9 100% 196.5 982*) Service pricing / payment partially distorted by subsidized or free service provision

Enhanced IT-services: IT services account for 11% of all BDS payment recorded by the TA survey. However, the figure is likely to be distorted by TATP matching grants. Without the TATP, expenditure on IT services as recorded by the survey might have been some 10-25% higher25. Cross-selling potentials exist with (IT-

25 The 75% grant portion of the TATP reduces actual service payment of beneficiary SMEs strongly. When assuming that all IT services for which less than 0.5 million IDR was paid were TATP-subsidized, the average service price including TATP grant would range around IDR 0.9 million, which is some 50% higher than indicated in Figure 53. However, the TATP is likely to have (i) partly activated latent demand that otherwise would have been satisfied at a later point in time, and (ii) in-duced some upward pressure on service prices. If assuming such effects for half of all TATP-supported IT services, IT ser-vice expenditure without the TATP would only have been 15% higher than reported in the survey. Since it is neither possible to determine exactly from survey data (i) to which extent IT service purchase has really been TATP subsidized, i.e. if all service purchases for les than 0.5m IDR include TATP grants and (ii) which of these service purchases would have been


73

related) technical and management training, for which 20% and 16% of potential IT service users are willing to pay. 28% willingness to pay for accounting services and 12% willingness to pay for management advice among potential IT service us-ers suggest some scope to integrate IT services with advice on accounting and controlling issues. Similarly, 28% willingness to pay for advertisement services and 10% willingness to pay for communication & correspondence services suggest cer-tain market potentials for homepage design, e-business solutions as well as for in-tegrating IT services with advice on sales management procedures and systems.

Sector-specific 'full service packages' with focus on improving productivity & performance: Management and technical training together account for some 6% of all BDS payment recorded by the TA survey. Free or subsidized provision is very common for training. If provided at full cost, payment for management training might be some 30% higher and for technical training even double as high as re-corded. Both types of training offer considerable cross-selling potentials, with some 20% of potential users of one service also willing to pay for the other. However, even integrated provision of technical and management training can only support some 60-80 commercial providers in all Indonesia at the current level of SME ex-penditure for such services. Since technical training has to be sector-specific, such a small number of providers would be insufficient to ensure country-wide service access. Including (sector-specific) advice on management and production & operation issues into the ser-vice portfolio is possible, but in view of low expenditure on these services not help-ing much to overcome market limitations. Moreover, only 15% of potential man-agement training users are willing to pay for management advice, compared to 25% of potential accounting service users – an indication that training services are mainly used by small enterprises, while management advice is primarily sought from larger SME. However, some 25% of potential users of management or tech-nical training are willing to pay for marketing services, and some 20% for financing advice and assistance. This creates some scope for commercially viable operation of sector-specific providers of 'full service packages' that include training and as-sistance on managerial and technical / operational issues as well as marketing and financing assistance.

The overall small market size implies that even providers that apply one of the business models described above may have to exploit additional sales opportunities in order to achieve full cost recovery. Such additional sales opportunities could include

Capitalizing on existing equipment and staff by providing office services (photo-copying, fax, typing, internet access etc.) and/or temporary leasing rooms or vehi-cles;

Selling services not only to SME but also to private persons interested in up-grading their professional skills – this concerns in particular technical / skills-enhancing training including IT training;

Selling services to large enterprises wherever possible. In fact, many commercial providers of accounting / tax, advertisement, IT and performance-enhancing ser-vices are likely to have started with service provision to large enterprises and gradually 'downsized' their service offer to larger SMEs. This would also explain why commercial BDS providers are strongly concentrated in major agglomerations – smaller cities and peripheral regions provide few sales opportunities to large en-terprises and foreign investors.

postponed or have been less costly without TATP grants, the estimated 10-25% TATP impact on expenditure for IT ser-vices is a best guess.


74

Selling services to the government or donors, either in the form of (sub-) con-tracts for SME surveys, constraints analyses, strategy development etc., or by ob-taining funding for free or subsidized service provision to SMEs.

3.3.3 Supply-side constraints

Strategic and management skills "Donors tend to have a too idealistic picture of a BDS provider: A BDS provider is ex-pected to be a professional organization with clearly defined products and customers, sharp cost calculation and competitive pricing. Reality is different: A closer look at the participating 219 institutions shows that many of them are not even able to define their products, are not aware of the actual costs (most of them provide services for free), do not have a clear organization and BDS provision often constitutes only a small part among their activities. … Among the 200 service providers interviewed, only about 40 have a clear focus on SMEs, all others have a broad target range."26

The above statement, derived from SC's experience in screening providers for participa-tion in the East Java Voucher Program, draws a rather depressing picture of the average BDS provider's strategic and management skills. To a certain extent, the findings relate to the high number of NGOs and educational institutions that provide BDS in East Java – many providers screened for participation in SC's voucher program in Jabotabek left a more professional impression. Nevertheless, it is worthwhile to have a closer look at the specific deficits listed in the above statement:

Lack of clear focus (on BDS provision / on SMEs): As analyzed in the previous section, the market for provision of BDS to SME is in many segments too small too allow for full cost recovery from sales to SME alone. The fact that many BDS pro-viders sell services to SME alongside other client groups or have other business activities besides BDS provision may be unfortunate from a donor or policy per-spective, but reflects in many cases market realities.

Unable to define products: In order to obtain cost recovery, cross-selling poten-tials to existing clients must be exploited to the extent possible. This implies open-ness to a client's specific service needs, and constant adaptation of the service range. Most providers supported under SC's BDC Program obtained full cost re-covery only through custom-tailored provision of specific services to existing cli-ents. Against this background, a certain degree of opportunism and some vague-ness in defining products is legitimate and required, in particular during a pro-vider's start-up phase.

No clear organization: Constant adaptation of the product range to market and cross-selling opportunities and custom-tailoring of services to clients' specific needs requires a flexible organizational set-up. Since most BDS providers are rather small, work peaks are in many cases only manageable if available staff is al-located flexibly to tasks. Moreover, BDS providers are in general well advised to leave sufficient room to their professional staff, so each staff member can exploit his specific skills, experiences and contacts in the best possible manner. Clear di-vision of responsibilities between individual staff members could, at least for small providers, be counter productive.

No awareness of actual costs: Lack of accounting and controlling skills and mechanisms is quite typical for Indonesian SMEs, and small BDS providers are no exception in this respect. One of the main effects of SC's BDS program was im-proved commercial management capabilities of the supported providers, brought forward by intensive financial monitoring based on a standardized financial control-

26 Bissegger: "The BDS Market in East Java, Indonesia ..", section 3.3.1 / 4.2.3.


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ling system. The effect was most pronounced for providers of productivity and per-formance-enhancing (training) services, but even extended to some (although not all) providers that were themselves offering accounting and financial planning ser-vices to SME.

In summary, except for the prevailing lack of cost awareness, perceived strategic and managerial deficits of (small) BDS providers are to a good extent related to the small mar-ket size, which calls for a high degree of flexibility with respect to strategy, product & client focus as well as organization in order to achieve cost recovery.

