WORLD BANK INDONESIA FLAGSHIP REPORT REPORT OVERVIEW Harnessing Digital Technologies for Inclusion in Indonesia eyond WORLD BANK INDONESIA FLAGSHIP REPORT Beyond Unicorns Harnessing Digital Technologies for Inclusion in Indonesia 2021 REPORT OVERVIEW © 2021 THE WORLD BANK 1818 H STREET NW, WASHINGTON DC 20433 TELEPHONE: 202-473-1000; INTERNET: WWW.WORLDBANK.ORG Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. For information about WWW.WORLDBANK.ORG/ID the World Bank and its activities in Indonesia, @BANKDUNIA please visit: BANKDUNIA INSTAGRAM.COM/WORLDBANK WWW.LINKEDIN.COM/COMPANY/THE-WORLD-BANK All photos in this report are from Unsplash.com and are royalty free. ↳ HELP.UNSPLASH.COM/EN/COLLECTIONS/1463188-UNSPLASH-LICENSE) Satu Kahkonen↙ I SECTION — 00 COUNTRY DIRECTOR ndonesia has seen a rapid rise in the World Bank Indonesia number of people connected to the & Timor Leste internet over the last decade. A vari- ety of sources – including new ones documented in this report – show that Indonesians connected to the inter- net use it quite intensively, spending BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA as many as six hours a day on average to communicate with each other, participate in social media, stream content for leisurely consumption and increasingly also engage in com- mercial activity. This growing base of consumers of internet and internet enabled services has made Indonesia the largest and the fastest growing digital economy in South East Asia. The country is home to many of the sub-region’s largest digital platforms that are not only attracting large vol- ume of investments into the country but are also providing new and inno- vative solutions that are increasingly transforming the economic and social lives of Indonesians. Across the world, effective and smart use of digital technologies such as the internet and digital platforms, has emerged as a key marker of resil- ience for coping with the devasting impact of the COVID-19 pandemic on economic and social life. The same is true also for Indonesia. Firms have adopted these technologies at unprec- edented rates to ensure the continuity of their operations. Households and individuals have increasingly relied on these technologies to work from home when they can, purchase con- I Foreword sumer goods online, help children the country has made remarkable All of this would also require the Gov- stay connected with schoolwork and achievements in expanding digital ernment to lead from the front and even carry out medical consultations connectivity. Yet, almost half of the not only become more digital itself remotely. Government agencies have adult population is still without inter- but also put guardrails for a respon- used these technologies not only to net access and, as such, automatically sible digital economy. Taking a whole try and address the public health chal- excluded from the country’s digital of government approach to digitally lenges associated with the pandemic dividends. Even for the given level of integrate and streamline systems and but also to maintain the continuity connectivity, the quality of the inter- to create common and interoperable of their services and, importantly, to net experience in Indonesia is poorer service platforms, especially for the channel social assistance and other than in neighboring countries, which use and re-use of data, could generate support to those most affected. makes it a shaky foundation for more payoffs across the whole society. For productive, high bandwidth applica- instance, developing a digital identi- As Indonesia’s economy recovers, the tions, especially by firms but also by fication framework to equip Indone- accelerated utilization of digital tech- schools and medical facilities. sians with the ability to securely prove nologies can have a big impact on the their identity when transacting online country’s development. Firms can be- But digital divide does not have to be would boost trust in the digital econ- come more productive, which can drive destiny. Taking stock of the current omy, reduce fraud, and enable more growth. Workers can be productive stage of digital technology adoption in public and private sector services to be and see their earnings grow. The Gov- Indonesia and identifying the various delivered end-to-end remotely. This ernment too could utilize these tech- dimensions along which these technol- would allow any Indonesian with in- nologies in various ways to improve ogies could in fact widen gaps instead ternet, no matter how far away from the quality and coverage of services it of closing them, the report identifies the nearest government office or bank provides to its citizens, which would some crucial fronts on which policy- branch, to access such services. Simi- be instrumental in reducing inequality makers could prioritize action to en- larly, the Government would benefit of opportunities. For instance, mech- sure that the risks of these gaps could from strengthening safeguards for anisms established to identify, target be mitigated. Universalizing internet digital economy transactions and In- and channel assistance to vulnerable is a key starting point and should in- donesian in cyberspace by putting in citizens during the pandemic could clude interventions not just to address place strong regulations and indepen- become the basis for a permanent dig- the hard infrastructure part, especially dent enforcement regimes related to itally powered upgrade on social assis- along the last mile, but also softer in- data privacy, cybersecurity, and con- tance targeting and delivery. terventions related to competition and sumer protection. sector regulation which have a major A growing digital economy does not bearing on quality and affordability Our hope is that this report will pres- necessarily imply an inclusive one. As of internet. These would need to be ent a novel lens to look at this excit- this report shows, the benefits of the complemented with policies and regu- ing landscape of digital technologies digital economy cannot be taken for lations that enable the digital economy in Indonesia and inform a broader granted by all segments of the pop- to grow and active interventions to en- public dialogue, especially on what is ulation. Some will thrive, some may sure that the workers across the country needed to make the country’s digital be left behind and some in fact may are equipped with the skills they need future more inclusive. stand to lose as well. For example, to make the most of the opportunities. II Acknowledgements SECTION — 00 BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA B eyond Unicorns was prepared by a World Bank We express our sincere gratitude to Tokope- team led by Sailesh Tiwari, Senior Economist dia, Bukalapak, GoJek and Halodoc for their in the Poverty and Equity Global Practice of the collaboration and their generosity in sharing World Bank. The core team consisted of Rabia with us data that helped shed light on some key Ali, Erwin Ariadharma, I Gede Putra Arsana, questions addressed in the report. The team Lamiaa Bennis, Natasha Beschorner, Prasetya also benefited from excellent guidance and ad- Dwicahya, Jonathan Marskell, Ririn Salwa Pur- vice from the following peer reviewers at var- namasari, Laura Ralston, Jaffar al-Rikabi, Virgi ious points in the report preparation process: Agita Sari, Imam Setiawan, Bambang Suharnoko Carlos Rodriguez Castelan (Lead Economist), Sjahrir, Muhammad Ajisatria Suleiman, Maria Ana Paula Cusolito (Senior Economist), Na- Monica Wihardja and Putu Sanjiwacika Wibis- talija Gelvanovska-Garcia (Senior Digital De- ana. Other contributors included Arun Arya, velopment Specialist), Tim Kelly (Lead Digital Hamidah Alatas, Maarten Bosker, Massimiliano Development Specialist), Siddhartha Raja (Se- Cali, Aufa Doarest, Frederico Gil-Sander, Sean nior Digital Development Specialist), and Jane Hambali, Hanan Jacoby, Scott Minehane, Mo- Treadwell (former Lead Digital Development chamad Pasha, Josefina Posadas, Abror Tegar Specialist). We thank them without implicat- Pradana, Ibrahim Rahman, Anissa Rahmawati, ing them in any errors or omissions that may Jan van Rees, Mayla Safuro Putri, Husnul Rizal, remain. Helpful suggestions provided by Vivi Mark Roberts, Arya Swarnata, Michael Weber, Alatas, Wendy Cunningham, Camilla Holmemo, Noah Yarrow, and Yongmei Zhou. Andrew Mason, and Rolande Pryce, especially in the early stages of the work, are also gratefully The work was conducted under Satu Kahkonen acknowledged. (Country Director, Indonesia and Timor Les- te) with overall guidance from Hassan Zaman Funding for the report was provided through the (World Bank Regional Director, Equitable Partnership for Knowledge-based Poverty Re- Growth, Finance and Institutions) and Carolina duction and the Australia World Bank Indonesia Sanchez-Paramo (World Bank Global Director, Partnership (ABIP) by the Government of Aus- Poverty and Equity Global Practice) and techni- tralia’s Department of Foreign Affairs and Trade. cal guidance from Aaditya Mattoo (Chief Econ- Peter Milne edited the report, Muhammad Ka- omist, East Asia, and Pacific Region), Rinku mal and Indra Inrawan designed the layout and Murgai (Practice Manager, Poverty and Equity Dyah Nugraheni and Elisabeth Ekasari provided Global Practice) and Deepak Mishra (Practice impeccable administrative support through all Manager, Macroeconomics, Trade and Invest- stages of report preparation. III ments Global Practice). Abbreviations & Acronyms 2G Second Generation (basic mobile for SMS) 3G Third Generation 4G Fourth Generation 5G Fifth Generation AI Artificial Intelligence ASEAN Association of South East Asian Nations ASN Indonesian Public Officials (Aparatur Sipil Negara) B2C Business-to-Consumer Bappenas Ministry of National Development Planning (Kementeri Perencanaan Pembangunan Nasional/Badan Perencanaan Pembangunan Nasional) FRONT PAGES BEPS Base Erosion and Profit Shifting BIG Geospatial Information Agency (Badan Informasi Geospatial) BPNT Non-Cash Food Subsidy (Bantuan Pangan Non-Tunai) BPPT Agency for Assessment and Implementation of Technology (Badan Pengkajian dan Penerapan Teknologi) BSA Basic Saving Account BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA BSSN National Cyber and Crypto Agency (Badan Siber dan Sandi Negara) BTS Based Transceiver Station C2C Consumer-to-Consumer CDP Collection-and-Delivery Point CHIP Connect, Harness, Innovate and Protect CIT Corporate Income Tax CMEA Coordinating Ministry for Economic Affairs COVID-19 Coronavirus Disease 2019 DEHS Digital Economy Household Survey DFS Digital Financial Services DGT Directorate General of Taxes DKI Special Capital Region (Daerah Khusus Ibukota) DSL Digital Subscriber Line DTIA Digital Transformation Implementation Agency DTKA Unified Social Welfare Database (Data Terpadu Kesejahteraan Sosial) DTT Digital Transformation Taskforce Dukcapil Directorate General for Population and Civil Registration (Direktorat Jenderal Kependudukan dan Pencatatan Sipil) EdTech Education Technology EU European Union FSP Financial Service Provider FTTH Fiber to the Home G2P Government-to-Person GB Giga Byte GDP Gross Domestic Product GMV Gross Merchandise Value GNI Gross National Income GoI Government of Indonesia HealthTech Health Technology ICT Information and Communication Technology ID Identification IV IDR Indonesia Rupiah IIGF Indonesia Infrastructure Guarantee Fund IMT International Mobile Telecommunications IoT Internet of Things Kabupaten District Kartu Pra Kerja Pre-Employment Card Kecamatan Subdistrict KK Family Card (Kartu Keluarga) Kota City KPK Anti-Corruption Commission (Komisi Pemberantasan Korupsi) SECTION — 00 KTP Indonesian Identity Card (Kartu Tanda Penduduk) KTP-el Indonesian Electronic Identity Card (Kartu Tanda Penduduk Eletronik) KYE Know-Your-Customer LAN State Administration Institution (Lembaga Administrasi Negara) LKD Digital Financial Services (Layanan Keuangan Digital), LP Branchless Banking (Laku Pandai) LSP Logistics Service Providers BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA LTE Long-Term Evolution Mbps Megabits Per Second Menkominfo Ministry of Communications and Information MenPAN-RB Ministry of Administrative and Bureaucratic Reform (Kementerian Pendayagunaan Aparatur Negara dan Reformasi Birokrasi) MHz Mega Hertz MNE Multi-National Enterprise MNO Mobile Network Operators MoEC Ministry of Education and Culture MoF Ministry of Finance MoHA Ministry of Home Affairs MOOCs Massive Open Online Courses MRT Mass Rapid Transit MSME Micro, Small and Medium Enterprises NIK Unique Identity Number (Nomor Induk Kependudukan) O2O Online-to-Offline OER Open Education Resources OKJ Financial Services Authority (Otoritas Jasa Keuangan) OTP One-Time Password Pembina Data Data Steward PIT Personal Income Tax PKH Conditional Cash Transfer Program (Program Keluarga Harapan) PLN State-Owned Electricity Utility (Perusahan Listrik Nasional) PMO Project Management Office PNG Papua New Guinea PPP Private-Public Partnership PNS Civil Servant (Pegawai Negeri Sipil) PSTN Public Switched Telephone Network QoS Quality of Service V R&D Research and Development RAN Rural Access Network Raskin Subsidized Rice Program (Beras Miskin) Ro-Ro Roll-on, Roll-off SAKERNAS Indonesia Labor Force Survey (Survei Angkatan Kerja Nasional) SEA-US Southeast Asia–United States SFH Studying from Home SIAK National Population Registry System (Sistem Informasi Administrasi Kependudukan) SIM Subscriber Identification Module Sislognas National Logistics System (Sistem Logistik Nasional) SME Small and Medium Enterprises SMPCS Sulawesi-Maluku-Papua Cable System FRONT PAGES STEM Science, Technology, Engineering and Mathematics SUSENAS Indonesia Socioeconomic Survey (Survei Sosial Ekonomi Nasional) Tbps TeraBits Per Second, or Trillion Bytes per Second Telco Telecommunications Service Provider TVET Technical and Vocational Education and Training BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA UNESCO United Nations Educational, Scientific and Cultural Organization USO Universal Service Obligation Fund VAT Value-Added Tax VoLTE Voice over LTE Wali Data Data Custodian Warung Street food vendor WFH Working from Home yoy Year-on-Year VI Contents Page: 1—8 Executive Summary Page: 9 Overview ↘ 1 2 3 4 SECTION — 00 FRONT PAGES BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA Policies to Leverage DTs for Greater Inclusion Access to the Using the PAGE: 51—62 Medium Medium to PAGE: 15—24 Deliver Better Services Harnessing the PAGE: 43—50 Medium to Boost Income PAGE: 25—42 VII VIII Executive Summary EXECUTIVE SUMMARY SECTION — ES BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA ES Chapter ⬎ S imilar to many other countries around the world, of digital technologies. Businesses, both large the COVID-19 pandemic has hit Indonesia hard. and small, have flocked to digital technologies to Latest estimates suggest that about 5.1 million try to ensure the continuity of their operations. people—equivalent to 2.4 percent of the work- School closures have forced students and teach- ing-age population—have lost their jobs, while ers to adapt and explore digitally enabled remote an additional 24 million have had to work re- learning options, including the adoption of a duced hours due to the pandemic. As many as 50 variety of EdTech solutions. HealthTech apps percent of workers have experienced a reduction enabling remote consultations and the delivery in earnings. The impact on living standards has of medicine have seen unprecedented growth in been devastating, with more than 2.2 million adoption rates. Confined at home due to mo- Indonesians estimated to have been pushed into bility restrictions, Indonesians have switched COVID-19-induced poverty in 2020. to the internet for their entertainment and so- cial needs, driving sharp growth in the usage of One unexpected silver lining from the crisis, digital media (music and video streaming) and 1 however, has been the turbo-charged adoption communications applications. 2 With this pandemic-induced flight to digital ex- Indonesians who are connected to the internet 5.1 pected to be permanent to a large extent, there use it intensively, with communication, social mil. is excitement about an even greater acceleration media and leisure applications dominating usage. in what was already the fastest growing digital On average, Indonesians spend around 6 hours a Indonesian have lost economy in Southeast Asia. But at the same time day online, with the younger and more educated their jobs questions have also emerged about the possibil- segments more digitally engaged than the rela- ity of the differential access to and adoption of tively older and less educated demographic. In- 24 digital technologies compounding existing in- tensity of internet engagement is highest for the mil. equalities. For a country that considers achieving 16 to 25 age group, which on average spends 9.7 balanced development one of its key priorities, hours a day online. Digital ride-hailing services Had to work this is an important new challenge. provided by companies such as Gojek—Indone- reduced sia’s homegrown decacorn that epitomizes the hours 50% This report conducts an in-depth assessment of country’s digital potential for policy makers— digital technologies in Indonesia, examining the and its regional competitor, Grab, are commonly experienced scale and extent of their current applications. used. And not only for their mobility services to a reduction Focusing specifically on how these technologies connect the otherwise fragmented labor markets in earnings SECTION — ES are touching, shaping and influencing the lives in Indonesia’s large and sprawling metropolitan of Indonesians, the report also identifies some areas, but also for several other conveniences, policies that the Government of Indonesia (GoI) such as food delivery and logistics. Buying and could adopt to ride the momentum of digital selling online is also growing and, while still only adoption generated by the pandemic, not only prevalent among a small share of the popula- to power economic recovery in the short run but tion, it is already enhancing consumer welfare by also to bring about greater inclusion and resil- providing cheaper options, and greater product ience in the medium run. variety and convenience. BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA 2.2 MIL. Indonesia has made rapid progress in internet In addition to consumers, these technologies are connectivity over the past decade but, despite also beginning to reshape the economic oppor- this, half of the adult population is still without tunity landscape for workers, generating newer access. Moreover, the inequality in access to the forms of jobs in some cases and enhancing pro- digital medium mirrors existing dimensions of ductivity of existing jobs in others. However, inequality—across groups, regions and income not all workers are positioned to capitalize on classes. While Indonesia compares well with its these opportunities. For example, the higher regional peers on mobile broadband penetration skilled workers, who as a group were already (at slower speeds), it is significantly behind on better rewarded in the labor market have edged 4G/LTE and fixed broadband rollout. Issues of further ahead relative to lower skilled workers. availability and affordability constrain the adop- One of the reasons for this is that, despite the tion of fixed broadband, while network conges- pandemic-induced increase in the adoption of tion impinges on the quality of available mobile digital technologies, the overall level of digital broadband. Limited spectrum, unavailability of adoption by firms remains low and of limited specific bands—particularly the 700mHz digital intensity, which has naturally limited produc- dividend band—limited regulatory clarity on in- tivity gains for most workers. Another reason is Indonesians frastructure sharing and the lack of competition, that, while low-skill biased applications of digital estimated to have especially in the provision of fixed broadband ser- technologies such as e-commerce and digital gig been pushed into vices, are the main barriers to universalizing access work are enabling certain segments of the work- COVID-19-induced to good-quality internet throughout Indonesia. force to boost income, their reach is also limited. poverty 2020 “Indonesia has made rapid progress in internet connectivity over the past decade, but half of the adult population is still 3 without access” Digital gig work is largely concentrated among urban men. E-commerce is providing an income diversification pathway, particularly for women temporarily dislocated from labor markets and youth. However, e-commerce penetration and intensity are both constrained by issues of trust ↳ Indonesians who are connected in online transactions and payments, logistics to the internet use it quite and internet connectivity. intensively, with communication, The ability of governments around the world to social media and leisure harness digital technologies to deliver services is applications dominating usage.