However, external sponsorship is likely to have contributed to a lack of focus. Such spon-sorship may have allowed providers to stay in the market that otherwise would not have survived, while at the same time promoting a management attitude that is more oriented towards acquiring government or donor funding than developing and maintaining a distinct service profile.

Service quality and service-related skills What concerns service quality, there is obviously strong variation among different provid-ers and services:

On legal services, an external observer has noted: "The legal profession in Indo-nesia is remarkable for its lack of definition. In theory, any individual can practice law and set up as a legal advisor. There is no single bar association to which all lawyers belong, and no formal bar examination - although there is a separate qualification to become an advocate able to litigate in the courts, and lawyers wish-ing to practice in certain fields (notably securities law) may be required to pass examination by the relevant regulatory authority. (..) In practice, the implications of this free-for-all are less frightening than they sound. 'The market will judge you' is a common comment. (..) One result of the lack of formal qualification is that the lines between legal advice and business consulting can be blurred. In practice, business consulting firms established with consents from the Ministry of Trade may operate as de facto law firms, outside the purview of the Ministry of Justice. One lawyer commented that the role of the Notary, required to draw up a contract between two parties in on the basis of fairness as well as the written law, is rooted more deeply in Indonesian tradition than the concept of a lawyer advising one party to a transaction, which only has a 30-year history in the country."27

Providers of tax and accounting services can draw back on IAI as a professional body that is relatively strong compared to other Indonesian business membership organizations, and is actively setting and disseminating professional standards. However, anecdotic evidence suggests that only a fraction of accounting service providers has been rated sufficiently qualified by Bank Indonesia to carry out au-dits of banks. IAI representatives have noted in this respect: "There are indications that (..) members of the profession (..) have not fulfilled their professional respon-sibility to study and master new pronouncements in a timely manner. (..) It is also considered a challenge to promote the standards within the academic community. It is not unusual to find colleges and universities not updating their curriculum with the development in Indonesian professional standards"28 One provider that has been interviewed for this study complained heavily about the low level of accoun-tancy training in Indonesian universities. He would have to invest two years train-

27 Robin Weir: "AsiaLaw Profiles 2002 – Indonesia", Euromoney Publications (Jersey) Ltd. (cited from http://www.asialaw.com/directories/asialaw2002/indonesia/default.htm)

28 Dudi M. Kurniawan /Nur Indriantoro (IAI): "The Role of Disclosure in Strengthening Corporate Governance and Ac-countability", Presentation for The Second Asian Roundtable on Corporate Governance (organized by ADB, OECD and the World Bank), Hong Kong, China, 31May –2 June 2000, p.21


76

ing until he could entrust a university graduate to take over assignments without in-tensive supervision.

With respect to IT services, programming skills appear to be reasonably well developed. Interviewed service providers reported no staff qualification problem. To the opposite, fresh university graduates were rated as surprisingly well skilled and technically qualified. However, according to the TATP secretariat with MoIT, many IT providers are primarily technology-oriented, but have difficulties in communicating with SMEs and addressing their needs adequately. The TATP management contractor reported a well-developed IT service supply on Java, but problems in identifying providers with system development skills outside Java. On outer islands, service supply appears to be primarily focused on IT training. IT and network maintenance services were described to be generally underdeveloped, as well as vocational and professional training in this area.

What concerns production & operation-related services, the DAPATI program management reported strong quality variation. At program start, there had been hardly any domestic providers working up to internationally acceptable standards. As a result of intensive provider capacity building during sub-project execution, DAPATI program management estimates that now some 35 providers can deliver services at reasonable standards. With more than 200 providers of production & operation-related services for the manufacturing sector on Java identified by DA-PATI, service supply seems to be strongly overcrowded in relation to actual and potential demand. To which extent demand from other sectors for operation-related services is adequately covered by supply is unknown.

With respect to technical, management and start-up training, the SC Voucher Programs in East Java and Jabotabek yielded in general reasonably high satisfac-tion rates. However, in Phase II of SC's voucher program in East Java, only 52% of users were satisfied with the instructor, and only 42% with the training facilities. Complaints centered around instructors lacking field experience and only working along textbooks, and the training being too theoretical and not complemented with hands-on experience. Moreover, from 58 technical training and business-start-up training services offered in East Java, only 21 found the interest of voucher users. In Jabotabek, it was 4 out of 54 offered services29. In terms of approach and con-tent, most service supply appears to not meet SMEs' demand for practical, hands-on training that is delivered by experienced instructors and directly implement able in the trainee's business. The level of fees currently charged for technical and management training offers few incentives for product development and employing highly qualified trainers.

According to SwissContact's assessment, only two of the ten BDCs supported are able to provide qualified assistance on marketing and business strategy includ-ing assistance in obtaining credit. Respective deficits are multifold. They include lacking understanding of basic concepts such as market segmentation and target groups, insufficient knowledge of domestic and foreign markets, skills deficits in data analysis and financial planning, as well as missing practical experience and a tendency to underestimate the difficulties of turning a strategy into effective sales. However, since many respective services are provided commission-based (finan-cial and sales brokerage), such deficits primarily fall back on the providers and not on their clients.

A common deficit across all segments appears to be lack of practical business experience among providers. Being academically trained, and often having an NGO background, many providers seem to have problems in finding common grounds with a more hands-on

29 Swisscontact "Draft Report on the Progress Implementation of the Voucher Program, Period April 2001 - March 2002", p. 15 / p.7.


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oriented SME clientele. This cultural gap may partly explain why it is mainly university-educated managers that use BDS.

Financing In most service areas, the initial investment required to start-up BDS provision is relatively low. Experience from SC's BDC project demonstrates that some 40 million IDR (USD 4,000) are sufficient to finance initial purchase of office furniture and equipment as well as advance payment on office rent. More costly is investment in company vehicles. However, during the start-up phase of a BDS provider, occasional vehicle rent and / or using taxis is fairly acceptable. An exception, however, is provision of technical training for manufactur-ing enterprises, which may require considerable start-up investment in equipment.

The main financial challenges for BDS providers lie with covering operational costs dur-ing the start-up phase and financing business growth. Operational post start-up ex-penditure includes staff, office operation, communication, advertisement and product de-velopment costs. Until the point is reached where sales cover these operational costs, start-up losses can easily sum up to another 30-50 million IDR. Afterwards, maintaining business growth requires additional investment in staff resources as well as product de-velopment and marketing, which impacts in particular on office operation, communication and travel costs.

Several interviewed BDS providers complained about the lack of affordable working capital and growth finance. Being typically usually unable to provide bankable collateral, most providers have to obtain short-term credit from informal sources such as money lenders at monthly interest rates around 10%, if they cannot draw on funding from their extended family. Alternative finance such as factoring appears to be widely unknown among and/ or unavailable for BDS providers.

The problem is exaggerated by tax withholding: Any incorporated user of BDS has to withhold 9% of the fee as income tax prepayment on behalf of the BDS provider. Due to losses incurred during the start-up phase, which according to Indonesian income tax legis-lation can be carried forward for up to five years, a BDS provider is unlikely to be liable for any income tax payment during the first four to five years after start-up. Even though with-held income tax can after the 2000 tax reform now be reclaimed by providers in their an-nual income tax statement, tax withholding still reduces liquidity of BDS providers and is effectively constituting a forced short-term credit at 0% interest of (younger) BDS provid-ers towards the government.