⬎ perhaps one area on which the COVID-19 pan- demic has focused the strongest spotlight. Just as people and businesses have had to adapt to various measures taken to contain the spread EXECUTIVE SUMMARY of the virus, so too have governments. And the ability to use digital technologies to curb and manage the pandemic, as well as to ensure the continuity of essential services, has emerged as a key marker of resilience. Indonesia’s nascent EdTech and HealthTech scene has received a major boost and, though BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA these applications have clearly filled a void during the pandemic, their overall reach is limited to the more affluent clientele in urban centers, mostly within Java. Specifically, on ed- ucation, the lack of complementary inputs such as supporting ICT devices (smartphones and computers), and limited access to good-qual- ity internet has limited the ability of students to access online learning during the pandemic. Experiences from around the world suggest that while some of these digital innovations help en- rich the menu of available solutions, the truly transformative impact can only come from the Government experimenting with, internalizing and eventually adopting some of these innova- tions at scale to enhance the delivery of services. In addition to the low connectivity in key service delivery nodes (e.g., schools and hospitals), two key challenges that Indonesia faces on this front are: (i) the absence of an officially-recognized and universally accessible digital ID for online transactions; and (ii) transitioning from a siloed structure of multiple, incompatible government information and data management systems to a platform-based whole-of-government approach to digital transformation, which has emerged as best practice in many economies globally. What can Indonesia do to address these challeng- es and effectively leverage digital technologies to achieve greater inclusion? The report emphasizes three key priorities for policy. The critical first priority is improving digital connectivity and universalizing access to the 4 THREE KEY PRIORITIES digital medium. This will require bet- this, Indonesia will need to make ter management of the telecom spec- progress on financial inclusion, facil- 1 trum, regulatory clarity on passive itate trust to promote greater take-up infrastructure sharing and improved of digital payment services, improve competition in the fixed broadband logistics and scale up investment in space. Under recently enacted Law No. digital skills as well as a broader set of 11/2020 on Job Creation (the so-called skills to thrive in the digital economy. “Omnibus Law”), reform of spectrum The variety of efforts underway to im- Improve Digital management is on the right track for prove financial inclusion remain im- Connectivity the optimization of spectrum alloca- portant entry-points. One promising tion. The Omnibus Law also imposes digital solution is the reduction in ver- & Universalize a mandatory two-year plan to convert ification costs that could come from Access analog television to digital television, widespread availability of an e-KYC in order to secure a digital dividend option underpinned by a strong and in the 700 MHz spectrum band. This reliable digital ID system. For those 2 measure would be crucial in lowering already banked, including some of the SECTION — ES capital costs require to provide afford- more sophisticated users, trust in on- able connectivity to remote parts of the line transactions and issues related to country. Release of the 2.6 GHz band, data privacy, cyber security and finan- currently used for satellite TV, would cial integrity represent another barri- add capacity in urban centers and al- er that needs to be overcome. In this leviate congestion. The Ministry of regard, the passing of the draft Law Make the Communication and Information on Personal Data Protection will be Digital (Kominfo) should consider acceler- critical for promoting the adoption of BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA Economy Work ating its plans for the reallocation of digital financial services in Indonesia. for All this band from satellite broadcasting to mobile broadband by the end of 2024. On citizen skills, modern tertiary ed- ucation needs to cultivate in students 3 The Omnibus Law also mandates a minimum threshold of foundational passive infrastructure sharing and the “transferable” higher-order skills for next step for the GoI in this regard is the 21st century digital economy, even to create an implementing regulation. in STEM fields. Technology and in- This will require effective leadership tegration have increased the demand to coordinate the government agen- for higher-order general cognitive Adopt Digital cies involved, including, among oth- skills—such as complex problem-solv- Technologies ers, Kominfo, the Ministry of Home ing, critical thinking, and advanced to Upgrade Affairs, the Ministry of Public Works communication—that are transferable and Housing, and local government across jobs. Incorporating more gen- Citizen-State agencies. Indonesia should also con- eral education in tertiary programs is Interactions sider transitioning toward the unified one way to do this. An additional year licensing of service providers to enable of general education was added to un- each one to deliver a larger portfolio of dergraduate programs in Hong Kong services. A fixed broadband provider and China in 2012 to focus on prob- should be able to deliver a full port- lem-solving, critical thinking, com- folio of services, not only broadband munication, leadership, and life-long internet but also telephony, TV, and learning skills and that seems to have other value-added services. Appoint- yielded some positive results.1 Anoth- ing an independent regulator is criti- er way is through innovative pedagogy cal to improving the overall competi- that adopts learning strategies, includ- tiveness in the sector. ing open-ended assessments, feedback opportunities, and a progressive cur- The second priority is ensuring that riculum that balances academic chal- the digital economy works for all. This lenges with student support. will require investing in and facilitat- ing key enablers of the digital econo- The third policy priority is harness- my while at the same time unlocking ing the medium to provide better citizen capabilities to seize the oppor- services and upgrade the quality of 5 tunities that are generated. To achieve citizen-state interactions. This will re- quire, among others, a whole-of-econ- this transformative agenda will rest shackled in this manner, and workers omy national digital ID initiative and crucially on the adoption of a coordi- lack the skills required to thrive in the a whole-of-government approach to nated whole-of-government strategy second industrial revolution, let alone digital transformation driven by an as opposed to a siloed one. the fourth, could potentially amplify agency sufficiently empowered to re- distortions and accentuate inequalities. solve crucial inter-agency coordina- In addition to these three fronts there Thus, doubling down on reforms to tion challenges. A national digital ID is a crucial fourth area that should not strengthen the analog foundations of initiative would enhance and harness be forgotten. In order to truly make the digital economy will be equally crit- the existing strong national ID system the digital economy more inclusive, ical in ensuring that digital dividends managed by the Ministry of Home Af- efforts to universalize the digital me- benefit all Indonesians. fairs to introduce an official digital ID dium and stimulate digital innova- for online transactions and could rec- tions must be embedded in a broader ognize other forms of digital IDs, such ‘bricks-and-mortar’ reform agenda ↳ Indonesia’s digital as those issued by the private sector, that includes greater openness and economy is growing and for interoperability purposes. In order competitiveness, stronger regulations, beginning to reshape EXECUTIVE SUMMARY to boost trust in online transactions more comprehensive social protection and digital government, the passage and investments in skills for the future. how Indonesians work, of the draft Law on Personal Data Pro- The long-standing non-digital chal- consume goods and tection would be important to provide lenges that Indonesia has faced in its services and interact safeguards and accountability for the efforts to make growth inclusive con- collection, use and sharing of personal tinue to remain important constraints with each other.⬎ data, as well as formalizing the rights on how effectively Indonesia is able to BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA of data subjects. An essential feature harness the digital dividends for its for the credibility and strength of such poor. For example, the high cost of a law would be independent oversight, logistics, which has always prevented similar to the Office of the Australian far flung markets in eastern Indone- Information Commissioner and the sia from being integrated with thicker Singaporean Personal Data Protec- markets in Java, is precisely also one of tion Commission. the key binding constraints on growth of e-commerce in these areas. Digiti- Beyond digital IDs, Indonesia could zation of the logistics sector itself can, also consider reorienting from a nar- and indeed is, already beginning to row focus on e-government to a com- chip away at this. But a bigger chal- prehensive national digital transforma- lenge lies in the analog domain and tion agenda. Given the complexities, relates to the large deficit of connectiv- this can be implemented in phases. ity infrastructure and the regulatory Strengthening the role of the Ministry environment that keeps transit times of State Apparatus and Bureaucratic long and costs high. Reform (MenPAN-RB) to orchestrate and deliver on the existing mandate on Likewise, a whole host of other factors e-government could be coupled with that are binding constraints on the parallel efforts to create an institutional overall productivity of the economy and regulatory framework or appara- are also relevant. It has been well doc- tus necessary for a more integrated umented elsewhere, for example, that and centrally managed transformation restrictive trade policies limit access to agenda. This could be in the form of key inputs and markets, restrictions an agency that has multi-ministerial on investments depress commercial oversight and is attached to the Office performance, a weak competition of the President. Such an agency could framework shields incumbents from be tasked with the articulation of the potentially more productive market vision as well as the formulation and entrants, while the unpredictable reg- implementation of policies to drive the ulatory environment further weakens transformation agenda in an integrated the business environment, inhibiting manner. The Government Digital Ser- competition and depressing invest- vice, or GDS in the United Kingdom ments. The super-efficiencies asso- and GovTech in Singapore are success- ciated with digital technologies in an ful examples of this model. There could economic environment in which do- be other models as well but success in mestic firms, both large and small, are 6 What can Indonesia do to ensure an inclusive digital future for all? PRIORITY OBJECTIVE Improve Digital Connectivity I to Universalize Access SECTION — ES Optimize spectrum Strengthen mechanisms to 1 2 allocation for mobile ensure sharing of active and broadband passive infrastructure BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA →→Implement the →→Optimize the higher →→Update the Telecom →→Implement through “Analogue Switch Off” frequency capacity Law, PP 52/53, to regulations the by the end of 2022 in bands, starting with allow for sharing of passive infrastructure accordance with the the freeing up of the active infrastructure sharing mandated under Omnibus Law so as to 2.6 GHz band, followed on a B2B basis the Omnibus Law free up the 700MHz by the 3.4-3.8 GHz band for greater rural band and potentially RESPONSIBLE AGENCIES: RESPONSIBLE AGENCIES: connectivity using 4G the broader 3.3-4.2 Kominfo Kominfo and future 5G networks GHz band to facilitate MoHA 5G deployment in urban RESPONSIBLE AGENCIES: Ministry of Public Works areas. Consideration Kominfo should be given to the release of the mmWave spectrum bands for 5G in urban areas RESPONSIBLE AGENCIES: Kominfo Strengthen competition →→Review current →→Appoint an 3 licensing regime and independent regulatory along the broadband transition toward body for the telecom value chain international best practice of single/ sector consistent with exemplar practice unified licensing and Indonesia’s RCEP to allow a larger commitments number of providers to deliver the full RESPONSIBLE AGENCIES: portfolio of services Kominfo RESPONSIBLE AGENCIES: Kominfo 7 PRIORITY OBJECTIVE Make the Digital Economy II Work for All Nurture digital skills and skills for the 1 2 21st century digital economy Support the development of logistics →→Continue to develop →→Align non-formal education →→Build partnerships between EXECUTIVE SUMMARY basic physical services and lifelong learning tertiary institutions and infrastructure to with needs of the working-age the private sector to train improve connectivity adult population, adopting a vocational students in high- through strengthened modular approach to course tech areas using practice-based and/or rehabilitated offerings with an emphasis curricula, practitioner-led infrastructure on soft skills in addition instruction, and professional (roads, ports, to technical digital skills, certification and electricity), incorporating employment- leveraging private specific digital skills RESPONSIBLE AGENCIES: BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA sector capital relevant for Indonesia, Ministry of Education and Culture/Private and expertise as emphasizing a mindset of Sector appropriate through continuous learning, and PPPs offering opportunities to practice “self-managed” RESPONSIBLE AGENCIES: learning Ministry of Transport RESPONSIBLE AGENCIES: Directorate General of Highways Ministry of Education and Culture Ministry of Public Works Ministry of Manpower and Housing →→Ensure that tertiary →→Incentivize employers to →→Deepen reforms education offers a minimum offer internships and off- to reduce entry threshold of foundational campus learning to students barriers to logistics “transferable” higher-order and transportation RESPONSIBLE AGENCIES: skills such as critical services and build thinking, problem-solving and Ministry of Education and Culture/ long-term investor Ministry of Manpower communication, even in STEM confidence, to expand fields warehousing outside of large metropolitan RESPONSIBLE AGENCIES: areas Ministry of Education and Culture RESPONSIBLE AGENCIES: Ministry of Transport, with →→Continue to develop data systems that allow for identification support from Ministries of Trade and Finance and of occupations and skills in demand, monitor educational the Coordinating Ministry institutions’ compliance with quality standards, and ensure of Maritime Affairs and that information on employability of individuals with various Investments degrees, wage profiles, and occupation-specific courses is available to jobseekers and workers →→Continue to modernize the National RESPONSIBLE AGENCIES: Post Service; Ministry of Education and Culture/Ministry of Manpower standardize addresses and postcodes RESPONSIBLE AGENCIES: Ministry of Communication and Informatics 8 PRIORITY OBJECTIVE Make the Digital Economy II Work for All CONTD. Promote supply of DFS/digital payment 3 solutions that cater to the unbanked and the underbanked →→Streamline the →→Standardize rules and licensing and procedures to enable registration processes interoperability of required to become a payment schemes provider of digital financial services RESPONSIBLE AGENCIES: SECTION — ES Bank Indonesia RESPONSIBLE AGENCIES: Bank Indonesia OJK →→Incentivize the →→Increase use cases →→Strengthen the BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA private sector to of DFS products legal and regulatory innovate and develop in the delivery of framework for managing new DFS products that government services risks related to cater to the rural (including Government- data governance population to-person payment) to and privacy, cyber sustain the commercial security and RESPONSIBLE AGENCIES: viability of DFS operational risk, and Bank Indonesia agents financial integrity, in order to build Directorate General of Taxes RESPONSIBLE AGENCIES: consumer trust in DFS CMEA (Financial Inclusion products Council) RESPONSIBLE AGENCIES: Ministry of Social Affairs Bank Indonesia OJK Use tax policy instruments to 4 ensure a level playing field →→Complete the design of measures to reform →→Lower the overly tax policy and modernize tax administration generous VAT threshold in relation to DE transactions, ensuring to expand the digital adoption and communication of consistent economy tax base rules, institution of efficient IT systems to administer registration, filing, payment RESPONSIBLE AGENCIES: and use of digital transaction data with Ministry of Finance other third-party data and taxpayer data for (Directorate General of Taxes, Directorate General of Customs strengthened compliance risk management and Excise, and Fiscal Policy Agency) RESPONSIBLE AGENCIES: Ministry of Finance (Directorate General of Taxes, Directorate General of Customs and Excise, and Fiscal Policy Agency) 9 Use Digital Technologies to Provide PRIORITY OBJECTIVE III Better Services and Upgrade Citizen- State Interactions Develop a national digital 1 ID framework →→Pass the draft Law →→Launch a whole- →→Close the coverage →→Introduce a national on Personal Data of-economy national gaps in the national digital ID system or EXECUTIVE SUMMARY Protection digital ID initiative population registry federated ecosystem to define the optimal database (SIAK), fit-for-purpose for RESPONSIBLE AGENCIES: model for Indonesia, streamline the new online transactions in Kominfo bringing together registration and the Indonesia context, government, private update processes, and building on the SIAK MoHA sector and civil introduce biometric- society based e-KYC processes RESPONSIBLE AGENCIES: Office of the President RESPONSIBLE AGENCIES: RESPONSIBLE AGENCIES: MoHA BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA Office of the President MoHA Kominfo MoHA Kominfo Reorient from a narrow Implement a whole- 2 3 focus on e-Government to of-government data a comprehensive national management policy digital transformation agenda →→Strengthen the →→Adopt a whole- →→Implement the →→Build alliances political and of-government One Data Policy with key institutions bureaucratic influence approach to digital comprehensively, in such as MenPAN- needed to move the transformation, priority sectors RB,Kominfo, and MoHA agenda by placing a coordinated and relevant for managing to instill One Data central government spearheaded by an the post pandemic principles into the authority like agency that has multi- recovery (e.g., implementation of the the Office of the ministry oversight. education, health, digital government President in the social protection or and digital ID driving seat RESPONSIBLE AGENCIES: MSMEs). initiatives. Office of the President RESPONSIBLE AGENCIES: RESPONSIBLE AGENCIES: RESPONSIBLE AGENCIES: Office of the President Bappenas Bappenas BPS BPS and other line agencies and other line agencies 10 Overview 1.1 Access to the Medium: Who is 1.2 HARNESSING THE MEDIUM TO BOOST 1.3 USING THE MEDIUM TO DELIVER BETTER 1.4 POLICIES TO LEVERAGE DTS FOR OVERVIEW connected, who is INCOME: Who is SERVICES: What GREATER INCLUSION: not and why? winning, who is holds Indonesia What can Indonesia behind, and why? back? do? BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA 11 12 S imilar to many other countries around tainment and social needs, driving sharp growth the world, the COVID-19 pandem- in the usage of digital media (music and video ic has hit Indonesia hard. The global streaming) and communications applications. A slowdown in economic activity, com- recent industry estimate shows that 37 percent bined with domestic measures to con- of all digital service consumers in Indonesia in tain the spread of the virus, dragged 2020 were new COVID-induced users and more down the economy, which is estimated than half (56 percent) were from conventionally 5.1 to have shrunk by around 2.2 percent weaker markets such as non-metro areas.2 mil. in 2020. Latest estimates suggest that Indonesian about 5.1 million people—equivalent to 2.4 per- This digital pivot is expected to be permanent have lost cent of the working-age population—have lost and, as such, promises to provide a major boost their jobs their jobs, while an additional 24 million have to what is already the largest and the fastest had to work reduced hours due to the pandemic. growing digital economy in Southeast Asia. 24 As many as 50 percent of workers have experi- The behavioral change that has accompanied mil. enced a reduction in earnings. The impact on this accelerated adoption of digital technolo- living standards has been devastating, with more gies can be expected to be enduring. Estimates Had to work reduced than 2.2 million Indonesians estimated to have from industry indicate that 93 percent of new hours been pushed into COVID-19-induced poverty adoptees expect to stay with at least one of the 50% in 2020. new digital services post-COVID-19. If true, this would imply a major boost to Indonesia’s internet experienced a reduction One unexpected silver lining from the crisis, how- economy which, at an estimated US$44 billion in in earnings ever, has been the turbo-charged adoption of dig- gross merchandise value, is not only the largest ital technologies. Businesses, both large and small, in Southeast Asia, but also the fastest growing.3 2.2 MIL. have flocked to digital technologies to try to en- BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA sure the continuity of their operations. Adoption At the same time, the pandemic has also fo- of e-commerce has soared, with online purchases cused a spotlight on Indonesia’s inequalities. proving a viable way of securing uninterrupted One enduring challenge of Indonesia’s develop- access to essential consumer goods, including ment experience over the past two decades has even basic groceries. School closures have forced been making economic growth more inclusive. students and teachers to adapt and explore dig- While remarkable progress has been made in itally-enabled remote learning options, includ- terms of poverty reduction, persistent welfare ing by adopting a variety of EdTech solutions. disparities remain across regions, and growth HealthTech apps enabling remote consultations in living standards experienced by those in the and the delivery of medicine have seen unprec- bottom 40 percent of the income distribution edented growth in adoption rates. Confined at has persistently lagged average growth.4 By dis- home due to mobility restrictions, Indonesians proportionately hitting the poor and the vulner- have switched to the internet for their enter- able harder, the pandemic threatens to widen Indonesians estimated to have been pushed ↳Indonesia has made rapid progress “ into COVID-19- induced poverty 2020 in expanding internet access over the past decade, but half of the adult population is still 13 without access→ 60% ↪ As school closures pushed students toward remote learning, around 60 percent of students were found to be unable to participate in online classes due to the lack of reliable internet and limited ownership of internet-enabled devices OVERVIEW these inequalities. Meanwhile, the susceptibility toward remote learning, around 60 percent of BOTTOM 40% BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA to infection, and the burden of disease among students were found to be unable to participate the poor and vulnerable in the most directly af- in online classes due to the lack of reliable inter- fected urban areas have been more intense than net and limited ownership of internet-enabled among the non-poor, likely due to risk factors devices. A remedial measure was introduced in such as poorer diets, lower access to quality the form of an IDR 7.2 trillion data package for health services, higher prevalence of smoking, students and teachers. But, given how costly poorer hygiene and sanitation practices, and the mobile broadband data is for high bandwidth inability to afford inputs to preventive behaviors applications such as video streaming, this is like- (e.g., masks, hand sanitizers, etc.). At the same ly to only be a stop-gap solution to the real prob- time, sectors and forms of work that have been lem: namely, that only 10 percent of Indonesian most affected, especially in urban areas of the public schools are connected to fixed broadband country, are also the ones in which the poorer internet and around half of the population is still and less skilled segments of the population are not connected to any kind of internet. more likely to be working. As a result, while the pandemic has affected everyone, uninsured in- The pandemic has also put a spotlight on the come and welfare losses in the bottom parts of importance of digitized, integrated and interop- the income distribution have been the highest.5 erable data systems in achieving resilience. With quarantines and the scaling-down or shutdown Differential access to and adoption of digital of many government and commercial opera- technologies could compound these inequalities. tions, countries have had to try rapidly shifting Digital solutions to achieve resilience during this services to digital channels in order to keep them ↳ Growth in crisis have not been available to all. For exam- going. Countries that had, for instance, invest- living standards ple, compared with 88 percent of government ed in and built strong digital identification (ID) experienced by jobs and 40 percent of jobs in manufacturing, systems before the pandemic were by and large those in the bottom less than 10 percent of jobs in hotels and restau- better able to do this than those countries that 40 percent of the rants, construction, wholesale, and agriculture had not. For example, Estonia, Singapore, the income distribution were found amenable to being done remotely. United Kingdom, and other digitally advanced has persistently lagged average Similarly, just 11 to 12 percent of casual and countries were able to reduce disruption for growth own-account work could be performed from their public service delivery, as well as enable the home (compared with 42 percent of wage work). private sector to shift to trusted online transac- While 84 percent of high-skilled work could be tions. But the difference was particularly telling done from home, 85 percent of work done by in terms of whether countries were able to deploy low-skilled workers required physical presence quick, accurate and effective social protection in their place of work.6 measures to mitigate shocks and safeguard liveli- hoods, including being able to reach populations Similarly, as school closures pushed students such as informal workers. These workers were 14 especially difficult to target because they were it as many times as needed. Digital technologies not present in either databases of people living also render moot place-based constraints on eco- in poverty or databases of people contributing nomic activities. Near costless transmission of to social security. information and digital services helps unlock op- portunities for buyers and sellers anywhere in the Thailand, for example, built a website to al- country, leading to both the deepening, as well low informal workers to apply for emergency as the stronger integration, of markets. Lower payments online, using its national ID system tracking costs, or costs of connecting individu- to verify the identity of applicants, establish als with information about them, facilitates the their uniqueness and determine their eligibil- design and delivery of services better customized ity by cross-checking government databases. to personal needs (e.g., government-to-person Since national IDs were already linked to bank payments, credit provided based on information and mobile money accounts, there was added on consumer behavior, etc.). Finally, by lowering assurance that cash transfers would reach the verification costs, digital technologies can enable intended beneficiaries. Within just a few weeks, individuals and firms to build up reputations more than 28 million Thai citizens had applied, and trust and participate in markets assured of SECTION — OV with 15 million deemed to be eligible. Payments reasonable contestability. Evidence, primarily began for some within days of applying. In Chile from high-income countries, suggests that the and Peru, social registries were used to expand efficiency gains brought about by the adoption existing social assistance programs and citizens of these technologies can boost aggregate pro- could use their digital ID to access a portal that ductivity and growth.8 allowed them to check if they were included. In contrast, although Indonesia introduced signif- But there are risks as well. Without strong laws icant fiscal measures, there were critical delays on personal data and consumer protection, the BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA in getting a couple of similar programs off the lowering of tracking and verification costs could ground on account of challenges related to the lead to price discrimination, fraud and violations updating and cross-checking of databases and of privacy. The lack of trust in government insti- the verification of identities. tutions and regulations to protect and safeguard citizen interests could retard the adoption of dig- Looking ahead, one key question policymakers ital technologies. Furthermore, the introduction in Indonesia are facing is how to ride the momen- of digital super-efficiency in an environment tum of digital adoption generated by the pan- in which there are significant structural ineffi- demic not only to power the recovery in the short ciencies in the bricks-and-mortar world could term but to also bring about greater inclusion potentially accentuate inequalities. This could and resilience in the economy in the medium play out in several ways. First, failure to univer- term. The crisis is clearly far from over, but some salize access to reliable and good-quality inter- signs of economic recovery are beginning to ap- net could result in the benefits of digitization pear on the horizon. As the economy rebounds being concentrated among a small segment of and adjusts gradually to the new post-pandemic the population, while a significant share gets left equilibrium, questions about ways in which In- behind. Skill premia may rise, and labor markets donesia could leverage digital technologies to could get polarized. Access to digitally enhanced better prepare for similar shocks in the future learning experiences and opportunities may be and address some of its long-term development limited to students of certain backgrounds, fur- challenges have become highly pertinent. ther widening intergenerational inequalities. The promise exists. Digital technologies signifi- Second, distributional tensions could arise also cantly reduce economic costs related to search, among online and offline domains on the one replication, transportation, tracking and verifi- hand, and domestic and foreign players on the cation.7 Lower costs for finding and comparing other, with gains for one coming at the expense of information can help reduce price dispersion, the other. Or between larger players and smaller improve matching, boost efficiency, and deepen ones, and between owners of capital and owners financial, labor and retail markets. The non-ri- of labor. Most platform-based applications of val nature of information (one person’s con- these technologies are often propelled by strong sumption does not lower the amount available network effects (or demand-side economies of for consumption by another) encoded digitally scale); the larger the number of users, the greater lowers the replication cost; once the upfront cost the value of the product for the users. This posi- of developing an application has been incurred tive feedback loop generates advantages for the 15 and the product tested, it is costless to replicate first mover and can accord significant market power to the incumbent by making it difficult investigates the key challenges that Indonesia even for more productive newcomers to enter faces in maximizing its digital dividends in an the market. As the market begins to mature, this inclusive manner; and (ii) identifies some ac- concentration of some firms within an industry tionable entry-points for investments and pol- can slow down innovation, hurt consumers and icies. The report is fundamentally about how workers, and lead to the redistribution of rents digital technologies touch, shape and influence to the platforms themselves. the economic and social lives of people, and the diagnostic as well as policy thrust of the report is This report conducts an in-depth diagnostic of organized around three main dimensions along digital technologies, and the scale and extent of which the risks of ‘digital exclusion’ are the most their current applications in Indonesia. Fully pronounced: (i) access to the medium (digital exploiting Indonesia’s rich data landscape, new technologies); (ii) ability to harness the medium survey data collected specifically for this report, in private capacity to enhance incomes; and (iii) as well as anonymized data shared with the ability to benefit from public sector adoption of World Bank in confidence by some of the major the medium to provide services more effectively digital platforms in the country, this report: (i) and efficiently. OVERVIEW BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA ↳ Digital technologies significantly reduce economic costs related to search, replication, transportation, tracking and verification⬎ 16 Access to the Medium →Who is connected, who is not and why? Indonesia has made rapid progress on internet connectivity, but O ver the past decade, Indonesia has sustained steady growth in internet connectivity, driven primarily by rapid invest- about half of the adult population is still without access and the ment in network infrastructure by the private sector. The share of the adult population connected to the internet inequality in the access to the internet mirrors patterns of other ACCESS TO MEDIUM increased almost four-fold, from 13 percent in 2011 to 51 inequalities between demographic groups, regions and income classes percent in 2019.9 This impressive growth notwithstand- ing, 49 percent of Indonesian adults are still not connect- ed to the internet and a significant digital divide persists across various spatial, economic and social dimensions. For example, the urban-rural divide in connectivity is large and appears to have been increasing over the years. BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA In 2019, 62 percent of Indonesian adults in urban areas were connected compared with just 36 percent in rural BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA areas. Urban and rural internet connectivity was 20 and 6 percent, respectively, in 2011 (Figure O. 1). The Government of Indonesia (GoI) has made major ef- forts to close the digital divide, most notably with the implementation of the Palapa Ring project, which aimed to extend the fiber-optic backbone infrastructure of the country to the outer eastern islands. With the comple- tion of the Palapa Ring project in 2019, all of Indonesia’s 514 kota/kabupaten (cities/districts) are now connected to the national backbone. This has led to a remarkable increase in the proportion of adults connected to the internet in all major island regions of the country. But there are still sizeable gaps across regions. For example, 1 only about one-third of the adult population in Papua is connected, compared with about 55 percent in Java-Bali (Figure O. 2). At the same time, the fact that almost half Section ⬎ of the population, even in regions with relatively better infrastructure, remains without internet access points to major challenges in the middle and last mile connectivity segments. Income gaps in access are similarly huge. Adults in fam- ilies in the top decile of the income distribution are over five times more likely to be connected to the internet than adults in the poorest decile, only 14 percent of whom are connected (Figure O. 3). This sharp income gradient points to a possible affordability constraint in the access to internet. Likewise, there is also a sharp generational, education and gender divide. Younger adults are signifi- cantly more likely to be connected, as are adults who are better educated. Men are 8 percentage points more likely to be connected than women, suggesting possible inequal- 17 ities in device ownership within households. 18 FIGURE O.1 The share of the adult population with access to the internet has been increasing over the past decade PROPORTION OF INDIVIDUALS 15+ WITH ACCESS TO THE INTERNET LEGEND Urban National Rural SECTION — 01 BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA FIGURE O.2 FIGURE O.3 Some parts of the country are Richer Indonesians have better still lagging access PROPORTION OF ADULTS WITH ACCESS TO THE INTERNET, BY PROPORTION OF ADULTS WITH ACCESS TO THE ISLAND REGIONS IN 2011 AND 2019 INTERNET IN 2019, BY DECILE OF PER CAPITA CONSUMPTION Source: World Bank staff calculations based on various years of Susenas. Note: Connection to the internet is defined based on whether adults reported having access to the internet in the past three months (including accessing social media apps such as Facebook, 19 YouTube, Instagram, Twitter, and WhatsApp). Most Indonesians connect to the internet using FIGURE O.4 mobile devices, and private sector investment growth in mobile broadband infrastructure has powered the increase in internet connectivity Relative to other countries in the region over the past decade. Major players, such as Tel- Indonesia does well enough on mobile komsel, Indosat, XL Axiata, Tri and SmartFren, broadband penetration, but is lagging have accelerated the deployment of base stations severely on fixed broadband focusing increasingly on 4G/LTE stations. An estimated 95 percent of the population lives with- MOBILE BROADBAND PENETRATION in reach of the fastest, i.e., 4G/LTE networks, though the number of actual 4G/LTE subscrib- LEGEND ers with access to those networks is significantly 4G/LTE 3G GSM lower (just over 50 percent). Moreover, fixed broadband, or fiber-to-the-home (FTTH) ser- vice—particularly important for large volumes ACCESS TO MEDIUM of data usage, for instance by schools, medical facilities, government offices and businesses—is used by a very small segment of the population. Latest estimates from the industry put the total estimated number of fixed broadband subscrib- ers at about 9.7 million. This translates to fixed broadband penetration of just 4 percent of the population, or 16 percent of households. Thus, BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA while Indonesia performs relatively well com- pared with some of the regional peers in terms of mobile broadband penetration (particularly at slower speeds), it performs distinctly more poorly compared with some of the regional peers such as Singapore, Malaysia, Thailand and Vietnam on the fastest mobile broadband (4G/LTE) and fixed broadband rollout (Figure O. 4). → Adults in fam­ ilies in the FIXED BROADBAND PENETRATION top decile of the income distribution are over five times more likely to be connected to the internet than adults in the poorest decile LEGEND C onnecting people is not just Population about network coverage. Household Internet must be afford- able as well, especially for the poorer and less affluent segments of the popula- tion to be able to access and adopt it. Indonesia Source: ranked 61st out of 100 countries analyzed by the Telegeography Economist Intelligence Unit’s annual Inclusive (2020). Internet Index in 2020. Compared with its re- gional peers, Indonesia outperforms Cambodia and the Philippines, but lags Thailand, Singa- pore, Malaysia and Vietnam in terms of overall internet affordability. 20 Affordability of mobile data is not a major con- FIGURE O.5 cern, particularly for relatively small volumes of data use. While mobile service providers in In- donesia adopt differential tariff-pricing to cover Fixed broadband subscriptions are higher service provision costs in more sparsely prohibitively costly for many populated and geographically challenging areas, there is a wide range of mobile data packages for REASONS FOR NOT SUBSCRIBING TO FIXED BROADBAND, BROKEN different budgets and needs, making internet mo- DOWN BY ISLAND REGIONS bile data relatively affordable for every segment of the population. Even for poor households, the average price per GB in a mobile data plan of US$0.64 is less than 1 percent of their monthly per capita expenditure, suggesting that mobile data costs should not prevent Indonesians from connecting to the internet. The price of mobile prepaid data in Indonesia—1GB at an average SECTION — 01 of 0.95 percent of GNI per capita—is lower than the ASEAN average of 1.4 percent and the global average of 5.5 percent. This is also well within the affordability criteria set out by ITU-UNESCO (1GB at 0.95 percent of GNI per capita). In contrast to mobile broadband, setting up a fixed broadband service entails a wide array of BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA costs that can include the cost of modem rental, an installation fee and the monthly subscription fee. In Indonesia, the price of a monthly broad- band subscription currently ranges from IDR 250,000 to IDR 800,000 (US$20 to US$55). The cost of installation and the first-month subscription of a fixed-line internet connection using even the cheapest internet package is es- timated to be equivalent to around 1.2 times the monthly per capita expenditure of a typical poor household. Indeed, Indonesia ranked 131st out of the 200 countries in the 2019 ITU rankings on fixed-line subscription fees, suggesting that cost could be a clear binding constraint for the adoption of fixed broadband. LEGEND Data from a survey conducted specifically for this report confirm this. Over 40 percent of house- Source: Digital Economy Household Survey, 2020. holds reported fixed broadband subscription costs to be prohibitive. This is distinctly higher than the proportion of households whose reasons for non-adoption were the use of mobile broadband as substitutes for fixed broadband (24 percent) and the proportion of households that reported not Indonesia ranking having access to a provider (14 percent) (Figure O. out of the 200 countries in the 5). From a regional perspective, cost is the most sa- 131 2019 ITU rankings st lient barrier to adoption in places such as Sumatra, on fixed-line Sulawesi and Maluku, while availability of services subscription fees is the bigger barrier in Papua and West and East Nusa Tenggara. In contrast, Java-Bali stands out with the highest proportion of households that treat mobile broadband as a satisfactory enough substitute for the fixed broadband internet expe- 21 rience (Figure O. 5). FIGURE O.6 →Both fixed and mobile broadband speeds in Indonesia are among the Both fixed and mobile broadband download speeds in Indonesia are among the lowest lowest in ASEAN, and the poorer in the ASEAN region quality in the more populous parts of the country suggests that network MOBILE BROADBAND THROUGHPUT (MBPS) congestion is a major challenge Q uality of service (QoS), or the overall quality and reli- ability of internet services, ACCESS TO MEDIUM is also another challenge in different parts of the coun- try. QoS impacts the speed of data transmission (uploads, downloads), the quality of phone calls, and hence the ability of us- ers to access online services, be it e-commerce or video streaming, for example, for remote health- BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA care or learning services that have become in- FIXED BROADBAND THROUGHPUT (MBPS) tegral during the COVID-19 pandemic. This is also an area in which Indonesia lags critically behind some of its regional peers. Average mo- bile broadband download speed experienced by Indonesian consumers is about 9.8 Mbps, the lowest speed in all of ASEAN. The mobile down- load experience in Indonesia is not just a mere one-quarter of the average speed available to Singaporean consumers but also a little over half of what is enjoyed by consumers in Myanmar. Incidentally, Myanmar is also the only country in the ASEAN region that Indonesia outperforms on fixed broadband download speeds. But the overall level is almost one-tenth of market lead- ers in the region such as Singapore (Figure O. 6). Source: Ookla Speedtest (March, 2020). Note: Mobile broadband speeds in the left panel and fixed broadband speeds in the There is considerable variation in download right panel. speeds within Indonesia as well, with, somewhat interestingly, places in West Papua (Sorong), Maluku (Ambon) and Papua (Jayapura) reg- istering the best mobile download speeds. In contrast, more populous places particularly in the periphery of large metropolitan areas, such as Cimahi outside Bandung, and Tangerang and Bogor, just outside Jakarta, are the places with the poorest internet experience as measured by download speed. QoS is determined by several factors, including network congestion (linked to the availability of spectrum for data transmis- sion), availability of cell sites, weather and geo- graphic location. This observed pattern on the variation in the QoS across the country clearly points to network congestion being a key imped- iment to high quality download experience in the higher population density places in Indonesia. 