Barriers to foreign investment In spite of a number of recent liberalizations, the (business) service sector is still among the most protected sectors in Indonesia:

In order to practice as public notary or court lawyer, or be licensed as account-ant, in addition to graduation from an officially recognized institution, Indonesian citizenship is required. Foreigners may operate as legal or accountancy consult-ants, but are, however, not entitled for legal representation, endorsing contracts and signing audits, respectively. Foreign law or accounting firms can only operate in Indonesia by means of association, licensing or technical assistance agree-ments with licensed local firms30.

Trading and trade-supporting sectors remain in general closed to foreign invest-ment and shareholding. Presidential Decree 96/2000 jo.118/2000 has introduced a number of respective exceptions, namely for "wholesale trading (distributors / wholesalers, exporters and importers), exhibition / convention service providers,

30 Office of the US Trade Representative: "2002 National Trade Estimate Report on Foreign Trade Barriers", p. 193f


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quality certification service providers, market research service providers, ware-housing services outside seaports, and after-sale services". However, according to this decree, trade and freight brokerage as well as translation and correspon-dence services are still closed to foreign investment. Moreover, in literal interpre-tation of the text of the Presidential Decree, any BDS provision to Indonesian trad-ing enterprises (including respective IT services) appears to require full domestic ownership.

To which extent promotion and advertisement services (except for provision of exhibition/ convention services) in general qualify as 'trading and trade-supporting sectors' that are closed to foreign investment has remained unclear. In any case, with radio broadcasting services, multimedia and printed media, film production, and film technical services, most advertisement instruments except for billboard painting and direct marketing are closed to foreign investment according to Presi-dential Decree 96/2000.

Since 1998, foreign educational institutions are allowed to operate in Indonesia in partnership with local universities. MONE Regulation 216/1999 has allowed foreign institutions and companies to establish training centers in Indonesia, which may among others conduct courses in information technology, industrial/ technical train-ing, management / business training, transportation, hospitality and health. How-ever, it appears that domestic co-ownership is still required for investment in such training centers.

A stronger involvement of foreign investors in BDS provision to SME could not only help overcoming the current lack of investment and working capital finance in the sector, but would also improve access to international know how considerably. In the context of over-hauling Indonesia's investment law, abolishment of most of the a/m investment barriers is currently under discussion.

3.3.4 Does Supply Match Demand – Summary and Conclusions In quantitative terms, BDS supply is relatively well developed, at least what concerns large urban agglomerations on Java. Aside from private, commercial BDS providers, educa-tional institutions, government agencies and NGOs play important roles, in particular for provision of training and technology-related advice and BDS provision outside major ur-ban centers. Many of the aforementioned providers use external sponsorships to subsi-dize their service fees.

Service quality varies strongly among service areas and providers. A common deficit across most segments appears to be lack of practical business experience among pro-viders. Being academically trained, technology oriented, and often having an NGO back-ground, many providers seem to have problems in finding common grounds with a more hands-on and business oriented SME clientele. In terms of approach and content, most technical, management and start-up training offered appears to not meet SMEs' de-mand for practical, hands-on training that is delivered by experienced instructors and di-rectly implement able in the trainee's business. Few providers are able to give qualified assistance on marketing and business strategy including assistance in obtaining credit. Deficits in academic training in some BDS-relevant areas contributes to service quality problems.

A key constraint is the small size of the market for BDS provision for SME, which only al-lows for existence of some 2,000 commercially viable small BDS providers all over Indo-nesia in all service sectors. Due to the small market size, many providers have to search for clients outside the SME segment and for cross-selling potentials. This leads to unclear service and product foci. On the provider side, widespread unawareness of actual costs of service provision contributes to strategic management problems. Provider development and product innovation is hampered by insufficient access to working capital and


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growth finance, as well as income tax withholding, which de facto constitutes a forced short-term credit at 0% interest rate of (younger) BDS providers towards the government. Foreign investment in the BDS sector is constraint by a number of regulative barriers.

In spite of the small market size, there exist some business models for BDS provision that may be commercially viable. Such models are in particular:

Accounting and tax services combined with complementary BDS (legal / management / finance). These services in combination account for some 47% of SME's current BDS expenditure, and would allow for existence of some 500 com-mercially viable providers with SME focus in Indonesia.

Combined provision of sales-related services (Advertisement & promotion, marketing, information, correspondence): These services in combination account for some 30% of SME's current BDS expenditure and would allow for existence of some 300 commercially viable providers with SME focus in Indonesia.

Enhanced IT-services (training, system and software development, IT-related management advice) can be delivered commercially viable in most larger Indone-sian cities, in particular if delivery to SME is combined with services to larger en-terprises and professional training of individuals.

Sector-specific 'full service packages' with focus on improving productivity & performance as well as marketing and financing assistance: The market for techni-cal and training services is, among others due to wrong price signals sent by ex-ternal sponsorships, in most cases too small to allow for commercially viable op-eration of sector-specific providers. However, if the service range is enlarged by sector-specific marketing, information and financing services, there is scope for commercially viable operation, in particular in clustered sectors / regions.

Moreover, the various managerial and technical deficits of BDS providers are likely to have significantly contributed to the current small market size. This concerns in particular productivity & performance enhancing services such as training and technology-related assistance, where supply is often not meeting SMEs' demand. Varying and not transpar-ent service quality enhances risks for potential BDS users across most service sectors and is likely to have contributed to low usage rates. Widespread donor and government sponsorship for BDS providers and BDS provision has enhanced rather than overcome deficits. Subsidized provision of technical and man-agement training has sent wrong price signals to SMEs and resulted in service fees that hardly provide incentives for product development and employing adequately qualified trainers. Sponsorship may have allowed providers to stay in the market that commercially would not have survived. This concerns in particular training and technology-oriented ser-vices, where (at least on Java) supply appears to be overcrowded in relation to demand. Moreover, external sponsorships promote a management attitude that is more oriented towards acquiring government or donor funding than developing and maintaining a distinct service profile, thereby contributing to strategic and managerial deficits of BDS providers, and a supply structure that is not transparent for potential service users. Finally, there is indication that sponsorships have reduced incentives for product development, primarily in productivity & performance enhancing services. SC reports several cases of providers in-volved in the Voucher Programs that postponed or cancelled introduction of new services, as work on new donor or government contracts was absorbing available management and implementation capacity.


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4 PROPOSED STRATEGY FOR BDS MARKET DEVEL-OPMENT

4.1 Combining Demand and Supply Development – The Overall Approach

General principles The demand analysis carried out indicates the need for a new paradigm: BDS are not driving development and modernization of SMEs, and can in isolation improve SMEs competitiveness. Rather, the role of BDS is to support modernization processes that have been triggered off by changes in SMEs' business environment. This does not make BDS irrelevant. However, priority has to be given to creating a business environ-ment that provides incentives for innovation and quality improvement, promotes competi-tion, and enables SMEs to grasp new opportunities. Only in such a business environment, SME will use and benefit from BDS.