22 →Limited spectrum, unavailability of specific bands, limited regulatory clarity on infrastructure sharing and lack of competition, especially in the provision of fixed broadband services, are the main drivers of limited access to good quality internet in Indonesia BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA 23 A ll Mobile Network Op- with lower ongoing operating costs. This would UPWARD OF 80% erators (MNOs) need a result in more affordable services to Indonesian spectrum portfolio, and consumers. the availability and overall quality of mobile broad- While the unavailability of low-frequency bands band hinges crucially on limits coverage expansion, the unavailability of having adequate spectrum. Currently, Indonesia specific high-frequency capacity bands retards has allocated a total of 467 MHz in total IMT the preparation for 5G rollout. Indonesia has re- spectrum to its active MNOs. In global and re- cently made the 2,100 MHz and the 2,300 MHz gional terms, this quantum of available spectrum bands available through an auction process. But in Indonesian is low and has not increased for the continued unavailability of higher-frequen- some time except for some small additional spec- cy capacity spectrum, including particularly the trum being made available in the 2.3 GHz band. 2.6 GHz and the 3.5 GHz bands, has meant that Before the introduction of 5G services, 100-150 the MNOs have been doing their best with their MHz in total IMT spectrum may have been existing spectrum allocations. Arguably, they are ACCESS TO MEDIUM enough for a successful MNO. However, this is over-investing in additional cell sites for 4G/ unlikely to remain the case in the future. Poten- LTE services when they could be investing in tially, MNOs will need more than 1,000 MHz new 5G technology. of spectrum (including 3.5 GHz and mmWave spectrum), although prices for spectrum cannot As 5G is more efficient, it offers a much lower increase by that same factor as this would crowd cost per unit (and higher speed, better QoS out investment. Three Indonesian MNOs do not and can be used for other innovations, such as ↳ Passive have enough spectrum to be viable in the long 5G IoT), instead of continued capacity growth BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA infrastructure such term, with Hutchison (Tri) having no low band on current 4G/LTE systems. The sector needs as ducts, poles and rights of way spectrum at all. clarity, perhaps in the form of a spectrum road- account for up to map, in order to be better able to plan and direct 80 percent of the At about 1.71 MHz per million people, Indone- investment in the network in the most optimal investment in fixed sia’s total IMT spectrum allocation is on the low- way. Without such clarity, investment becomes broadband rollout er side compared with other emerging countries. significantly less efficient, and does not result in This lack of useable IMT spectrum available to improved broadband speeds and lower latency the MNOs has a direct negative impact on the offerings to Indonesian consumers. In addition, quality of mobile internet services in Indonesia. it is necessary to consider the future switch-off This manifests itself in a number of ways, such as of legacy 2G and 3G networks as other Asian and poor latency, call drops, inability to do voice over ASEAN markets are doing or have done in order LTE (VoLTE), etc. However, the most import- to free up legacy spectrum for 4G and 5G ser- ant way is how it negatively affects broadband vices.11 For example, Singapore’s 2G services are speeds as discussed above, especially download already switched off, Malaysia’s 3G networks are speeds as traffic to consumer mobile devices is scheduled to be switched off by the end of 2021, typically asymmetrical. Higher spectrum pric- and Vietnam is scheduled to switch off legacy 2G es also result in less capital being available for services in early 2022.12 MNOs to invest in the network. With height- ened additional demands for bandwidth due to Major investment is required to expand fixed larger share of population working from home broadband rollout in Indonesia. However, (WFH) and studying from home (SFH) due to typically 70 to 80 percent of the investment in the COVID-19 pandemic, the need for further fixed broadband is in the form of passive infra- useable spectrum is more acute. structure, such as ducts, poles, rights of way, and civil works. Mobile broadband deployment In addition to quality issues, this spectrum scar- across Indonesia has relied instrumentally on city also contributes directly to the digital di- tower-sharing, which has been well-established vide by constraining further rollout of mobile since the 2009 Regulation on Tower Sharing. broadband. The crucial 700 MHz band, which Independent tower-sharing companies have has propagation characteristics that are particu- brought efficiency to tower deployments. larly well suited for remote connectivity, is cur- Cross-sectoral passive infrastructure sharing rently occupied by analog television. If the 700 between (rail)roads and fiber-optic and elec- MHz spectrum were to be made available to the tricity poles has also occurred to some extent. MNOs in Indonesia, then 4G and/or 5G10 ser- But sharing between the telecom operators is vices could be provided to remote communities not yet well established and lacks regulation. at significantly lower capital cost and therefore Duplication of passive infrastructure is costly 24 and unnecessary, and therefore making reg- mobile providers to offer services without re- 65 ulatory provisions to avoid such duplication quiring a fully duplicated RAN rollout. mil. would be a significant step toward expanding fixed broadband access networks. Unlike the mobile broadband market, the fixed million broadband market is very concentrated, with homes passed by Sharing of active network will also increase com- the current FTTH rollout dominated by PT PLN petition in mobile broadband in rural areas. This Telkom (IndiHome), with some smaller pro- 30 mil. takes the sharing a step beyond the current (pas- viders such as Biznet, MNC, My Republic, etc. sive) tower-sharing arrangements. The more in some major cities (Figure O. 7 and Figure O. million homes remote areas of the country often have a single 8). In most places there is no real competition passed by Telkom provider while, if active rural access network for fixed broadband. This lack of competition (RAN) sharing were to be allowed, this would in the fixed broadband space constrains rollout create more options for competition. This could and affects the quality of services, as well as the be in the form of a single shared RAN in the most affordability of tariffs, as it limits the incentive remote areas, or two competing RANs in rural to upgrade networks in a timely manner and re- areas that, through sharing, enable three or more main competitive in terms of pricing. SECTION — 2 FIGURE O.7 FIGURE O.8 While the mobile …the FTTH market is more broadband space is concentrated, with Telkom competitive… dominating market share BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA SUBSCRIPTION SHARES OF VARIOUS SUBSCRIPTION SHARES OF VARIOUS PROVIDERS PROVIDERS Telkom Telkom 46% 87% Source: Subscription data various sources. 25 A fixed broadband provider should be able offer fixed telephony services over the broad- to deliver a full portfolio of services, not only band connection, customers would have to broadband internet but also telephony, TV and change telephone number to migrate to another many other value-added services. However, the provider. Not being able to take their numbers current regulatory regime limits this by requir- to another provider locks in users with Telkom, ing providers to bid for service-specific licenses as changing numbers can be a disincentive, es- instead of a single uniform license for all services. pecially for institutional users (such as schools Local telephone licenses are still formally limited and businesses). to Telkom, Indosat and Batam-Bintan Teleko- munikasi, with Telkom effectively being the only Although (fixed) telephony is a service under provider outside a specific area of Batam-Bin- pressure, the restrictive licensing regime reduces tan. This is a major hurdle for fixed broadband the competitiveness in the broadband market competition since customers are forced to keep and limits entry for other providers, since they a Telkom connection to maintain their telepho- cannot offer a full-service proposition to cus- ny service. Number portability is another issue. tomers who remain locked in with the incum- ACCESS TO MEDIUM Even if another provider were to be allowed to bent provider. BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA “The lack of competition in the fixed broadband space not only constrains rollout but also affects quality and affordability of internet as the incentive to upgrade networks and remain competitive in terms of pricing is limited” 26 Harnessing O n average, Indonesians spend around six hours online, with the younger and more edu- the Medium cated segments more digital- ly engaged than the relative- to Boost ly older and less educated demographic. Intensity of internet engagement is Income highest for the 16 to 25 age group, which on average spends 9.7 hours a day online. There are no significant differences be- →Who is tween men and women in terms of intensity of internet use. Among the various online activ- HARNESSING THE MEDIUM ities, communication, social media and leisure winning, who dominate usage (Figure O. 9). According to in- dustry estimates, Indonesia is the fifth most in- SECTION — 02 ternet engaged country in the world, behind the is behind, Philippines, Brazil, Thailand and Colombia. The average intensity of internet usage in Indonesia is 28 percent above the global average, making it an & why? attractive market for content developers and ad- vertisers.13 Another industry estimate suggests that daily time spent on the internet in Indone- BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA sia could have spiked by 31 percent during the BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA peak of the pandemic and leveled off at around Indonesians who are connected 20 percent more than pre-pandemic levels more recently, suggesting that as Indonesia emerges to the internet use it from the crisis its population could have become quite intensively, with even more intensively engaged on the internet.14 communication, social media Being an internet user in Indonesia is almost and leisure applications synonymous with being a social media user. dominating usage Over 85 percent of internet users were also users of social media, with the most popular platforms being WhatsApp, Facebook and Instagram. WhatsApp is principally used for communication and sharing information while on other platforms (Facebook, Instagram and 2 Twitter), users are active in seeking out news and information. Social media platforms are increasingly also important for commerce in Section ⬎ Indonesia, with a sizeable proportion of users (about 20 percent) using Facebook, Instagram and WhatsApp for buying and selling. The most common topics of discussion across all platforms relate to hobbies and lifestyles. How- 5 ever, religion, public policy and politics are also th According to industry widely discussed, highlighting the importance estimates, Indonesia is the of social media as a channel of communication fifth most internet engaged country in the world, behind and influence on these topics. the Philippines, Brazil, Thailand and Colombia. Though seemingly unproductive, social media and other digital applications used for leisure also generate value and can be stepping-stones to more sophisticated and ‘productive’ uses. A key question that is often asked is whether the consumption of these largely free digital ser- 27 vices generates any value to the users, or are the 28 FIGURE O.9 Communications, social media and leisure activities account for 80 percent of average time spent online SHARE OF TIME SPENT ONLINE 36% 21% 21% SECTION — 02 Leisure 11% 7% BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA Others Communications Social Media Browsing Buying & Selling 3% Source: World Bank staff calculations using data from the Digital Economy Household Survey (2020). Note: Communication includes time spent on online texting and email. Leisure consists of time spent streaming content (audio and video), as well as playing online games. Social media includes time spent on Twitter, Facebook, and Instagram. Others consist of e-travel reservation, e-gig jobs, e-finance, ordering ride-hailing for transportation and food, and creating or downloading digital content. hours spent browsing pictures of friends on In- stagram and watching cat videos on YouTube ↳ Though seemingly simply time away from other more productive unproductive, social endeavors. If there is value generated, it is not clear how this value can be measured. There- media and other fore, these benefits are often also not captured digital applications in statistics on national accounts. Yet, the fact used for leisure also that so many consumers voluntarily choose to spend so much time consuming these services generate value and can must imply that there is some consumer surplus be stepping-stones to that they derive from it. There have been some more sophisticated and efforts, primarily in advanced economies, to try to estimate the value of this consumer surplus ‘productive’ uses and, depending on the methodology used, the numbers range from 3 to 25 percent of income in one estimate, and close to US$100 billion over the 2007–11 period in another.15 Using one of the approaches from the literature, we estimate that consumer surplus of free internet services in Indonesia averages around 19 to 21 percent of 29 per capita income for users.16 21% ↳ of the urban population ordered food using the digital ride- hailing app HARNESSING THE MEDIUM BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA → Digital ride hailing is commonly used and not only provides mobility services to connect the otherwise fragmented labor markets in Indonesia’s large and sprawling metropolitan areas, but also offers several other conveniences D Digital ride-hailing ser- 36.5 percent of urban dwellers reported using vices provided by com- the ride-hailing service provided by these com- 18% panies such as Gojek— panies before the pandemic.17 A striking 18.4 of users of these Indonesia’s homegrown percent of users of these ride-hailing services ride-hailing decacorn that epitomizes used them for their daily commutes. Other services used them the country’s digital poten- reasons for use included circumstances when for their daily tial for policy makers—and its regional com- private vehicles could not be used (52 percent), commutes petitor, Grab, are potentially among the most a travel option for odd hours (41 percent), and frequently experienced digital transactions for to travel to areas where public transportation many Indonesians. The green jackets worn by services are not available (26.6 percent). With- the motor-cycle taxi drivers of both companies out the availability of these digital ride-hailing are a distinctive feature of almost all Indone- options, journey times would be longer for 55 sian cities. And this is not without reason: these percent of users but travel costs higher for a platforms not only provide efficient mobility negligible 1.9 percent of users. In addition to services to connect the otherwise fragmented ride-hailing services, these companies have also labor markets in Indonesia’s large and sprawling been providing a whole host of other services metropolitan areas, but also offer several other through their apps. Chief among these is food conveniences such as food delivery and logistics. delivery through their complementary Go- While the pandemic and the associated decline Food and Grab-Food services. Survey results in mobility has temporarily hit this segment show that around 21 percent of the urban pop- hard, one-quarter of all Indonesians and around ulation ordered food using these apps. 30 → Buying and selling online is growing, and while still only prevalent among a small share of the population, it is already enhancing consumer welfare by providing cheaper options, greater product variety and convenience SECTION — 02 E -commerce is one of the ability of products drives 40 percent of online largest components of In- purchases. In Bali, the reasons for buying online BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA donesia’s digital economy are roughly split equally among price, conve- and has also been one of the nience and local non-availability of the goods major drivers of its growth that are purchased. In DKI Jakarta, however, during the pandemic. In- online purchases are driven almost exclusively dustry estimates suggest that the gross merchan- by price- and convenience-related factors. In dise value (GMV) of e-commerce in Indonesia is addition to lower prices, being able to consume likely to have increased by 54 percent yoy, from goods that were previously unavailable, having US$21 billion in 2019 to US$32 billion in 2020. a greater variety of the same products to choose This more than offsets the decline in travel over from and being able to conveniently procure are the same period, which contracted from US$10 welfare enhancing and Indonesian consumers billion to US$3 billion.18 The industry is buoyant who have adopted e-commerce are realizing about the stickiness of pandemic-driven adop- some of these benefits.19 tion from both the buyer and seller sides, and the possibility of this growth potentially setting off In addition to making cheaper goods available e-commerce on a different trajectory. In 2019, to those who buy online, greater penetration of the proportion of internet-using households e-commerce into a geography can also have an that reported buying and selling online was impact on the prices of similar goods sold offline, 12.8 and 5.1 percent, respectively. As a share of helping to lower overall inflation for the benefit the overall population, e-commerce-engaged of the larger community. This can happen be- households (those who buy or sell) only account- cause, with cheaper options online, including ed for around 7 percent. A rough back-of-the- from sellers in other parts of the country, buyers, envelope calculation using industry estimates on especially in remote places, can essentially arbi- the adoption of digital services during the pan- trage away price differentials across geographies. demic and their anticipated stickiness suggests Indeed, we find that price inflation of commodi- that this could grow by up to 10 to 11 percent of ties likely to be traded relatively more intensively the population as Indonesia begins entering the online was 0.8 of a percentage point lower in high economic recovery phase. e-commerce penetration provinces relative to provinces with lower e-commerce penetration. Indonesians who use e-commerce appear to be A similar impact does not exist for commodities benefiting from it. Price and convenience are the less likely to be traded online. In other words, most frequently cited reasons for online pur- greater penetration of e-commerce in a geogra- chases (Figure O. 10). Looking across regions, phy may be contributing to a broader slowdown other factors also come up in specific geogra- in inflation of a class of commodities more likely 31 phies. For example, in Papua, local non-avail- to be traded online with greater intensity. FIGURE O.10 Price and convenience are the most dominant reasons for buying online… …FOR THE COUNTRY AS A WHOLE HARNESSING THE MEDIUM …AND, WITH SOME HETEROGENEITY, FOR THE MAIN ISLAND REGIONS AS WELL BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA LEGEND Source: World Bank staff calculations based on data from the Digital Economy 40% Household Survey (2020). of e-commerce transactions in Papua entail purchase of goods not available in local markets 32 →While most workers have benefited from digital technologies, SECTION — 02 the more educated ones have benefited BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA more than others 33 G HARNESSING THE MEDIUM BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA rowth of the digital economy has clearly generated some Yet, evidence suggests that specific applications of digital benefits for the Indonesian consumers who are connected technologies are benefiting some population sub-groups. and able to avail themselves of these services. A key ques- For example, e-commerce provides a viable pathway for tion of interest is whether the applications of these technol- Indonesian women re-entering the labor market after ogies can also bolster income-earning opportunities. This leaving jobs due to pregnancy/maternity or domestic can be both at the extensive margin by creating more jobs work. Similarly, digital gig jobs, including those in the of a certain type, and at the intensive margin by enhancing ride-hailing industry, are providing economic oppor- the returns to labor in the form of higher wages and salaries. tunities that appear slightly better than other informal Greater availability and access to fast internet has been options, especially to young, relatively better educated, found in the literature to have a positive impact on broad- male adults in urban areas. er employment outcomes, including increased (female) labor force participation and employment rates, net firm In an aggregate sense, however, we find that higher skilled entries and improved productivity.20 There is also evidence workers have perhaps benefited more than the lower from Nigeria to suggest that increased mobile broadband skilled ones from the expansion in internet access that coverage has led to an increase in labor force participation Indonesia has experienced in recent years. Specifically, and employment, particularly among women, and this has over the 15-year period between 2005 and 2019, educated enabled households to realize higher income and attain Indonesians have consistently enjoyed higher earnings higher living standards. Greater mobile broadband pen- relative to their less educated peers. For example, aver- etration is associated with lower aggregate poverty rates. age earnings for the most educated group (those with a college or university degree) have been almost 80 percent The evidence from Indonesia, however, is somewhat mixed. higher than those for the uneducated group (less than six In a sample of districts that were not connected to the fiber years of schooling) (Table O. 1).21 Looking at the differen- optic backbone until 2010 - 33 percent of all districts and tial impact of internet penetration on these skill premia, ones disproportionately outside of Java-Bali and Sumatra - we see that while greater internet penetration benefits being connected to the national backbone infrastructure in- all types of workers except the very low educated, the creased the number of internet users but did not fundamen- benefits are higher for the more skilled. The magnitude tally alter the structure of the economy. Patterns of overall of the coefficients implies that, if internet penetration labor force participation, female labor force participation, (measured by the proportion of individuals having access total employment and youth employment were similar be- to internet at home) increases by 10 percentage points fore and after the arrival of the fiber optic links. It is true that in a particular district, the earnings premium enjoyed a dominant share of Indonesia’s industrial activity is concen- by a college educated worker will, on average, go up by trated in Java-Bali. Close to 90 percent of jobs in manufac- 6 percentage points.22 Thus by benefiting higher-skilled turing, and 84 percent of all jobs in high-value or modern workers more relative to lower-skilled ones, the pattern of services, for example, are in Java-Bali and Sumatra, while diffusion of digital technologies in Indonesia is potentially the more recently connected parts of the country remain contributing to an increase in overall inequality. more dependent on agriculture and natural resources, etc. 34 TABLE O.1 Greater internet access is benefiting higher-skilled workers more than the lower skilled ones RETURN TO EDUCATION W.R.T. ADDITIONAL AVERAGE RETURN OF 1 <6 YEARS OF SCHOOLING PERCENTAGE POINT INCREASE IN INTERNET PENETRATION PRIMARY SCHOOL 18.50% 0.00% LOWER SECONDARY SCHOOL 32.80% 0.10% HIGHER SECONDARY SCHOOL 49.70% 0.30% COLLEGE/UNIVERSITY DEGREE OR HIGHER 79.40% 0.60% SECTION — 02 NON-PRODUCTION WORKERS (RELATIVE TO PRODUCTION WORKERS) IN MANUFACTURING 12.70% 0.20% Source: Jacoby et al. forthcoming. Note: Reported marginal returns to internet are coefficients on the interactions between education levels of individual workers and average internet connectivity within a district in fixed-effect panel data models that also control for all relevant individual characteristics, level of urbanization and economic development of the districts, as well as year effects to capture secular trends in returns to skills. A separate specification is used for the non-production worker result. The analysis uses data from Sakernas (Indonesia Labor Force Survey) (1990–2019), Susenas (Indonesia Socioeconomic Survey) (1990–2019) and the Medium and Large Manufacturing Survey (1995–2015). The unit of the analysis is individual worker BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA (production/non-production worker by sector-district in the case of the Manufacturing Survey → One of the reasons for this is that despite the pandemic induced increase in the adoption of digital technologies, overall digital adoption by firms and workers is still quite low T he need to ensure business had closed and continued to remain temporarily continuity in a period of closed. Of the 46 percent of firms that reported limited mobility during the having to make some adjustments in their busi- COVID-19 crisis has forced ness processes to either remain open or to reopen many Indonesian firms to after a hiatus, 42 percent reported adoption of initiate and intensify their the internet, social media, specialized apps or digital transformation. A survey conducted digital platforms as having been the main coping by the World Bank in June 2020 showed that strategy (Figure O. 11). The pandemic induced only 36 percent of firms had managed to remain uptake of digital technologies was found to be continuously open since March 2020. The same higher among larger firms (90 percent), but also survey also showed that only about 40 percent of not entirely negligible for SMEs (58 percent) firms had temporarily closed but had reopened and micro firms (32 percent) (Figure O. 12).23 35 by June 2020, while roughly one in five firms In addition to general business administration, FIGURE O.11 marketing and sales have been the functions that have seen the strongest pivot to digital. Larger SHARE OF FIRMS ADJUSTING THEIR BUSINESS PROCESS DUE TO COVID-19, and more formal firms with a more conducive BY TYPE OF ADJUSTMENTS enabling environment (e.g., access to internet, digital knowhow) would have certainly been bet- ter positioned to take advantage of these oppor- tunities. Businesses that were already online before the pandemic also intensified their online activi- ties. For example, digital merchants with an online and offline presence were found to increase their online activities during the pandemic.24 Industry estimates suggest that e-commerce volumes soared HARNESSING THE MEDIUM by as much as a factor of 2.1 during the pandemic and are expected to settle at around 1.7 times the levels relative to pre-pandemic levels.25 This soaring of demand can naturally be expected to draw more suppliers into the digital ecosystem. However, any increase in digital adoption that the pandemic brings will be from a very low base, es- Source: World Bank Survey. pecially for micro and small enterprises. Though somewhat dated now, the economic census from BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA FIGURE O.12 2016 reveals that only 5 percent of all Indonesian non-agricultural enterprises used the internet, SHARE OF FIRMS THAT REPORTED ADJUSTING IN RESPONSE TO COVID-19 with significant heterogeneity by firm size. Larger establishments were significantly more likely to have adopted the internet (67 percent) to buy and sell, as well as to conduct other activities over the internet, while the adoption rate among micro-enterprises was significantly lower (4 per- cent) (Figure O. 13). More recent data suggest that internet adoption, especially by household enterprises, could have increased to about 11.1 percent in 2018 and 12.8 percent in 2020.26 How- ever, even among household enterprises, the rich- er ones exhibit a much higher level of adoption relative to the poorest ones (Figure O. 14). The low level of internet adoption by enterpris- es—especially micro and small enterprises—also LEGEND translates into low adoption among workers. This is especially true given the fact that these micro and small enterprises jointly account for almost 75.3 percent of Indonesia’s non-agricul- Source: World Bank Survey. tural employment. In 2019, only 27.2 percent of all workers reported using the internet at Pandemic induced uptake of digital technologies their work. This was the highest among tertia- ry educated workers (78.1 percent), followed by LARGE FIRMS SMALL FIRMS MICRO FIRMS much lower use among workers with just low- 90% 58% 32% er secondary education (17.7 percent).27 Thus, on the one hand, the overall level of internet adoption among workers and firms is low. On the other hand, there are sharp heterogeneities in adoption between different types of workers and firms, with the higher skilled workers, and larger and more formal establishments having greater adoption rates. 36 FIGURE O.13 FIGURE O.14 Internet use by non-agricultural Internet adoption is far higher enterprises is still very low, with among richer household enterprises much higher incidence among medium and large enterprises LEFT AXIS SHARE OF NON-AGRICULTURAL ENTERPRISES SHARE OF HOUSEHOLDS WITH ENTERPRISES WHO USE THAT USE THE INTERNET, BY SIZE THE INTERNET FOR THEIR BUSINESS OPERATIONS, BY INCOME STATUS RIGHT AXIS THE SHARE OF ENTERPRISES OUT OF TOTAL NUMBER OF ENTERPRISES (DOT) SECTION — 02 BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA Source: Economic Census 2016, WB staff calculations. Source: DEHS 2020, WB staff calculations. → Another reason is that while low-skill biased applications of digital technologies such as e-commerce and digital gig-work are enabling certain segments of the workforce to boost income, their reach is limited. Digital gig work is largely concentrated among urban men and e-commerce growth is severely constrained by issues of trust, logistics and internet connectivity U nlike the narrative surrounding digital workers who had a job before, “unsatisfactory income” economy jobs in more industrialized was the most common reason for switching to digital gigs. countries, we see that digital gig jobs However, these opportunities are largely limited to select in Indonesia are, on average, relative- demographic: men (85 percent of all digital gig workers), ly better paying than many informal living in urban areas (87 percent) and working in the jobs, though certainly not as well-pay- transportation, storage and communications sector (69 ing as wage jobs. For example, internet-using gig workers percent). In sum, digital gig workers in Indonesia work make 6.2 percent more per hour in earnings than otherwise significantly harder than all other workers but earn slightly identical informal workers in the same sector of employ- better on average in comparison to informal workers. Digi- ment. But they also work the longest hours among all other tal gigs are also a stepping-stone into the labor market and types of workers. Indonesians work 39 hours a week on a perceived ticket to higher incomes for many, but these average and informal workers typically work 38 hours a opportunities are concentrated among a specific sub-group week. In contrast, digital gig workers average 49 hours of the population. a week. About 33 percent of digital gig jobs were being performed by workers for whom this was their first ever E-commerce is another promising source of employment job, suggesting that these were new opportunities being and income. In 2019, around 13.2 million out of a total of 37 created by the digital economy. Among the low-skilled around 127 million employed workers (10.4 percent) in 38% Indonesia were engaged in e-commerce activities as either their primary or secondary job.28 In terms of its contribu- tion to overall employment, this number is higher than in China, where e-commerce accounts for 5 percent of total employment.29 A peculiar aspect of e-commerce in Indo- nesia is the dominance of social media and chat apps in the e-commerce landscape. Among those engaged in e-com- merce, about 71 percent reported selling exclusively via so- cial media and chat messaging apps, 3 percent sell via a plat- form only, while 26 percent use a blend of the two.30 This means that e-commerce in Indonesia remains dominated by consumer-to-consumer (or C2C in industry parlance) business, which makes it more similar to TaoBao Market- HARNESSING THE MEDIUM place, as opposed to the business-to-business (B2B) eco- system similar to Alibaba, or even a business-to-consumer (B2C) one, such as TMall. These C2C digital merchants are generally regarded as more casual market participants than the B2B or B2C ones. They also operate on a smaller scale and potentially also at a lower level of productivity. ↳ Among women who Although Indonesian men are almost twice as likely to use the internet be using the internet at work, internet-using women are at work in their slightly more likely than men to be engaged in e-commerce BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA primary jobs, 37.8 activities. Among women who use the internet at work in percent of them their primary jobs, 37.8 percent of them are active online are active online sellers (as sellers (as opposed to 34.8 percent of men). E-commerce opposed to 34.8 is more common as a secondary job, suggesting that it plays percent of men) a useful role in supplementing family income, especially by women and youth. Among all women, e-commerce en- gagement (selling) is highest especially among those who are primarily engaged in housework. Moreover, e-com- merce also appears to be providing a pathway for women re-entering the labor market by providing opportunities to those who may not be in their previous jobs for a variety ↳ 85 percent of of reasons. About 58.1 percent of internet-using women all digital gig who had to leave their previous jobs because of pregnancy/ workers are men maternity or to return to domestic work were engaged in and and 87 percent of them live in e-commerce, suggesting that e-commerce provides one 85% urban areas avenue for women to stay productively engaged, given that they exit other forms of work to take on greater respon- sibilities at home. The female labor force participation rate in Indonesia has been persistently low, hovering at around 50 percent for the past three decades. This has been identified as one of the key challenges in meeting Indonesia’s development aspirations of becoming a high-income country.31 By ex- panding opportunities for women in the labor market, e-commerce could help Indonesia to at least partially ad- dress this challenge. However, the opportunity to engage in and benefit from e-commerce is not currently available to all Indonesians. While e-commerce has increased and spread to all parts, its intensity remains concentrated in more populous and affluent parts of the country (Figure O.16). Analyzing the spatial and temporal evolution of e-commerce over the past five years, we find that, in addition to income and 38 population, internet connectivity and the cost FIGURE O.15 of logistics have also played an important role in explaining e-commerce growth. E-commerce penetration (the proportion of buyers and sellers E-commerce is more prevalent in populous in the population) has increased more rapidly and affluent provinces in provinces in which internet access expanded and the cost of logistics declined over this peri- PROPORTION OF HOUSEHOLDS WITH ACCESS TO INTERNET ENGAGED IN od. E-commerce intensity (value and volume of E-COMMERCE, BY PROVINCE transaction per buyer and seller), on the other hand, is constrained more significantly by the cost of logistics. In other words, while expand- ing internet access has drawn more people into the ecosystem, the cost and ease of logistics con- strain how intensively they are able to buy and sell online. SECTION — 02 Logistics as a bottleneck for e-commerce is con- sistent with the broader challenges that Indo- nesia faces in moving goods and commodities across its far-flung geography. The availability and reliability of transport infrastructure is the first, and perhaps the major, impediment to a smooth logistics chain. There are considerable imbalances of land, sea and air connectivity, for BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA example, between well-developed cities around Jakarta, Surabaya, Medan and Denpasar (Bali), and to secondary, tertiary and rural areas, result- ing in high variability in logistics costs. A 2017 World Bank survey of manufacturers on logistics performance in Indonesia showed that compa- nies located in the Jabodetabek area (Greater Jakarta) managed to receive their goods in full and in good condition, and to maintain logistics costs at around 12 percent of the cost of sales, whereas companies in Kalimantan incurred up to 30 percent of cost of sales in logistics costs. In addition to direct logistics costs, delays in receiv- ing or sending products are another source of indirect logistics cost for manufacturers. Indonesia’s entire logistics performance is ham- pered by bottlenecks from the first to the last mile. In addition to weaknesses in transport in- frastructure, the availability and competitiveness of logistics service providers (LSPs) is a chal- lenge, especially outside of the main economic areas.32 On maritime connectivity, the lack of regular inter-island maritime routes affects the timeliness of goods transit, with domestic ship- ping lines channeling regular calls mostly on the most lucrative shipping lanes (between the main ports) and the development of roll-on roll-off shipping (ro-ro), which has proven cost effective in several maritime countries, being constrained. On air connectivity, airlines usually give priority to passengers rather than goods, which reduces the likelihood of goods being delivered on time Source: World Bank staff calculations using data from SUSENAS 2019 Note: Households are considered engaged in e-commerce if they report buying 39 to the next destination. On land connectivity, or selling online FIGURE O.16 Adoption of digital financial services is extremely low 0.5% 9% Advanced 43% DFS Users users of DFS 52% Personally own account With access HARNESSING THE MEDIUM to account All HHs 48% 9% 34% Access Only have Financially others' bank excluded account account 50% BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA Source: World Bank staff calculations based on data from the Digital Economy Household Survey (2020). ↳ Even among those who buy online, 50 percent still prefer to pay cash on delivery. the lack of temperature-controlled trucks and quality whether a return will be accepted in case the customer is warehousing services across Indonesia prevents expansion not satisfied. Trust could also relate to having to make on- to secondary and tertiary cities, especially for perishable line payments, and often in advance of the package being goods. More specifically on the last mile, a key challenge is received. The general lack of trust in online transactions is also the lack of standard addresses and precise postcodes in among the most frequently cited reasons for not engaging Indonesia. This prevents the implementation of productiv- in digital transactions in Indonesia. Even among those who ity enhancement tools, such as the automation of sorting buy online, 50 percent still prefer to pay cash on delivery. facilities to speed up routing of goods, and the utilization Lack of access to bank account is a binding constraint to of route optimization software to map the most efficient participation in the digital economy for those in the bot- routes for the courier. A complex regulatory framework on tom 20 percent of the distribution. With only 52 percent logistics services and an uneven distribution of population of all households having access to a bank account, financial across the archipelago drive these logistics challenges. inclusion is a recognized challenge in Indonesia (Figure O. 16). While 9 percent of households are users of DFS Another key bottleneck in the expansion of e-commerce (which we define here as having access to online banking and the digital economy more broadly in Indonesia is the and mobile money services), a much smaller proportion lack of trust in digital transactions and the consequent low of households (0.5 percent) are users of more advanced adoption of digital financial services (DFS). Trust can have DFS products, which would include credit, remittances, multiple dimensions and can, specifically in the context insurance, etc.33 of e-commerce, also include issues related to whether a purchased item will be delivered in good condition and 40 → Striking the right balance between promoting innovation and growth without according undue advantages to first movers in the new economy is critical from the perspective of equity SECTION — 02 ↳ Concerns regarding unauthorized data disclosure by any of the several entities involved could discourage the more sophisticated would be-users from adopting DFS 52% For more sophisticated would-be users, issues of trust could also be rooted in the understanding I In addition to universal- izing the medium by ex- BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA of the risks related to data governance and priva- panding access to reliable cy, cyber security and operational risk, financial and high-quality internet integrity, and several others.34 Concerns regard- at affordable prices to all ing unauthorized data disclosure by any of the Indonesians, maximizing several entities involved could discourage this economic inclusion benefits of digital tech- segment from adopting DFS. And these are not nologies will also require enabling the popula- entirely misplaced concerns; complaints coming tion—especially those at the lower parts of the from financial consumers, as well as the banking income distribution or living in less populous sector itself, on these breaches have been increas- and prosperous parts of the country—to har- ing lately. While Indonesia’s Financial Services ness the medium to boost their incomes. Some Authority (Otoritas Jasa Keuangan, OJK) has of these efforts could be purely in the digital been trying to develop a stronger legal and reg- domain. For example, officially recognized dig- ulatory framework for this, consumers still re- ital IDs backed by strong consumer and privacy gard the disclosure of personal ID to financial protection mechanisms to foster greater trust in service providers as a major risk. Provision of a digital transactions, greater adoption of digital legal basis, such as passing the current draft of payments and other digital financial services. the Law on Personal Data Protection in the leg- islature is necessary to promote DFS adoption But if the objective is to not just promote the in Indonesia. ↳ only 52 percent digital economy for its own sake but to also of households have maximize its impact on the population, then There is a significant knowledge and awareness access to a bank these efforts must be nested in a broader reform account deficit which, somewhat surprisingly, is almost agenda that includes the analog, or the conven- as prevalent among the financially excluded tional bricks-and-mortar parts of the econo- as it is among traditional bank account users. my as well. Logistics is one example. Though Roughly half of banked, as well as unbanked, there are several digital innovations disrupting households report not fully understanding the the logistics landscape, the bigger challenges benefits of DFS, or not knowing how to use of logistics in Indonesia are the ones related to them, or more surprisingly, especially for those the fundamental difficulty of moving physical already with bank accounts, never even having goods and commodities across the vast sprawl- heard of these services. This highlights the key ing archipelago. These relate to the availabili- role for agent networks in helping to reach the ty and quality of transportation infrastructure unbanked, as the face-to-face personal interac- (air, land and sea), as well as the organization of tions are ideally suited to overcome the trust and these markets, which has a bearing on the cost 41 knowledge gaps. structure. But a whole host of other factors that are binding constraints on the overall produc- adapt. Ensuring that the policy and regulatory en- tivity of the economy are also relevant. It has vironment strikes the right balance between not been well documented elsewhere, for example, according undue advantages to the first movers in that restrictive trade policies limit access to key the new economy, while at the same time also not inputs and markets, restrictions on investments stymying innovation, is an important consider- depress commercial performance, a weak compe- ation from the perspective of equity. Policy mak- tition framework shields incumbents from poten- ers in Indonesia are cognizant of this issue and tially more productive market entrants, while the have recently put in regulation on e-commerce unpredictable regulatory environment further requiring digital merchants active on platforms weakens the business