Free or subsidized BDS provision by government and donors has in most cases nega-tively affected BDS supply, while hardly influencing BDS demand. Availability of BDS to SME can only be improved sustain ably, if providers work commercially and financially self-sustainable. Otherwise demand-orientation and efficient service provision cannot be ensured. Government and donors should accept that BDS provision is essentially a pri-vate sector task and activity. External interventions should aim at promoting efficient BDS markets. This may include activities geared at preventing or reducing market distor-tions, enhancing market transparency and transaction security, and improving the quality and regional coverage of commercial BDS supply. Primarily, regulative instruments should be used for these purposes. Direct interventions should be non-discriminatory in charac-ter, have to be legitimized by significant market and institutional failures, and must be tar-geted towards overcoming such failures.

Successful development of the BDS market has to address BDS demand as well as supply. A focus on BDS supply only will hardly be effective, since many supply-side con-straints originate from SMEs' current low usage of paid BDS. Demand-oriented strategies are in general more promising. However, they risk that activated demand cannot be satis-fied due to qualitatively or regionally insufficient service supply. A point in case is SMEs' current low usage of productivity & performance enhancing services in relation to latent demand.

Strengthening BDS demand In general, any policy action geared at removing market barriers and enhancing competi-tion strengthens the demand for BDS. In line with the findings described above in Chapter 3.2., specific attention should be given to the following areas:

Improving SMEs' access to (investment) finance. Respective recommendations are included in the TA's final report and its Policy Paper No. 10 "Action Plan for SME Development: Strategy and Recommendations".

Removing barriers to international trade including imports: Aside from con-tinuing with general trade liberalization in line with ASEAN and WTO agreements, attention should also be given to simplifying or abolishing import licenses and tax withholding on imports, as well as reviewing the various export taxes and Sales Tax on Luxury Goods due on various imports.

Promoting business registration and formalization, among others by streamlin-ing business licenses, introducing one-stop services, and improving information on registration requirements and procedures.


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Improving tax coverage and compliance by reviewing and simplifying tax laws, improving access to tax-related information, and containing corrupt taxation prac-tice. Particular attention should be given to the possibility of extending partial non-collection of VAT according to Article 16B of the VAT law to SME that are currently VAT-exempt according to Article 1 of the VAT law. Such partial non-collection of VAT could be a powerful incentive for small enterprises to improve their tax com-pliance, while at the same time delivering cross-checking possibilities for the tax administration with respect to the tax compliance of suppliers and clients of these small enterprises.

The aforementioned actions should significantly increase BDS demand. However, they will primarily work on SMEs that are in general aware of the usefulness of BDS and willing to pay for services. In order to reach out to SMEs that are unwilling to pay for BDS or have difficulties in finding adequate providers, they should be complemented by Voucher Schemes, wherever local service supply makes this feasible.

In order to reach also those SME that are unaware of the need for and usefulness of BDS, a new approach towards enforcement of public standards is required. Currently, many regulations are hardly supervised by the government, or sometimes used by offi-cials as opportunity to levy illegal charges. Instead, government should in areas of prime public concern such as fire security introduce mandatory regular certification by inde-pendent experts. This would create new markets for BDS providers, while at the same time relieving public officials from detailed examinations, which would enable them to in-crease enterprise coverage. The approach is exemplified by audit requirements for com-panies listed on the stock exchange, or ISO 9xxx certification procedures. In this context, attention should also be given to whether rights of tax advisors vis-a-vis tax authorities (e.g. simplified verification of tax returns prepared by tax advisors) may be strengthened.

Voluntary standards and certification that allows for the use of specific quality labels deserve attention as well. While Indonesia is relatively advanced in the use of such certifi-cates, certification is in many cases still done by the regulatory authority instead of being entrusted to qualified accredited providers. A point in case are 'halal' certificates issued by the Council of Indonesian Ulemas. Opening up 'halal' certification to commercial BDS pro-viders that undergo accreditation with and are supervised by the Council of Ulemas could greatly enhance service demand and reduce certification cost for companies outside Ja-karta.

Strengthening BDS supply To improve BDS supply outside major urban centers on Java, supply-oriented actions should focus on such service combinations / business models which can support relevant provider numbers:

In line with the analysis carried out in Chapter 3.3 above, tax advisors & ac-countants will have to be the prime field structure that provides BDS outside large urban centers. No other BDS segment can support similar provider numbers in In-donesia.

As secondary, albeit less dense field structure, providers of sales-related ser-vices including advertisement, information services and marketing assistance should be promoted.

In clustered regions, there is potential for providers offering a full service range for a specific sector that includes combined technical/ management training, management, production and operation assistance, and sector-specific marketing & investment consultancy. Such sector/cluster-specific providers will in rural re-gions often be agro-focused. While respective privately-owned providers should in no way be discriminated, it appears to be particularly promising to promote devel-opment of respective commercial services by local business associations. Such


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business associations could integrate service provision to SMEs with other activi-ties such as vocational training.

Large urban agglomerations may provide opportunities for more sophisticated and more specialized service providers, including providers of IT services. However, respective pro-vider numbers will in most cases be too small to justify specific activities.

BDS supply should primarily be strengthened by:

Improving academic education in BDS-relevant areas such as taxation, account-ing and controlling, business diagnostics, market analysis, business strategy and planning, as well as supply-chain and quality management. Particular attention in this respect should be given to promoting case-study based training instead of theoretical education based on text books. Academic institutions should also be encouraged to develop and offer short skills upgrading offers geared at BDS prac-tioners.

Promoting provider networks by strengthening professional organizations, orga-nizing provider forums and promoting the use of electronic media in information exchange. Issues to be discussed in provider forums may include exchange on feasible business models and specific service ideas, as well as management and controlling issues. What concerns the use of electronic media in provider network-ing, IAI's experience with thematic member forums on their homepage deserves particular attention. As the forums are closed to non IAI members, an assessment was unfortunately not possible in this study.

Removing entry and transaction barriers and regulative constraints - this concerns in particular restrictions for foreign investors, as well as tax withholding on BDS provision to incorporated clients.

Enhancing market transparency and creating quality incentives for BDS pro-viders by means of provider accreditation and certification. In addition, the need for a law on provider liability should be assessed.

For the time being, provision of investment and working capital finance for BDS pro-viders should not be a specific policy focus. Attention should rather be given to im-proving SMEs' access to finance in general in line with the strategy proposed by the TA. Such improved access to finance, in particular what concerns factoring, would also benefit BDS providers. On Java, provider density is already relatively high, which restricts the need for additional start-up finance. What concerns outer islands, it is recommended to observe SC's respective experience with their BDC program before deciding on the even-tual need for specific financial support to provider start-up. An exception, however, is pro-vision of technical training in manufacturing. The high investment required to establish such training centers justifies financial involvement of international donors.

Stand-alone technical assistance and provider training is not recommended. Out-reach, efficiency and chances for sustainabiIity are higher if such activities are connected to promoting provider networking and improving academic education, respectively. How-ever, specific skills deficits may be addressed through matching grants with an inte-grated strong provider capacity building component. The following matching grant schemes are specifically recommended:

Matching grant scheme for product and process improvement and co-operative research (oriented on DAPATI, but with enlarged focus);

Matching grant scheme for assistance in business diagnostics and business strategy development;

Matching grant scheme for first-time input and output market research of business associations.

These schemes, as well as a number of other recommendations, will be described in more detail in Section 4.3 below.


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4.2 Minimizing Intervention And Market Distortion By Govern-ment And Donors

In order to promote effective BDS markets, provision of BDS by the government and do-nors should be minimized and restricted to

Services related to public functions, e.g. protection of intellectual property rights (IPR);

Services/programs explicitly running under wider objectives such as poverty al-leviation, consumer or environmental protection. Poverty alleviation may also in-clude programs for peripheral and strongly underdeveloped areas such as hinter-lands of Papua province, Sulawesi, Kalimantan, and outlying islands in eastern part of Indonesia; and

Services geared at fostering public-private partnership and/or supporting re-spective reorientation of public institutions.

Even in the aforementioned cases, serious consideration must be given to possibilities for commercial service provision before embarking on direct service provision by the govern-ment.

Reviewing and streamlining BDS programs FY-2001/2002 budgets, as well as the Task Force's MTAP 2000 - 2004 comprise numer-ous BDS programs, which are to a considerable extent overlapping, can be replaced by the streamlined programs proposed above, or constitute direct government provision of BDS in competition with the private sector. Other programs may be in principle justified, but require review with respect to their targeting, or appear to interfere in provincial and district affairs. A list of central government programs that should be divested, consoli-dated, and/or reviewed, respectively has been presented to the Task Force in May 2002 and is enclosed in Annex 2. What concerns the BDS market development programs as-sessed in this report, it is in particular recommended to

Divest / phase-out the TATP, and Review MONE's 'vucer' Program, thereby according priority to sub-projects that

assist SMEs in (i) defining their medium-term technological strategy and (ii) select-ing adequate equipment suppliers and/or commercial technological consultants for implementing this strategy, and stopping support to IT-related subprojects.

Taking account of the multiplicity of government programs, it is not possible to give a complete list of programs to be streamlined and divested, respectively. Further review will be required. For this purpose, an inter-ministerial working group under the proposed Small Business Council (SBC) should be established to:

Establish a full inventory of all government programs targeted at SME.

Assess each program for consistence with the guidelines set above, and, in case of the program being in principle justified, review it for possibilities to enhance decentrali-zation, cluster development and BDS market development.

Develop, based on the above guidelines, detailed standards for future programs targeting at SME, including conformance to the mandatory log-frame design (Bap-penas).

Develop regular mandatory pre-screening mechanism for compliance of pro-gram/project proposals with the established standards and priorities, and for avoiding overlaps and duplications by several line ministries.

Develop a monitoring and evaluation plan, derived from the respective log-frame models used to assess progress and eventually, impacts on social-economy develop-ment in the regions.


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Based on evaluation of impacts, develop new concepts/guidelines.

The review should also include programs of state-owned enterprises that have no direct relation to their business activity, i.e. are not geared towards developing suppliers or dis-tributors.

Reorienting public institutions A similar review is required for public institutions involved in BDS provision such as the various research and training centers of line ministries. Major options include

Commercialization and/or privatization in order to strengthen the commercial provider base;

Reorientation, eventually in public-private partnership, towards a resource base to support national and local cluster development strategies and/or act as a BDS facilitator;

a mix of both, effected through spin-off of commercial BDS provision; and/or if none of the above is feasible and justified, respectively, divestment in order to

reduce market interference and distortion. For some institutions, the ADB TA has already outlined their new role. For the National Agency for Export Development (NAFED) under MOIT, e.g., it is recommended to reorient towards a facilitating role, while leaving dissemination of export market information and provision of export training to the private sector and business associations, respectively31. A similar role may be envisaged for the Agency for Assessment and Application of Tech-nology (BBPT).

However, there are many more public institutions that have to be reviewed. For this pur-pose, national line ministries should in co-ordination with each other

Elaborate a detailed agenda for restructuring service providers under the na-tional government, including selection of core institutions for inclusion in the re-structuring plan, development of institution-specific restructuring concepts and, where appropriate, encouragement of private sector institutions to engage in the management and eventually co-financing of selected public service providers, and;

Develop and coordinate implementation of a strategy for communicating restruc-turing concepts developed and experiences gained on national level to the dis-tricts and provinces in order to support elaboration of similar though locally ad-justed concepts for reorienting and restructuring public support structures under local authority.

Role of the donor community Minimizing market distortions requires active participation of the donor community:

Donors should resist the temptation to sponsor BDS provision or establish / main-tain BDS providers, whether in co-operation with the government or independently, outside the specific cases listed in the first paragraph of this section. There are a number of donor programs for 'establishing regional offices of national agency xyz', 'creating a network of Business Centers' or 'strengthening manufacturing industries in co-operation with local NGOs' under implementation or preparation that may re-quire review for their impact on the BDS market.

Review of government programs and restructuring of public service providers is likely to require assistance from the donor community.

31 See the TA's ‘Evaluation Of SME Trade And Export Promotion In Indonesia’ (Background Report 24, May 2002) for further details


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4.3 Specific Interventions

Voucher Programs Voucher Programs have proved to be worthwhile instruments for activating BDS demand of those SME that either find BDS too expensive or have problems in identifying suitable services and providers. Against this background, introduction of further regional Voucher Programs in addition to the ones already established by SwissContact is recommended.

In defining the adequate regional coverage of a Voucher Program, consideration should be given to the following:

The region should cover a sufficient number of BDS providers in order to enable SMEs to choose among services and providers. For each of the SC Voucher Pro-grams in East Java and Jabotabek, some 70 providers submitted proposals, and slightly below 40 providers were selected for inclusion in the Programs.

The region should be likely to constitute one integrated BDS market. This means in particular, that SME from within the target region should be able to use most ser-vices offered without having to spend too much time and money on transport to the provider's location.

The optimal regional coverage will have to be defined on a case-by-case base by finding a good compromise between both criteria. While a district is probably too small, a province is likely to be too large. As a rule of thumb, a sensible region for a Voucher Program may either be a larger city together with its adjacent districts, or the belt between two larger cities (e.g. Yogyakarta-Solo, Semarang-Kudus, or Cirebon-Tegal). This implies that most Voucher Programs have to be established by several districts in co-operation.

Funding of Voucher Programs should in general be no problem. For a program with a voucher value of IDR 100,000, total program costs including program management and advertisement are unlikely to exceed IDR 750 million (USD 75,000) per year. As these costs are shared by several districts, they can be accommodated from own resources even by poorer districts. Nevertheless, it is recommended for the national government to establish a facility for support of local voucher programs as incentive for inter-district co-operation. Assuming a 30% central government cost contribution, and two voucher pro-grams being supported, IDR 500 million central government budget for the next fiscal year excluding staff and travel costs appears to be sufficient for this purpose. Depending on the success of the facility, the budget may be extended in the following years to support more regional programs.

The voucher programs should focus on SMEs that are interested in (post-) start-up assistance and support for business formalization. This focus would be primarily re-flected in the selection of services eligible under the program. Such services could include start-up, technical, IT, management and marketing training, as well as training and advice on legal, tax and accounting matters related to business registration. Specific attention should be given to the possibilities of including gender-specific counseling on how to combine entrepreneurial activities with a woman's social and family role into the program.