environment, inhibiting to be eligible for value-added tax. However, Indo- competition and depressing investments. The nesia’s overly generous VAT threshold also needs introduction of super-efficiencies associated with to be reviewed, not only to expand the digital tax digital technologies in an economic environment base, but also to make this an effective instrument HARNESSING THE MEDIUM in which domestic firms, both large and small, for leveling the playing field.39 are heavily shackled in this manner could amplify existing distortions and accentuate inequalities. Finally, the third distributional tension is be- tween workers and firms. Business models that One concrete example is cross-border trade on rely on platforms characterized by network ef- e-commerce which, in the current business en- fects essentially generate value by matching cus- vironment, could make importing significantly tomers with complementary needs. The value of easier than exporting. Consumers would benefit the platform to the marginal customer depends from cheaper consumer goods from abroad en- on the number of vendors and service providers BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA tering the domestic market. But if the econom- already on board. Similarly, the value of the plat- ic landscape forces domestic firms—especially form to a marginal vendor also depends on the the smaller ones—to compete effectively with a number of customers already on board. Thus, to hand tied behind their backs then this could end grow and become successful, platforms need to up eroding the country’s manufacturing base build a critical mass on both sides of the market. and compounding inequalities. Indeed, with But once a platform becomes dominant, it could inbound e-commerce transactions increasing become too large for potential competitors to more than eight-fold from 6.1 million to 49 mil- dislodge, giving rise to a winner-takes-all market lion in just two years between 2017 and 2019, this structure. In developed countries, this network is an area that the Government is acutely con- effect has given rise to giant technology compa- cerned about. And there has been some effort to nies, such as Google, Facebook, Apple, Amazon, address the issue as well. For example, Minister Uber and Airbnb, where just a few firms capture of Finance Decree No. 199/2019, effective as of a dominant part of the market. January 2020, lowered the taxable threshold on inbound shipments from US$75 to US$3 per The large amount of data these digital business- consignment, significantly increasing taxes on es collect, and the increasing use of automated commodities such as foreign-produced textiles, machine-learning and artificial-intelligence (AI) apparel, bags, and shoes.35 Lowering the de mini- driven analytics to power continuous improve- mis threshold to deal with low-value shipments ments in the products and services that they puts Indonesia in the company of other early provide, on pricing, personalization, and the movers in this reform space.36 However, anoth- targeting of ads, could further entrench their er complementary approach could be doubling position. Data collection and sharing across down on addressing some the critical issues that platforms belonging to the same company could constrain the productivity of Indonesian firms.37 give rise to an exponentially higher benefit to the company compared with those companies Another relevant distributional tension is the operating only under one platform. And once one between online and offline players. If not all this is established, there is a risk that they could online purchases are catering to new demand, dig- exploit monopsonist power vis-à-vis vendors ital transactions will be displacing analog ones. to extract a larger share of value added of the More goods bought online necessarily implies product. This increase in market concentration fewer goods are bought from bricks-and-mortar may lead to greater inequality, as labor receives stores.38 A comprehensive welfare calculus needs a smaller share of value added in these seg- to consider not only the benefits for consumers ments.40Some have found these consequences and producers who can partake in these digital of the digital economy to be the most important transactions but also the potential losses incurred reason behind the recent increase in inequality by the bricks-and-mortar sellers who are slower to in the United States.41 42 The level of digitization in Indonesia has per- inclusive digital future Indonesia wants, so is a haps not reached levels where these effects would nation filled with data scientists, cloud-solution begin to manifest themselves and more work architects and AI experts. Thus, in addition to will be required specifically in the Indonesian low digital literacy and the severe shortage of dig- context to see how these dynamics play out as ital talent at the high end, investments in skills the digital economy grows. Nonetheless, it is a for a digital future should also include a broad- potential risk with consequential distributional er-based effort to develop a pipeline of workers implications and a front to already start acting who are generally better at problem-solving, on. Boosting digital entrepreneurship, including communication, teamwork and adaptability (i.e., by addressing the glaring gaps in high-end digi- high-order cognitive and social skills). tal talent (developers, AI and machine-learning specialists), leveling the uneven playing field for innovation and preempting policies that protect ↳ digital innovations can generate players, while not being too restrictive on the opportunities, but the extent to which growth of what is still a nascent digital economy, workers can grasp these opportunities can be some elements of strategies to address to move up the economic ladder will SECTION — 02 this issue. Similarly, Indonesia does not current- ly regulate working conditions and contracts ultimately depend on worker skills; of digital platforms and their workers and the digital skills specifically as well platforms themselves set working conditions through their terms of service agreements. How- as a broader set of skills necessary ever, as the digital economy grows, and more and to survive and thrive in the digital more workers enter these work arrangements, economy Indonesia may need to regulate this form of work BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA to provide workers the protection they need. Finally, digital innovations can generate oppor- tunities, but the extent to which workers can grasp these opportunities to move up the eco- nomic ladder will ultimately depend on worker skills; digital skills specifically, as well as a broad- er set of skills necessary to survive and thrive in the digital economy. Indonesian firms routinely identify the shortage of specialized professionals and managers in the local labor market as one of the most important bottlenecks in fostering innovation within firms. The share of firms re- porting inadequate skills as the top constraint in hiring professionals and managers is the highest in the ASEAN region. A shortage of qualified talent to develop new products and services has prompted well-funded digital platforms to look elsewhere for R&D capabilities. For example, Gojek has established an off-shore R&D division by acquiring three Indian tech companies, and its regional rival, Grab, has also set up an R&D center in India for similar reasons.42 This skill gap not only stunts innovation but also represents a major lost opportunity; these are good jobs going unfilled in a labor market in which millions are looking for a pathway to the middle class. It also explains the digital technology-induced widening of the skill premia discussed above (Table O.1). But just as a nation filled with smartphone-wielding micro-entre- preneurs all selling their wares through digital 43 platforms is far from a realistic portrayal of the “In addition to low digital literacy and the severe shortage of digital talent at the high end, investments in skills HARNESSING THE MEDIUM for a digital future should also include a broader-based effort to develop a pipeline BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA of workers who are generally better at problem-solving, communication, teamwork and adaptability.” 44 3 Using the Medium to he ability of governments T Section ⬎ around the world to har- ness digital technologies Deliver Better Services to deliver services is per- haps one area on which the COVID-19 pandemic →What holds Indonesia back? has focused the strongest DIGITAL TECHNOLOGIES FOR BETTER SERVICES spotlight. Just as people and businesses have had to adapt to various mea- sures taken to contain the spread of the virus, so too have governments. And the ability to use digital technologies to curb and manage the pandemic, as well as to ensure the continuity of essential services, has emerged as SECTION — 03 a key marker of resilience. Digital technologies have also been useful in the rapid deployment of social assistance responses. In countries with extensive mobile phone or internet penetration, as well as strong existing social protection sys- tems, digital technologies related to digital ID and digital financial services have helped to facil- BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA itate the identification and registration of benefit BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA ↪ Over 530,000 recipients. Since it is the poorer segments of the schools had to be population that have been most affected by the >530,000 closed, affecting pandemic—by job losses and income reductions, 68 million students from pre-primary as well as by the disruption of education—coun- through tertiary tries that have been able to better harness digital levels technologies in this manner have also been suc- cessful in laying a more robust foundation for inclusive recovery. For Indonesia, the pandemic has laid bare the lack of readiness to fully capitalize on these dig- ital opportunities. Over 530,000 schools had to be closed, affecting 68 million students from pre-primary through tertiary levels. While all students still reported engaging in some form of learning activities at home, 64 percent of them faced critical constraints related to the lack of reliable connections and supporting devices. In the early stages of the pandemic, Indone- sia also struggled to obtain consistent data of COVID-19 cases due to challenges in integrating information systems across the various tiers of government, slowing down the response.43 The lack of digital and other alternatives caused widespread disruptions in non-COVID health care across the country.44 Some emergency so- cial assistance that was approved by the Govern- ment, such as Kartu Prakerja (pre-employment card, repurposed as temporary cash assistance to unemployed workers), faced critical delays in deployment due to difficulties in verifying the identities of recipients. More recently, efforts to accelerate vaccine rollout have also been ham- 45 strung by lack of reliable data. 46 → Indonesia’s nascent EdTech and HealthTech scene has received a major boost and though these apps have clearly filled a void during the pandemic, their overall reach is limited to the more affluent clientele in urban centers, mostly within Java. For digital technologies to make a dent on the root causes of long-term inequalities, they need to be adopted and applied at scale by the Government. D iscussions about the role of services remotely (telemedicine) through apps digital technologies in sec- and websites, as well as cloud-based solutions tors such as education and for hospital information management systems. health often begin and end While telemedicine generally covers various with overwhelming opti- health services, including consultations with mism about the power of doctors, the provision of diagnosis, treatment these technologies to inspire a disjunctive break and preventive care, telemedicine in Indonesia SECTION — 03 with the past. In the context of developing coun- is relatively new and still limited primarily to tries that typically face complex and deep-root- teleconsultation. For example, companies such ed challenges in delivering quality services, the as Halodoc and Alodokter—considered the “disruptive” promise of these technologies can most well-funded firms in the market—con- be especially appealing. Indonesia is no differ- nect patients to medical doctors to do online ent and, over the years, as the digital economy consultations.47 Hospital information manage- has grown, so has the number of new entrants ment systems have traditionally been offered by in the EdTech and HealthTech scene. A World software developers and vendors catering for BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA Bank study estimated that close to 160 EdTech tailored solutions for hospitals. However, more startups in Indonesia mostly established in the recently, new firms such as Medico and Perik- 2013–18 period. Of these, 60 companies were sa.id have started to offer cloud-based services still operational and offering a variety of prod- (software-as-a-service). ucts and services before the pandemic struck.45 Similarly, the Indonesian HealthTech Associa- The interest in these applications has soared tion reports that around 250 registered firms are after the COVID-19 outbreak. In the second operating in the HealthTech space.46 quarter of 2020, the number of new users on Zenius jumped 12-fold over the previous year.48 Indonesian EdTech companies provide a range Ruangguru, which had been growing steadily ↪ …while (EdTech) apps have clearly of services and products: (i) targeted at stu- even before the pandemic, reported a jump in filled a void during dents to help them with learning and upskilling; web-hits from around an average of 7.5 mil- the pandemic, their (ii) targeted at educators to assist them with lion to over 11 million per month. Industry overall reach is student management, communication and estimates suggest that the usage of telemedi- limited to the more teaching; and (iii) targeted at educational insti- cine apps in Southeast Asia increased by a fac- affluent clientele in urban centers, tutions to help them with administration. For tor of 4.5 in March 2020 (at the peak of the mostly within Java example, companies such as Ruangguru, Zenius COVID-19 outbreak) compared with January and usage is and Quipper develop and provide self e-learn- 2020 usage. The number is consistent with higher among ing content, interactive learning platforms and growth seen by some of the prominent players the relatively study tools that help K-12 students expedite in Indonesia. Halodoc reported its monthly ac- better off the learning process, along with interactive tive users increasing by a factor of 10 during the online services that help students with their pandemic compared with the fourth quarter of assignments and test preparation. Companies 2019, while Alodokter claimed to have experi- such as Arsa Kids, Digikids and Educa Studio enced a 1.5-times increase compared with the develop game-based and blended-learning pre-COVID-19-outbreak period.49 experiences, including interactive storybooks and educational mobile apps, to help improve However, while these apps have clearly filled a early childhood educators’ effectiveness. These void during the pandemic, their overall reach is products and services are typically disseminat- limited to the more affluent clientele in urban ed using several approaches, such as web-based centers, mostly within Java and usage is higher and mobile-based applications. among the relatively better off. According to a nationally representative survey conducted a few On the HealthTech side, innovative products months after the pandemic outbreak, more than 47 and services are geared toward providing health 83 percent of households in Jakarta were found DIGITAL TECHNOLOGIES FOR BETTER SERVICES to be providing some form of learning activities developed parts of the world shows, and Indo- ↳ more than using mobile apps and/or online learning to their nesia's own recent experiences confirm, these 83 percent of children.50 The number was significantly low- innovations should not be thought of as tools to households in er in other parts of Java (43 percent), and even displace the traditional modes of service delivery, Jakarta were found lower outside of Java (38 percent). While on av- but ones to help enhance them.52 Especially from to be providing some erage 54 percent of all Indonesian families took the perspective of using digital technologies to form of learning activities using up some form of digital learning to minimize reduce intergenerational inequalities, bigger mobile apps and/or the disruption in the education of their children, gains will come from the Government’s readiness online learning to the option was available to only 38 percent of to experiment with and internalize some of these their children 83% families in the bottom 40 percent of the income digital solutions to chip away at bricks-and-mor- distribution. Lack of complementary inputs tar challenges to enhance service delivery. In fact, such as supporting ICT devices (smartphones, given the differential adoption of digital technol- computers) and limited access to good-quality ogies induced by the pandemic in sectors such BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA internet were reported to be the main reasons as education, with wealthier children in better behind this observed pattern. endowed schools having leapfrogged their peers from less affluent backgrounds, it has become One interesting trend that has been observed even more urgent for the Government to catch throughout the world is how even with the wide- up. In that sense, a vibrant innovation ecosystem spread pivot toward online education induced that extends the frontiers of these solutions is by the pandemic, the specific technologies that something Indonesia should certainly strive for have been adopted for the purpose have sought as these innovations expand the menu of options to replicate the classroom environment instead available for the Government to experiment with of deviating from it. Relatively better endowed broader applications.53 schools have taken to Zoom-classrooms, while across the country WhatsApp has provided a A key challenge with all these efforts is to move medium for student-teacher interactions. Even away from ad-hoc solutions to a more compre- as education has moved online, the pandemic hensively thought out whole-of-government has ended up underscoring the inherent irre- approach to the broader digital transformation placeability of student-teacher interactions.51 of government and service delivery. Another Likewise, in health, in-depth interviews with foundational challenge is connectivity. As dis- 43% some doctors providing teleconsultations re- cussed above, fixed broadband penetration in veal that telemedicine is likely to be most useful Indonesia is very low compared with regional Other parts for early-stage diagnosis and educating patients. peers. This is an especially binding constraint of Java It is also likely to be useful for certain areas of for institutional users such as schools, hospitals, medicine (e.g., mental health) that carry a cer- and other health facilities, which may want to 38% tain stigma in Indonesia and on which patients intensify their use of digital technologies to en- Outside may feel more comfortable discussing matters hance service delivery. For example, of all the of Java through the digital medium. But for a broad 219,000 schools under the Ministry of Educa- range of other medical consultations, doctors re- tion and Culture (MoEC), just 10 percent had gard being able to physically examine patients as access to fixed broadband connections in 2019, an indispensable part of the diagnostic process. 