While voucher programs are by approach open to all participants, it may be considered to enhance outreach to young enterprises by providing additional incentives to partici-pants that have registered their business after participation in the program. For ex-ample, voucher users may, in addition to the voucher grant, upon presentation of registra-tion documents get another 30% of the service fees that they have paid for up to three services reimbursed. Such a mechanism would also facilitate evaluation of the program's impact on enterprise start-up and registration.

Voucher programs require professional management in order to ensure adequate provider screening, program advertisement, voucher distribution and control against fraud. It is


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therefore strongly recommended to outsource program management to adequately qualified institutions selected through public tender.

Matching grant scheme for business diagnostics and business strategy Diagnostic and strategic planning skills are only weakly developed among BDS providers. In order to address these deficits, and support development of providers that can deliver a 'full service range' to their clients, a matching grant scheme for business diagnostics and business strategy development is proposed. The scheme shall focus on supporting

Elaboration of a SWOT analysis of the client's enterprise that covers current prod-ucts and markets as well as technical, managerial and financial capacities;

Analysis of relevant trends in actual and potential markets; Outlining the enterprises' future strategy and priority fields of action.

In order to not distort service areas for which the market is already developed, the match-ing grants shall not extend towards follow-up action such as business and investment planning, improving management systems and procedures, or assistance in finding clients and obtaining credit, respectively. Such eventual follow-up action is to be contracted on full commercial terms.

Consequently, the matching grant shall be restricted to a maximum of five consultancy days. In order to attract well qualified consultants to such assignments, and create incen-tives for skills upgrading among interested providers, however, a daily fee up to IDR 2 million IDR (USD 200) excluding inter-local travel and allowances should be accepted. The matching grant should cover 50% of the service fee including inter-local travel. For clients in remote areas, it may be envisaged to grant up to 80% of the consultant's inter-local travel costs. Food and accommodation should be fully borne by the client. This set-up would result in sub-projects of up to IDR 10 million (USD 1,000) volume, and matching grants of up to IDR 5 million IDR (USD 500), both excluding inter-local travel and allow-ances.

The client's own contribution of up to IDR 5 million plus travel, food and accommodation is quite significant, if one considers SMEs' current expenditure on BDS. The matching grant is therefore unlikely to activate demand from SMEs that have never used BDS before. It rather addresses 'high performers' that have been actively using BDS in the past. Never-theless, 3.5% of respondents to the TA survey indicated to have paid more than 3 million IDR for BDS during the last three years. An extrapolation of this figure to the total number of SMEs as determined by the BPS enterprise census 1996 yields some 50-60,000 SME in Indonesia that might in principle be prepared to pay 3-5 million IDR on BDS32, which is a quite sizeable number. Even though not all these SMEs will be interested in business diagnostics and business strategy, the grant scheme is likely to be rather con-strained by insufficient service supply and capacities for sub-project handling than by a lack of demand.

Key requisite for program success and efficiency is the timely development of a clear and concise guideline for the structure, content and quality expected from the diagnosis and strategy report to be delivered by the consultant. This guideline will serve several pur-poses, namely:

Providing a framework for initial training of interested providers; Promoting the scheme and the new 'product' introduced through it among potential

beneficiaries;

32 The figure has been estimated by multiplying the share of survey respondents in each turnover class that have paid more than 3 million IDR on BDS with the total number of SME in that turnover class as given by the 1996 enterprise census. Turnover classes of the enterprise census have been inflation-adjusted for this purpose.


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Facilitating discussion between interested SMEs and providers on services to be delivered, as well as adequate time budgets and fees;

Serving as a benchmark for assessment and evaluation of sub-projects. Program management including development of this guideline require know-how that is hardly available in Indonesia. Therefore, it is recommended to seek for donor support for implementation of the matching grant scheme.

Under the assumption that initial provider capacity building and development of a reason-able application pipeline will require some time, a program duration of 3-4 years should be envisaged. Total program costs can be roughly estimated at some 3.5-4 million USD. The grant fund should be set to around 2 million USD, which corresponds to 4,000 – 5,000 subprojects. A higher number of subprojects is unlikely to be manageable, and also not required for upgrading provider skills and introducing a new, standardized 'product' in the market. Program management costs may range around 1.5 –2 million USD, depend-ing among others on the extent to which the scheme shall cover provinces outside Java.

Matching grant scheme for product and process improvement and co-operative research and development This proposed scheme is similar to the DAPATI matching grant scheme. However, in or-der to increase outreach, which was relatively low for the DAPATI scheme, the new scheme shall go beyond providing only matching grants for commercial technology-related BDS provision to individual SME. The new scheme shall also support joint re-search of SME groups, in particular small enterprise clusters, carried out in cooperation with research institutes, technology-oriented service providers, or equipment and compo-nent suppliers. The new scheme is therefore aiming at promoting BDS market develop-ment as well as cluster development and business networking. The rationales for the scheme are:

Research, development and innovation carry high failure risks, which may discour-age SME from such activities and service use, respectively; and

SME are inexperienced in research co-operation and may require incentives to in-crease collaboration with competitors or along the supply chain.

Under these rationales, activities such as ISO 9xxx certification that provide visible bene-fits to SMEs and for which service supply is already well developed shall not be supported anymore by the new scheme.

The scheme requires further elaboration with respect to eligibility criteria, grant levels and eligible expenditure, in particular what concerns the extended focus on co-operative re-search. This implies that the budget required for the scheme cannot be estimated at the moment. However, taking account of the sizeable application pipeline that could not be supported by DAPATI anymore due to project termination in autumn 2001, matching grant funds required for technology-related BDS provision to individual SMEs should at least range in the size of USD 500,000 over two to three years.

If domestic DAPATI program management staff is still available, it can be entrusted with most tasks related to program management. However, some international expert input is advisable, in particular what concerns the proposed new facility for co-operative research. It is therefore recommended to seek for donor support for further specification and subsequent implementation of the proposed scheme.

Matching grant scheme for input and output market research carried out by business associations This scheme shall serve several purposes:


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What concerns BDS market development, it shall improve the overall quality of information services offered, and strengthen the respective capacities of business associations. According to the TA survey, SME attribute business associations a prime role in providing information to them.

With respect to cluster and network development, the scheme shall generate rele-vant background information for elaboration of local cluster development strate-gies, and strengthen SMEs' potential for collective bargaining and interest repre-sentation via their business associations.

Matching grants shall only be available for initial research in areas yet uncovered by the respective association, and shall in particular be focused on input market research includ-ing input, equipment and component testing. In evaluating grant applications, specific at-tention shall be given to the association's concept for disseminating the research findings to members and other interested parties.

The following expenditure shall be eligible for support under the grant:

Costs of external market research through professional organizations; Costs for input, equipment and component testing carried out by third parties,

as well as costs for related research on international technological trends car-ried out by qualified external experts;

Costs for member surveys (e.g. assessment of market trends, experience with specific inputs or technologies) carried out and evaluated by professional organiza-tions;

Costs for external advice and assistance in relation to improving dissemination of research results (homepage development, establishing information desks etc.).