42 percent had some form of mobile broadband connectivity, while a significantly large share (45 The EdTech and HealthTech sectors in Indone- percent) was not connected at all. Closing these sia face several challenges to their growth. These connectivity gaps, not just in schools but also in include difficulties with financing, lack of digital other important service delivery nodes, will be a talent in the marketplace, and poor regulato- crucial step in harnessing digital technologies for ry clarity, including on sensitive topics such as greater inclusion in post-pandemic Indonesia. consumer protection and personal data protec- tion, etc. However, as experience from the more 48 → Indonesia does not yet have any officially- recognized digital IDs, but has a relatively strong national ID system that represents a significant asset on which to build a national digital ID ecosystem F or people to be able to ful- clusion prevents people not just from register- ly participate in the digital ing for a digital ID but also using a digital ID, economy and carry out of- such as by using technologies or processes that ficial and high-value trans- are not compatible with the local context. Data actions online, countries protection and privacy breaches require a dual need to introduce digital approach of developing comprehensive legal ID systems—a need that has been accentuated frameworks that ensure accountability, includ- by the COVID-19 pandemic. Digital ID systems ing independent oversight. Vendor and technol- SECTION — 03 for online transactions are a natural progression ogy lock-in can be mitigated somewhat through from national ID systems, which have been used the adoption of open standards and open-source For people to be able to fully predominately for in-person transactions, in- software, competitive procurement, and strong participate in the cluding in Indonesia, because a physical ID card contract and vendor management. digital economy cannot be used remotely over the internet. and carry out While Indonesia does not yet have an official official and high- Digital IDs make use of technologies such as digital ID system or ecosystem that would allow value transactions online, countries smartphones and cryptography to provide such Indonesians to securely verify their legal identity BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA need to introduce security and assurance for remote interactions. online, the existing national ID system is an asset digital ID systems—a They can be issued by a single entity (central- could be leveraged to create one relatively easily. need that has been ized) or by multiple entities in an ecosystem The national ID system, which is managed by the accentuated by the (federation). Emerging standards are also cre- Directorate General for Population and Civil Reg- COVID-19 pandemic ating opportunities for decentralized models istration (Direktorat Jenderal Kependudukan dan where the digital ID is stored on a personal de- Pencatatan Sipil, Dukcapil), is well-established, vice or digital wallet. its database (Sistem Informasi Administrasi Kepen- dudukan, SIAK) has been digitized, and nearly the Well-designed and implemented digital ID entire population has a unique identity numbers systems can unlock an enormous amount of (Nomor Induk Kependudukan, NIK). In 2011, a new economic value for countries, estimated by the ID card (Kartu Tanda Penduduk Elektronik, KTP- McKinsey Global Institute to be between 3 and el) was introduced and biometric recognition 13 percent of GDP by 2030.54 The largest gains (fingerprint, iris and faces) was added to assist will be experienced in the digital economy. First, with removing duplicates in the SIAK, as well as to digital ID systems can promote inclusion when enable identity verification. The national ID sys- they are universally accessible and useable be- tem offers a strong foundation on which an official cause they allow all people to do transactions, digital ID system or ecosystem should be built whether that means opening a bank account or on. Therefore, digital ID is a ‘low hanging fruit’ applying for a social protection benefit, online.55 for Indonesia to make services more inclusive, to Second, they enable services to be expanded promote trust in the digital economy and society, through online channels and made more effi- and to create new drivers of economic growth. cient. Third, they are part of a ‘digital stack’ of Doing so will also allow Indonesia to join all its platforms that promote innovation and value fellow middle and high income ASEAN Mem- added services, such as electronic signatures, ber States who have launched whole-of-economy digital payments, and allowing people to exercise digital ID frameworks. control over their personal data. Fourth, they facilitate cross-border digital transactions. In the Both the Ministry of Home Affairs and Ministry European Union, for example, the eIDAS regu- of Communications and Information (Kominfo) lation and proposed regulation for decentralized have expressed strong interest in designing and digital identity wallets enable a digital ID issued launching an official digital ID system or eco- by one member state to be used in others, with- system. In the absence of such a system, online out needing to be physically present. service providers are using unreliable and inse- cure mechanisms to verify the identity of Indo- 49 But there are also risks related to digital ID. Ex- nesians online, such as requesting customers to ↪ Digital ID is a ‘low hanging fruit’ for Indonesia MYANMAR LAO to make services more inclusive, to promote trust in P.D.R. the digital economy and society, and to create new drivers of economic growth. Doing so will also allow Indonesia to join all its fellow middle and high income THAILAND ASEAN Member States who have launched whole-of-economy digital ID frameworks CAMBODIA VIETNAM PHILIPPINES MALAYSIA BRUNEI BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA SINGAPORE INDONESIA TIMOR LESTE take selfies holding the national ID card (KTP- (e-KYC) services at a national scale. el). While this is a practical workaround, some fintech providers have reported that as many as There is substantial demand for digital ID in 60 percent of customers provide selfies that are Indonesia across the public and private sectors. unreadable or require manual intervention, such E-KYC and digital ID remains one of the priority as a video call, creating unnecessary expense and issues for the financial sector, from banks to fin- challenges. More recently, licensed e-signature tech companies. Likewise, government agencies providers have begun offering basic digital ID such as BPJS Employment and BPJS Health are authentication services (i.e., going lower in their trying to transform the way they offer services to value chain), but these are based on commercial citizens, including by shifting to online channels, relationships with the service providers and re- but are hampered by the absence of an acces- quire the charging of higher fees in order to make sible and affordable digital ID system. At the a profit. Other third parties have emerged offering regional level, there is an opportunity for mutual ID authentication services, but again these charge recognition arrangements to enable cross-bor- substantial fees. For example, the Kartu Prakerja der transactions as a stepping-stone toward a website had to purchase facial recognition services broader ASEAN-level arrangement, as has been from a private company when it rolled out appli- alluded to in the ASEAN Digital Masterplan for cations during the COVID-19 pandemic. Similar 2025. Beyond ASEAN, there is also an opportu- constraints exist for face-to-face transactions, as nity for mutual recognition arrangements with Dukcapil has not yet launched biometric au- the European Union (eIDAS), Australia, the thentication or electronic know-your-customer United States and Canada, among others. 50 A → Digital upgrade nother important and broader pathway to har- technologies make possible may be needed for transformation to be realized. of government nessing digital technologies can fundamentally for greater inclusion is by enabling these technologies Global experience also shows that digital transfor- mation of government is a complex undertaking transform the to fundamentally transform involving multiple stakeholders. In Indonesia the quality of citizen- the quality of citizen-state interactions. This could be for specific services, such as education, public sector’s institutional structure is particu- larly complex and highly fragmented with mul- state interactions health and social protection as discussed above, tiple agencies having overlapping mandates. This but also for a whole host of other services that fragmentation naturally also makes coordination could be improved significantly by a broader a major challenge, which increases the complex- digital transformation of government. The key ity of completing even the simplest of tasks that challenge will be to transition from the current require cooperation among different stakehold- siloed structure of multiple, incompatible gov- ers. For example, in more than two years since the ernment information and data management sys- e-Government Regulation was promulgated, the tems to a whole-of-government, platform-based e-government coordination team, which consists CHAPTER — 03 approach, which has emerged as best practice in of seven-line agencies with MenPAN-RB in the many economies globally. Related to that is the coordinating role, has been unable to convene and need to establish clear leadership and coordina- agree upon the shared vision of e-government tion for government digital services. implementation. In the absence of coordinating body such as the Government Digital Service Over the years, the Government has made sev- (GDS) in the UK or GovTech in Singapore with eral efforts to digitize government services. authority over all relevant stakeholders to over- While some of these first-generation efforts have come these coordination challenges, the digital BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA been moderately successful in their respective transformation agenda in Indonesia has not been objectives, they have been limited in terms of able to take any concrete shape and form, much their scope and often ad hoc in nature. These less gather any real momentum. attempts to digitalize, often at the behest of an agency-head or a subnational entity lead cham- Similarly, Indonesia does not have a clear pioning the effort, have resulted in a prolifera- whole-of-government data management poli- tion of information systems, websites, apps and cy. Presidential Regulation No. 39/2019 on One platforms that have very limited interoperability Data goes some of the way toward addressing at the front end and create significant duplica- this, but fragmentation remains an issue and tion of effort and investment at the back end.. several implementation challenges remain to be worked out. Each sector is responsible for In the past two years, the Government has its own data management, and guidance on made efforts to address these digital govern- cross-sectoral data sharing and utilization is ment issues. One concrete step in this direction often missing. The One Data regulation grants is the issuance of Presidential Regulation No. Bappenas greater authority to regulate, monitor, 95/2018 on e-Government and Presidential and enforce data governance across all govern- Regulation No. 39/2019 on One Data. The ment agencies. Recently issued implementing objective of the regulation on e-government is regulations also shed some light on the intersec- to implement an integrated e-government sys- tionality of this regulation with other initiatives, tem by, among others, getting all government such as the Regulation on E-Government/Dig- agencies to adopt a common and interlinked ital Government (Presidential Regulation No. enterprise architecture, co-using IT systems 95/2018), the Electronic Transaction Law and and establishing a national coordination team. its implementing regulation (PP No. 82/2012 The thinking on digital transformation as em- and its revision PP No. 71/2019), the forthcom- bodied in the e-government initiative focuses ing Personal Data Protection Law,56 the Popula- to a large extent on the digitization of existing tion Administration Law, the Digital Payment internal government processes. However, the Regulation, and the Omnibus Law.57 However, journeys taken by countries such as the UK some of the key strategic datasets are maintained and Singapore, among others, suggest a fun- by various government institutions and the One damental reimagination of processes, proce- Data regulation is ambiguous on the role of these dures and structures considering what digital administrative entities.58 51 “Presidential Regulation No. 39/2019 on One Data goes some ways in strengthening Indonesia’s data DIGITAL TECHNOLOGIES FOR BETTER SERVICES management policy, but fragmentation remains an issue and several implementation challenges remain to be worked out” BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA 52 What can Indonesia do? →Policies to Leverage DTs for Greater Inclusion POLICIES TO LEVERAGE DTS 4 CHAPTER — 04 Section ⬎ BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA T BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA he analysis presented in this report points to three key policy principles to en- sure that no one is left be- hind: (i) improving digital connectivity and universal- izing access; (ii) enabling the medium to generate economic opportunities for all and unlocking citizen capabilities to seize these opportunities; and (iii) harnessing the medium to upgrade the quality of citizen-state interactions and improve service delivery. Some specific and actionable reforms to implement these principles are discussed below. 3 FIGURE O.17 What can Indonesia Do? policy priorities 1 2 3 Adopt Digital Improve Digital Make the Technologies Connectivity Digital to Upgrade & Universalize Economy Work Citizen-State Access for All Interactions 53 54 1 IMPROVE DIGITAL CONNECTIVITY & UNIVERSALIZE ACCESS A ddressing the digital divide Consistent with International Telecommunica- and making affordable and tions Union (ITU) recommendations, Indone- SECTION — 04 high-quality internet avail- sia should endorse an overall target for available able to all Indonesians will IMT spectrum of at least 840 MHz plus alloca- require regulatory reform tions of mmWave spectrum as soon as possible59 in three key areas: (i) spec- and certainly no later than 2024. Such alloca- trum management, spe- tions should be made in larger contiguous blocks cifically sequential freeing in accordance with future best practice. MNOs up of spectrum in specific should also have the flexibility to use their allo- bands; (ii) greater regulatory clarity on pro- cated IMT spectrum for mobile broadband and/ BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA visions for active and passive infrastructure or fixed wireless access (FWA) services. High sharing; and (iii) greater competitiveness and speed FWA services using 4G/5G technologies regulation of the telecom industry more broadly. are proving globally to be a very competitive product with fixed broadband services.60 Optimize spectrum allocation for mobile Strengthen mechanisms broadband. to ensure sharing of active and passive infrastructure. Under the recently enacted Omnibus Law on Job Creation No. 11/2020, reform of spectrum man- Tower sharing for mobile broadband networks agement is on the right track for optimization was mandated in 2009 and has been deployed of spectrum allocation. The law also imposes at a large scale but sharing other passive infra- a mandatory two-year plan to convert analog structure, such as ducts, poles, etc. (required television to digital television in order to secure for fiber optic networks) between provid- digital dividend in the 700 MHz spectrum band. ers will likely remain limited without further Release of the 2.6 GHz band, currently used for regulatory reform. The 2009 Tower Sharing satellite TV, would add capacity in urban centers Regulation brought efficiency improvements and alleviate network congestion. Menkominfo to deployment of towers with some sharing of should consider accelerating its plans for reallo- passive infrastructure across sectors, between cation of this band from satellite broadcasting (rail)roads and fiber optic, and electricity poles to mobile broadband before the current end of and fiber optic. But sharing between telecom the spectrum license in 2024. Securing 3.5 GHz operators lags behind, despite a joint letter is- band spectrum will require consultation with sued by Menkominfo and MoHA in 2018. The current C-Band satellite users. Over time, some Omnibus Law mandates passive infrastructure form of sharing should be considered with use sharing through a change to the Telecom Law of this band for mobile services in urban centers Article 34A and B, but implementation of the and for satellite services in those rural areas that associated provisions will require inter-agency still require C-band connectivity. This would add coordination among national agencies and local further capacity and enable introduction of 5G. governments. Separately, active infrastructure Finally, the GoI should prepare to make available sharing would promote competition in mobile the mmWave spectrum in the 24-29 GHz band broadband services in rural/remote areas but is to enable immediate deployment as soon as the currently not allowed under Telecom Law PP 55 industry is ready for 5G mmWave services. 52/53. The Law requires in many cases separate 2 MAKE THE DIGITAL ECONOMY WORK FOR ALL POLICIES TO LEVERAGE DTS S deployment of (mobile) infrastructure by each everal crucial interventions will be required to and every telecom operator. The Omnibus Law make the digital economy work for all. does include a change to Article 34B that opens up the possibility of active infrastructure shar- ing, although that could have been made more Support the development explicit. Telecom Law PP 52/53 would have to of logistics. be updated to allow for sharing of active infra- structure on a B2B basis. Reducing the cost of logistics to enable an ef- ficient and cost-effective movement of goods BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA across the archipelago will enhance the impact Strengthen competition e-commerce can have on boosting the produc- along the broadband tivity of small and micro-entrepreneurs, espe- value chain. cially those in the lagging places of the country. Continuing to develop basic physical infrastruc- To improve the competitiveness of service pro- ture to improve connectivity through strength- viders, Indonesia should consider transitioning ened and/or rehabilitated infrastructure such as toward the unified licensing of service providers roads, ports and electricity will remain a crucial to enable each to deliver a larger portfolio of ser- foundation of this effort. This may also require vices. The current regulatory regime restricts leveraging private sector capital and expertise, the ability of operators to provide a full range as appropriate through public-private partner- of services by requiring them to apply for and ships. Separately, fostering an innovation envi- maintain specific service licenses, instead of a ronment that is conducive to the scaling of the single uniform license for all services. This limits several e-logistics that are emerging to provide the issuance of telephony service licenses and customized solutions to connect enterprises to the portability of telephone numbers, etc. To market will also be important. address these issues, it is recommended that the GoI reviews the current licensing regime and Nurture digital skills and considers transitioning toward a single/unified license to deliver the full portfolio of services skills for the 21st century. to a larger number of service providers, so that Institutional action and policies also need to rec- effective competition for dual-play and tri- ognize that digital skills are a subset of a broader ple-play fixed broadband services will emerge. skillset needed for the 21st century digital econ- This should be complemented by regulations en- omy. The exponential pace of technological abling portability of telephone numbers across change today makes it hard to anticipate which providers. Neither the Telecommunication Law job-specific technical, digital and other skills will nor its amendments in the Omnibus Law ad- thrive and which will become obsolete in the near dresses these issues. Telecommunications-re- future. As a result, the ability to adapt quickly lated regulatory commitments in the Regional to changes is increasingly valued by the labor Comprehensive Economic Partnership (RCEP) market.63 As such, the most sought-after trait and the ASEAN Digital Masterplan (ADM globally is adaptability—the ability to respond 2025),61 which was launched in January 2021 at to unexpected circumstances and to unlearn and the 1st ASEAN Digital Ministers’ Meeting,62 relearn quickly. This trait requires a combina- should also guide further regulatory reforms. tion of certain cognitive skills (critical thinking, problem-solving) and socio-behavioral skills 56 2 (curiosity, creativity). Indeed, the top five skills and skill groups that executives in Indonesia’s Close collaboration between industry and ter- tiary education is critical. The low quality of largest companies see as rising in prominence TVET and tertiary education in Indonesia has in the lead-up to 2025 are creativity, originality been linked to, among other factors, lack of com- and initiative, complex problem-solving, active petency frameworks developed in consultation learning and learning strategies, emotional intel- with the private sector. Inadequate labor-market ligence, and analytical thinking and innovation.64 information and intermediation make it hard to SECTION — 04 align curricula and teaching with the occupations Modern tertiary education needs to cultivate in and skills that are most needed. Private sector students a minimum threshold of foundation- participation in tertiary education planning and al “transferable” higher-order skills for the 21st policy is thus a requisite both at a strategic and century digital economy, even in STEM fields. technical, curricular level. In China, for exam- Technology and integration have increased ple, Lenovo is working with tertiary institutes to the demand for higher-order general cognitive train vocational students in high-tech areas, such BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA skills—such as complex problem-solving, critical as cloud computing, that feature practice-based thinking, and advanced communication—that curricula, practitioner-led instruction, and pro- are transferable across jobs. Therefore, the com- fessional certification.67 The GoI also needs to bination of general and technical skills is becom- incentivize employers to offer internships and ing highly valued (World Bank 2019). Tertiary off-campus learning to students. Second, fill- education systems should therefore guarantee ing in information gaps during the job-search a minimum threshold of transferable cognitive process enables students to make better choices skills, which are also the best inoculation against between and within different paths. Chile is es- job uncertainty. Incorporating more general ed- tablishing online platforms where students can ucation in tertiary programs is one way to do this. access information on the employability of indi- An additional year of general education was add- viduals with various degrees, wage profiles, and ed in 2012 to undergraduate programs in Hong courses to take for certain occupations. Colom- Kong and China, focusing on problem-solving, bia’s Jóvenes en Acción (Youth in Action) program critical thinking, communication, leadership, and combines classroom instruction with on-the-job life-long learning skills and with early assessments training at private companies. Indonesia needs showing positive results.65 Another way is through to continue to develop data systems that allow innovative pedagogy. The Faculty of Architec- for the identification of occupations and skills ture and Environmental Design at the College of that are most in demand, monitor educational Science and Technology, University of Rwanda, institutions’ compliance with quality standards, has promoted learning strategies that include and ensure that the information on employabili- open-ended assessments, feedback opportuni- ty of degrees, wage profiles, and occupation-spe- ties, and a progressive curriculum that balances cific courses is available to both jobseekers and academic challenges with student support. These workers. approaches have improved the critical-thinking skills of students. Forward-looking universities are finding ways for adult students to acquire a Promote the use of broad set of socio-behavioral skills. Vocational digital financial services/ colleges in the Netherlands are providing entre- payments, including preneurial courses aimed at improving noncogni- tive skills such as teamwork and self-confidence. among the unbanked and Tunisia has introduced an entrepreneurship track the underbanked. that combines business training with personal coaching to reshape the behavioral skills of