Grants shall only be approved if the aforementioned services have been tendered pub-licly. As a general rule, grants shall cover 50% of the eligible expenditure. In specific cases (e.g. high travel costs for services provided to business associations in remote ar-eas), higher grant portions may be considered.

While donor support could help to elaborate and specify the scheme further, it may al-ready implemented test wise with domestic funding and management. An initial grant fund in the range of 0.5-1 billion IDR (USD 50,000 –100,000) may be sufficient for such a test. Depending on the success of the facility, the fund may be extended in the following years to support more associations and more complex research activities, respectively.


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ANNEX 1: PROPOSED BDS EVALUATION FRAMEWORK (Internal TA Paper, presented to the BDS Working Group of the SME Task Force in April 2001) Level of assessment Outreach Efficiency Effectiveness Sustainability Intervention / interven-ing agency

No. of SMEs reached by pro-gramme

Total programme cost per SME assisted

Does the programme have a clear view of BDS in a wider context of markets and a conducive envi-ronment for private sector devel-opment? (Or is it welfare-oriented?)

Does the programme have a real-istic and explicit strategy regard-ing SMEs access to services be-yond programme period?

No. of service providers reached by programme

Total programme cost per service provider assisted

Has the programme made a real-istic assessment of market?

Does the programme have a clear, justified rationale for inter-vention?

No. of products developed by programme

Total programme cost per product developed

Assessment of programme inputs to programme outputs (eg com-pare $ inputs to service provider's $ turnover)

No/amount of information pro-vided by programme

Total programme cost per infor-mation unit provided

Focus of assessment: pro-gramme's outreach and cost effectiveness, under-standing of market context and strategy for sustainabil-ity of services

Market

Change in no. of SME purchases (or procurement through other commercial transactions) of spe-cific services

Change in price diversity for spe-cific services

Change in no. of service providers in market (delivering specific ser-vice)

Change in average subsidy con-tent of specific BDS in market

Change in value of specific ser-vice sales made by BDS providers

Change in average price for unit of BDS

Change in no. of new entrants to market (delivering specific ser-vice)

Focus of assessment: ex-pansion of specific BDS market, its diversity and competitiveness , reliance on subsidy and improved access by underserved groups to specific BDS market Change in % of potential SME

market penetrated by specific BDS

Change in no. of specific products in market


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Level of assessment Outreach Efficiency Effectiveness Sustainability Change in no./% of SME custom-

ers purchasing BDS represent targeted groups (eg women, ex-porters)

Supply (services /service providers)

Change in no./% of SMEs reached

Change in productivity : (staff or depreciation expense as proportion of fee income or profit) (proportion of service delivery staff as proportion of total staff)

Change in no./% of clients report-ing "expectations exceeded"

Change in: Level of cost recovery (define which costs included) or Profitability (gross, net or contribu-tion margin)

Focus of assessment : sus-tainability of service pro-vider or SMEs' access to services, service provider efficiency

Change in client base (no. of new additions) Change in no./% of clients making

repeat purchases

Does provider have a realistic, explicit strategy for longer term viability (subsidy dependence or commercial viability)

Demand (SMEs/consumers)

Change in no./% of SMEs aware of specific service No./% of SMEs stating that ser-

vice "exceeded expectations"

Change in no./% of SMEs willing to pay for a specific service

No./% of SMEs demonstrating change in business practice spe-cifically linked to service received

Change in no./ % of SMEs ever using specific service No./% of SMEs indicating per-

formance benefits from service

Change in no./% of SMEs using specific service for first time

Change in no./% of SME making repeat use of specific service

Focus of assessment: Changes in SME consum-ers' use, attitude and awareness of services and benefits derived from ser-vices

Change in no./% of SMEs with access to specific service


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Notes to accompany framework This framework for BDS evaluation provides the key headings that should be considered when assessing BDS promotion interventions. The framework is not intended to serve as a 'ready-to-use' tool. The 'indicators' and questions provided under each heading are in-tended to act as prompts to the assessor. They should assist the assessor in identifying important issues that need to be assessed. It should be noted that only some of the head-ings, indicators and questions will be appropriate in any given circumstance; the assessor should not try and use the framework in its entirety for each intervention. There may also be some overlap between indicators and questions - where these are raised is less impor-tant than what information they are seeking to capture.

To evaluate effectively, clearly defined indicators and more specific questions relevant to the context in question will need to be developed by the assessor.

When developing more specific indicators and questions, there are a number of important issues that need to be considered:

1. What is the key information required from the BDS evaluation exercise? Tightly defin-ing the required outputs at the end of the exercise (perhaps in some kind of table) from the outset will provide clarity and parameters when developing specific indicators and designing the assessment process.

2. How much interpretation and analysis is going to be feasible, given time and resource allocation? What depth, detail, complexity of analysis is required?

3. What will be the intended balance between quantitative and qualitative assessment?

4. Indicators for evaluation should be (a) defined in terms of how they will be measured or calculated (what they include/exclude etc), (b) timebound (relate to a defined pe-riod), and (c) reflect change rather than absolute numbers eg compare situation before and situation after (obviously requires baseline data).

5. Which sources of information (people, documents) will the assessment team require to get representative responses? Is such access feasible?

6. The absence of systems, regular measurement procedures and an unawareness of commonly-accepted BDS good practice may curtail the use of some of these indica-tors. However understanding the existence and prevalence of such absences and un-awareness is in itself a useful output for the project, and should be recorded.

7. For purposes of reference, heading and indicators used here are covered in more depth in a number of BDS publications, most notably the "Performance Measurement Framework" (PMF) and Swisscontact Indonesia's "Benchmarking Guide".


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ANNEX 2: BDS PROGRAM STREAMLINING AND DI-VESTURE (Paper delivered to the SME Development Task Force in May 2002)

Introduction Over the past two decades, there has been strong governmental involvement in provision of Business Development Services (BDS) to small and medium enterprises (SME). BDS are understood to be non-financial services that improve enterprise performance, its ac-cess to markets and its ability to compete, and are offered on a short-term or temporary basis to individual enterprises. BDS, however, do not include (i) provision of information to the wider public, (ii) services providing collective benefits such as advocacy, and (iii) ser-vices geared at individuals such as basic education and vocational training.

Governmental provision of BDS has in general not succeeded in sustainably improving SMEs’ competitiveness and gaining significant outreach. Programs are manifold, often overlapping, and have rarely been evaluated for effectiveness and efficiency. Moreover, government provision of BDS has hampered development of an effective BDS market and development of commercial BDS providers. There is ample evidence of SME’s ability and willingness to pay for commercial BDS that meet their specific needs, as well as emer-gence of professional BDS providers catering for these needs.

Against this background, the GoI, in the policy matrix for the ADB Industrial Competitive-ness and SME Development Program Loan, expressed its intention to consolidate and streamline technical and business support programs. This paper shall present guidelines and recommendations for this streamlining process.

Future Role of Government In general, BDS provision is a private sector task. Government should aim at promoting efficient BDS markets. This may include activities geared at preventing or reducing market distortions, enhancing market transparency and transaction security, and improving the quality and regional coverage of commercial BDS supply. Primarily, regulative instru-ments1 should be used for these purposes. Government may also intervene by means of information provision, provider capacity building, or through cost-sharing programs, pro-vided such interventions are targeted towards overcoming market and institutional fail-ures, and non-discriminatory in character.

Governmental provision of BDS should be minimized and restricted to (i) services related to public functions, e.g. protection of intellectual property rights (IPR), (ii) ser-vices/programs explicitly running under wider objectives such as poverty alleviation2, con-sumer or environmental protection; and (iii) services geared at fostering public-private partnership and/or supporting respective reorientation of public institutions. Even in the aforementioned cases, serious consideration must be given to possibilities for commercial service provision before embarking on direct service provision by the government.

Proposed Streamlined Program Structure (Medium-Term) The following table summarizes the streamlined program structure proposed by the ADB SME Development TA for implementation on a short- to medium-term perspective. The programs shall use cost-sharing mechanisms, namely matching grants for larger, specific

1 Such instruments may include (i) regulation on professional liability, (ii) standardization, accreditation & certification of services and providers, (iii) regulatory incentives for use of BDS, (iv) removal of regulatory and tax-related disincentives for BDS usage. 2 Poverty alleviation may also include programs for peripheral and strongly underdeveloped areas such as hinterlands of Papua province, Sulawesi, Kalimantan, and outlying islands in eastern part of Indonesia;


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services, and voucher schemes for standardized, low cost services. In order to contain the dangers of market distortion and creating supply structures that are not sustainable under commercial conditions, governmental cost contribution shall in general not exceed 50%. Rationale and approach of the programs proposed will have to be regularly reviewed.

Focus Type Rationales Remarks (Post-) start-up and business formaliza-tion assistance

Voucher scheme

High subjective risk asso-ciated with BDS usage (inexperienced first-time users)

To be implemented in close co-operation with dis-tricts

Research & Devel-opment, product & process innovation

Matching grant

High failure risk, SME inexperienced in research cooperation

To cover BDS usage, as well as cooperative re-search together with input and/or equipment suppli-ers

Business diagnosis & strategy develop-ment

Matching grant

Benefit only visible over medium-term

Cost-sharing restricted to strategic consultancy; eventual follow-up (sales assistance, financing as-sistance) to be contracted on full commercial terms

Trade fair participa-tion (first time only)

Matching grant

High subjective failure risk for first-timers

Strong role of Provinces (Sector focus and target countries differ by Province)

Cluster development Matching grant

Collective benefits For facilitation, capacity building, market research, feasibility studies and strategy development

First-time market research by busi-ness association

Matching grant

Collective benefits In particular geared towards promoting input market research and input testing

In addition, the ADB SME Development TA has proposed to consolidate the various re-volving funds of line ministries and SOEs into a Trust Fund.

Program Divestment FY-2001/2002 budgets, as well as the MTAP 2000 - 2004 comprise numerous BDS pro-grams, which are to a considerable extent overlapping, can be replaced by the stream-lined programs proposed above, or constitute direct government provision of BDS in com-petition with the private sector. Other programs may be in principle justified, but require review with respect to their targeting, or appear to interfere in provincial and district affairs. The following table provides examples of programs which should be divested, consoli-dated, and/or reviewed, respectively.

Program source BDS PROGRAMS

MOIT MCSME MTAPProposed

Action Rationale / Comments

1. Revolving Fund/RF & SOE funding schemes X X X Consolidate

into Trust Fund -

2. TATP ICT services matching grant scheme (WB finance)

X Divest Commercial ICT service market well developed

3. DAPATI technology ser-vices matching grant scheme (WB)

X - - Review scope To be developed into new proposed R&D MGS

4. HAKI & IPR – training Patent & IPR lawyers X X X Consolidate &

review In principle legitimate intervention, as

IPR are public function 5. Website & Database

SME, BDS Provider & Facilitators

X X X Review & con-solidate

Review, whether functions are better placed w. business organizations. Sys-

tems should be integrated 6. Trade Missions & Trade

Fairs /Dom-Overseas X

(NAFED) X - Review & con-solidate

Stronger role of provinces & private sec-tor associations preferable

7. Establishing Market Out-lets & Trading Houses X X - Divest Private sector does it professionally !


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Program source BDS PROGRAMS

MOIT MCSME MTAPProposed

Action Rationale / Comments

8. MONE/DIKTI ‘vucer’ pro-grams for Universities - - - Review

Legitimate intervention to strengthen Universities’ linkage with local SME.

Evaluation and dissemination of results to be improved.

9. BPPT applied technology for community developmt - - - Review Examine possibilities for integration into

cluster development programs 10. Entrepreneurship promo-

tion incl. beginners - X X Consolidate / Divest

To be replaced by proposed (post-) start-up support voucher scheme

11. Training HR incl. women to master technology etc - X X Consolidate /

Divest To be replaced by proposed (post-) start-

up support voucher scheme 12. Developing business

networks / clusters X X X Consolidate To be replaced by proposed cluster de-velopment matching grant scheme

13. Develop export-oriented / technology-based SME X X X Consolidate /

Divest

R&D / design-related components to be covered by new proposed R&D MGS.

Other components to be divested 14. Expand cooperation be-

tween SME & R&D insti-tutions

X X X Consolidate / Review

Direct service provision to be covered by new proposed R&D MGS. Other compo-nents to be reviewed for contribution to

cluster development 15. Developing support sys-

tem for SME-Cooperative X X X Consolidate / Divest

To be replaced by proposed new schemes for (post-)start-up support,

cluster development and R&D 16. Developing business

information system for SME

- X X Review

Public information functions (laws, busi-ness registration, support programs etc.) to be maintained. Other components to

be covered by Chambers

Proposed Review Procedures Taking account of the multiplicity of government programs, it is not possible to give a complete list of programs to be streamlined and divested, respectively. Further review will be required. For this purpose, an inter-ministerial working group under the proposed Small Business Council (SBC) should be established3 to:

Establish a full inventory of all government programs targeted at SME. Assess each program for consistence with the guidelines set above, and, in case of

the program being in principle justified, review it for possibilities to enhance decentrali-zation, cluster development and BDS market development.

Develop, based on the above guidelines, detailed standards for future programs tar-geting at SME, including conformance to the mandatory log-frame design (Bappenas).

Develop regular mandatory pre-screening mechanism for compliance of pro-gram/project proposals with the established standards and priorities (see TA – DFR – BDS – AP 2.1.4 and 2.1.6), and for avoiding overlaps and duplications by several line ministries.

Develop a monitoring and evaluation plan, derived from the respective log-frame mod-els used to assess progress and eventually, impacts on social-economy development in the regions (see TA – DFR – BDS – AP 2.2.1 and 2.2.2).

Based on evaluation of impacts, develop new concepts/guidelines (see TA DFR – BDS AP 2.3)

The above is the initial basic outline of the framework and should be further developed by the SBC and eventually proposed to the SME Commission for final inter-ministerial ap-proval.

3 This working group may be established by institutionalizing the current SME task force (BDS working group), thereby expanding membership to cover all relevant ministries.

Documents

22 Developing BDS Markets in Indonesia Impact Assessment o. · adb sme developmentta background report development of bds markets in indonesia – impact assessment of selected programs