uni- Financial exclusion and low uptake of digital versity students.66 payments impedes the growth of the digital 57 economy and locks out a significant propor- tion of the population from participating and benefiting from it. For many Indonesians, es- Use tax policy pecially those in the lower parts of the distri- instruments to ensure POLICIES TO LEVERAGE DTS bution, not having a bank account is already a major setback. The variety of efforts underway level playing field. to improve the supply of digital payments and A well-designed system of taxation for the dig- a broader suite of financial services remain im- ital economy can help level the tax playing field portant entry-points. One promising digital between conventional and online businesses; solution is the reduction in verification costs within online businesses, between goods and that could come from widespread availability of services; and between resident and non-resident e-KYC option and a strong and reliable digital businesses. This will reduce the distortive impact ID system. Second, for those already banked, taxation may have on the economy, helping to including some of the more sophisticated users, BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA ensure that sales, profits, and investment deci- trust in online transactions and issues related sions in the digital sector are driven by market to data privacy, cyber security and financial in- dynamics and efficiency improvements, and not tegrity represent another barrier that needs to by advantages gained through uneven taxation be overcome. While the Financial Services Au- policy or taxpayer avoidance. In the Indonesian thority (Otoritas Jasa Keuangan, OJK) has been context, two incidental benefits are equally rel- trying to strengthen the legal and regulatory evant. First, taxation of the digital economy will framework for DFS, consumers still regard the bring in a small but growing amount of revenue disclosure of personal ID to service providers as as digitalization accelerates within the Indo- a major risk. In this regard, the passing of the nesian economy,68 especially in the context of draft Law on Personal Data Protection will be COVID-19 pandemic. E-commerce in Indo- critical for promoting the adoption of DFS in nesia, for example, is projected to have grown Indonesia. Third, improving the interoperabil- by 54 percent during 2020, reaching US$32 ity of payment systems can stimulate use cases billion, at a time when private consumption in and increase transactions volume. An incidental the overall economy has suffered, falling by an benefit of this could also be an improvement in estimated 2.7 percent overall.69 Second, taxation the viability of the agent-based model, which of the digital economy presents Indonesia with is crucial to expanding DFS access, especially a unique opportunity to boost formalization of among the underserved demographic for whom businesses, particularly that of MSMEs. Regis- this model has shown to help overcome knowl- tered businesses will enjoy the benefits of having edge and trust deficits. Finally, investments in easier access to credit from the financial system, financial literacy programs should continue to and of potential future fiscal support from the remain shared responsibilities of the regulator Government. as well as market participants and should cover material on the variety of financial products and Indonesia is taking measures to reform its tax services but also of the risks: financial risks such policy and modernize its tax administration as online fraud, digital footprint, overborrowing; to deal with the challenge of intangible trans- digital financial risks associated with protection actions for VAT. Indonesia’s broad policy po- of personal information; and consumer risks and sition was reflected in Law No. 2/2020, which associated redress procedures. provided the legal umbrella for imposing VAT on digital goods and services provided by for- eign suppliers. Minister of Finance Regulation No. 48/ PMK.03/2020 (hereafter PMK-48) and DGT Regulation PER-12/PJ/2020 (hereafter PER-12) provided the next levels of policy and implementation details. They applied the ex- 58 2 isting VAT statutory rate of 10 percent on all intangible taxable goods and all taxable services quirements. Two measures can help in this regard. First, the GoI will need to ensure adoption and that are provided by foreign suppliers through communication of consistent rules, leverage an an electronic system. Both foreign and domestic efficient IT system to administer registration, fil- digital platforms are required to collect the VAT ing, and payment, and combine digital transac- on behalf of foreign suppliers, subject to being tion data with other third-party data and taxpayer appointed as “VAT Collectors” by the DGT. To data to enhance compliance risk management. CHAPTER — 04 date, companies that have been asked by the Second, Indonesia’s overly generous VAT thresh- DGT to serve in this capacity include Amazon, old needs to be reviewed to expand the digital Facebook, Google, LinkedIn, McAfee, Netflix, economy tax base. Indonesia’s VAT threshold of Skype, Spotify, Twitter, and Zoom.70 The qual- IDR 4.8 billion stands out in international com- ifying criteria for being appointed a VAT Col- parisons of VAT thresholds to GDP per capita, a lector are based on: (i) annual sales volumes of metric commonly used to compare the generosity at least IDR 600 million for digital goods and of VAT thresholds worldwide. Less-developed BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA services in Indonesia (or IDR 50 million in a economies tend to have higher thresholds, in part month); or (ii) online traffic volumes involv- because of weaknesses in tax administration and ing at least 12,000 users within Indonesia in 12 in part because they have larger informal econ- months, or 1,000 users in one month. To sup- omies.76 However, even when compared against port compliance with the reforms, the DGT has low-income economies, Indonesia’s VAT ratio introduced several administrative measures.71 stands out as being too generous.77 A high thresh- old means that a vast share of businesses whose Likewise, to deal with the challenge of low-val- annual turnover is below the VAT threshold are ue shipments Indonesia has lowered its mini- excluded from the VAT system, narrowing the mum threshold from US$75 to US$3. In so base and distorting the tax. This distortion is even doing, Indonesia has become an early mover in greater when the threshold is applied to e-com- this reform space, following on from Australia, merce in Indonesia, which is characterized by a which was the first to slash its GST threshold large share of small companies.78 from AU$1,000 to zero from July 2018.72 The EU has followed suit, with its previous exemp- Overall, design and implementation of digital tion of consignments of less than €22 abolished economy taxation reform must be geared around from January 2021 onwards.73 To allow VAT to the core principles of equity, efficiency, and sim- be levied, all imports into the EU now must be plicity, so that Indonesia’s economy and society declared using an electronic customs declara- can share in the benefits of digitalization. Over tion. To ease the implementation burden, the time, as digitalization expands, the demarcation EU has also introduced a simplified customs between the digital economy and the economy declaration form for all declarations of goods at large will become increasingly blurred and up to €150.74 In Indonesia, implementing the eventually dissolve. This evolving reality makes new rules without overwhelming the customs it ever more important that the GoI gets tax- administration or creating unnecessary burdens ation reform right. This means ensuring that on business will be more challenging, requiring tax policy and administration meet the princi- effective risk management.75 Experience from ples of good taxation. Create an uneven playing Australia and the EU may provide the GoI with field of taxation, for example, by having different some useful lessons. tax rates on online and offline businesses, or by enforcing rules on cross-border businesses but The effectiveness of these instruments—in gen- not on domestic ones, and Indonesia will end up erating additional revenue, as well as in leveling with a tax system that detracts from the organic, the playing field—will depend on its ability to healthy growth of the digital economy. Revenue effectively manage compliance with the new re- lost to special incentives that favor the select few 59 will mean less financing for the critical public investments need to enable inclusive growth of digitalization. Ultimately, taxation must not dis- tort business decisions on how to operate, and it should not alter consumer choice on what and where to buy—whether it be from a supermar- ket or a hypermarket, an online marketplace or via an online social media app. Taxes imposed 3 USE DIGITAL TECHNOLOGIES TO PROVIDE BETTER SERVICES AND UPGRADE CITIZEN-STATE must be fair and equal, and administered with a INTERACTIONS minimum burden on all. T his can start with a (i) concerted push on a BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA ↪ Overall, design and whole-of-economy nation- al digital ID initiative; (ii) implementation of digital economy a thorough re-imagination taxation reform must be geared of whole-of-government around the core principles approach to digital transformation driven by an agency empowered to resolve interagency of equity, efficiency, and coordination challenges; and (iii) a special rec- simplicity, so that ognition and focus on the question of data in- Indonesia’s economy and tegration which is an essential bedrock of any effort to digitally modernize government func- society can share in the tions and services. benefits of digitalization Develop a national digital ID framework. Indonesia needs to launch a national digital ID initiative, bringing together various government stakeholders, the private sector and civil society to chart out the optimal path for Indonesians to be able to prove their identity over the internet and thus carry out trusted online transactions. The status quo constrains growth of the digital econ- omy and introduces additional costs and risks for service providers interacting with customers over the internet, including identity fraud. Thailand offers a useful example: its National Digital ID ini- tiative was born out of the National Digital Econ- omy Committee chaired by the Prime Minister. Similar digital ID initiatives have been launched out of agencies attached to heads of government, such as SingPass by the Singapore Government Technology Agency (GovTech) and United King- dom’s Verify by the Government Digital Service (GDS). An initiative in Indonesia would ideally be spearheaded by the Kantor Staf Presiden (KSP) 60 3 with central roles for the Ministry of Home Af- fairs as the authority responsible for population ID system and the digital economy more broadly, by providing safeguards and accountability for data (i.e., the legal identity of Indonesians), and the collection, use and sharing of personal data, the Menkominfo as the authority responsible for as well as formalizing the rights of data subjects regulating electronic transactions, and also in- volving the Ministry of National Development Planning (Bappenas), the Coordinating Ministry Reorient from a narrow focus on e-Government to CHAPTER — 04 for Economic Affairs, Bank Indonesia and OJK. a comprehensive national Improvements to the national ID system will cre- ate a strong base on which to introduce a digital digital transformation ID system or ecosystem. It contains the popula- agenda. tion data on which digital IDs can be issued— by the Government and/or the private sector—with The GoI is strongly recommended to consider BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA high levels of assurance. This seamless onboard- a fundamental transition from the current nar- ing simplifies and significantly reduces the costs row focus on e-government to a comprehensive of introducing digital IDs in Indonesia. For the National Digital Transformation agenda. Given national ID system to realize its full potential the complexities, this can be implemented in to support service delivery and underpin a new phases. The current e-government initiative that digital ID system throughout Indonesia, the GoI is chaired by the Ministry of Administrative and will need to decide whether to build a central- Bureaucratic Reform (MenPAN-RB) focuses on ized digital ID system implemented exclusive- the digitization of internal government process- ly by the GoI (likely Dukcapil), or a federated, es. Looking at the scope in the e-Government multi-stakeholder ecosystem implemented by regulation, the role fits the main duties and re- multiple digital ID providers but still regulated sponsibilities of MenPAN-RB, which includes the by the Government through a trust framework management of government business processes. Doubling down of laws, rules and standards, with the possibility However, if the GoI aims to achieve truly com- on reforms related of limiting public sector transactions to a digital prehensive digital transformation of the nation, to the analogue ID issued by Dukcapil. it will need to shift the paradigm towards digital foundations of the government and rearrange its vision, governance, digital economy is One area that requires urgent attention is that and delivery model to better suit that aspiration. crucial to ensuring that digital Indonesia does not yet have a comprehensive Such a commitment would reorient Indonesia technologies do not data protection law with general applicability. in the same direction as that taken by digitally end up accentuating This undermines trust in any kind of collection, advanced countries, such as Singapore, the Unit- existing processing and sharing of personal data, which ed Kingdom, Australia, Estonia, the Republic of inequalities are core functions of a digital ID system, as well Korea and Canada.79 The digital government as the digital economy more broadly. A draft Law platforms would serve as the foundation of digital on Personal Data Protection was submitted by the services in the economy such that both public sec- President to Parliament at the end of 2019—a bill tor institutions and private enterprises can take that was largely modelled on the EU’s General advantage of these platforms to deliver services Data Protection Regulation (GDPR). An essen- to every citizen. tial feature for the credibility and strength of such a law would be an independent oversight entity, A short-term priority may be to continue to similar to the Office of the Australian Informa- strengthen the role of MenPAN-RB in orches- tion Commissioner and the Singaporean Personal trating and delivering the existing e-government Data Protection Commission. Such a law will help mandate. However, in parallel, Indonesia needs to ensure public trust and confidence in the exist- to create the regulatory and institutional frame- ing national ID system, as well as any future digital works necessary to imagine, articulate and imple- 61 ment a comprehensive transformation agenda. the One-Data policy comprehensively in priori- To start with, a presidential regulation could be ty sectors relevant in managing the COVID-19 prepared to mandate: (i) the development of a pandemic and revitalizing the economy (edu- POLICIES TO LEVERAGE DTS National Digital Transformation strategy; (ii) the cation, health, MSMEs, and social protection). establishment of a policy-making entity; and (iii) Appointing a data steward in each sector, assisting the establishment of an implementation entity. the stewards to develop a master data reference The policy-making entity—a Digital Transfor- for each sector and data standards, and to enforce mation Taskforce (DTT)—would ideally be at- the standards, and assisting policy makers in these tached to the Office of the President, overseeing sectors to draw insights from improved data man- and, if possible, consolidating and streamlining agement, which can then be used for expansion the governance structure of existing digital ini- to other sectors could be some concrete steps . tiatives, such as the e-Government agenda led by Building alliances with key institutions such as MenPAN-RB, One Data led by Bappenas, Online MenPAN-RB, Menkominfo and MoHA, to in- BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA Single Submission, and the One-Map Policy led still One-Data principles into implementation by CMEA. This would reduce the fragmentation of the Digital Government and Digital ID initia- that characterizes the governance structure of tives could be other measures. Bappenas could these initiatives, which has led to ineffective and also work closely with MoF during the execution unnecessarily complex implementation at a high of shared planning and budgetary roles to identify cost to coordination. Finally, the implementation and/or filter out programs and activities that lead arm of the DTT would be a Digital Transforma- to duplication or inefficient production of data. tion Implementation Agency (DTIA), similar to agencies in Singapore (GovTech) and the United Finally, doubling down on reforms related to the Kingdom (GDS). DTIA would be responsible analogue foundations of the digital economy is for delivery of cross-sectoral digital services, i.e., crucial to ensuring that digital technologies do platforms and supporting technologies for sec- not end up accentuating existing inequalities. toral ministries to host and operate their digi- A key finding of the report is that inequality in tal services. It would also serve as the ecosystem access to the digital medium and the ability to builder for the delivery of sector-specific digital benefit from this medium mirrors existing di- services, coaching and assisting sectoral minis- mensions of inequality—across groups, regions, tries to develop quality, and standardized digital income classes and skill levels. This implies that services for citizens. Both DTT and DTIA need the non-digital structural constraints that have not be newly established entities. Existing enti- long been realized as key barriers to inclusive ties within the public sector could be empowered development continue to remain important de- to play the role. Irrespective of the model that is terminants of how effectively Indonesia is able to chosen, the most crucial part of the reform would harness the digital dividends for its poor. Invest- be to ensure that the institutional arrangement ments and reforms directed toward a stronger facilitates a whole-of-government approach and economic integration of the country, reforms eliminates fragmentation. related to trade, competitiveness and the overall business environment, investments to improve Transition towards a the quality of Indonesia’s human capital, reforms to improve the effectiveness of the state will not whole-of-government only enhance Indonesia’s digital dividends but data management policy. also ensure that these are shared equitably across the population, In that sense, digital technologies To this end, Bappenas could strategize to ef- should not be seen as tools that can be used to fectively to develop and implement subsidiary leapfrog and circumvent conventional develop- regulations and also rally support for the One ment challenges, but rather as complementary Data agenda. Specifically, Bappenas could apply tools to effectively address some of them. 62 BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA SECTION — 04 63 destiny. be Indonesia’s does not have to The digital divide 64 BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA POLICIES TO LEVERAGE DTS Summary of Policy Recommendations ↘ PRIORITY OBJECTIVE Improve Digital Connectivity I to Universalize Access SECTION — 04 Optimize spectrum Strengthen mechanisms to 1 2 allocation for mobile ensure sharing of active and broadband passive infrastructure BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA →→Implement the →→Optimize the higher →→Update the Telecom →→Implement through “Analogue Switch Off” frequency capacity Law, PP 52/53, to regulations the by the end of 2022 in bands, starting with allow for sharing of passive infrastructure accordance with the the freeing up of the active infrastructure sharing mandated under Omnibus Law so as to 2.6 GHz band, followed on a B2B basis the Omnibus Law free up the 700MHz by the 3.4-3.8 GHz band for greater rural band and potentially RESPONSIBLE AGENCIES: RESPONSIBLE AGENCIES: connectivity using 4G the broader 3.3-4.2 Kominfo Kominfo and future 5G networks GHz band to facilitate MoHA 5G deployment in urban RESPONSIBLE AGENCIES: Ministry of Public Works areas. Consideration Kominfo should be given to the release of the mmWave spectrum bands for 5G in urban areas RESPONSIBLE AGENCIES: Kominfo Strengthen competition →→Review current →→Appoint an 3 licensing regime and independent regulatory along the broadband transition toward body for the telecom value chain international best practice of single/ sector consistent with exemplar practice unified licensing and Indonesia’s RCEP to allow a larger commitments number of providers to deliver the full RESPONSIBLE AGENCIES: portfolio of services Kominfo RESPONSIBLE AGENCIES: Kominfo 65 PRIORITY OBJECTIVE Make the Digital Economy II Work for All Nurture digital skills and skills for the 1 2 21st century digital economy Support the development of POLICIES TO LEVERAGE DTS logistics →→Continue to develop →→Align non-formal education →→Build partnerships between basic physical services and lifelong learning tertiary institutions and infrastructure to with needs of the working-age the private sector to train improve connectivity adult population, adopting a vocational students in high- through strengthened modular approach to course tech areas using practice-based and/or rehabilitated offerings with an emphasis curricula, practitioner-led infrastructure on soft skills in addition instruction, and professional (roads, ports, to technical digital skills, certification and electricity), incorporating employment- leveraging private specific digital skills RESPONSIBLE AGENCIES: BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA sector capital relevant for Indonesia, Ministry of Education and Culture/Private and expertise as emphasizing a mindset of Sector appropriate through continuous learning, and PPPs offering opportunities to practice “self-managed” RESPONSIBLE AGENCIES: learning Ministry of Transport RESPONSIBLE AGENCIES: Directorate General of Highways Ministry of Education and Culture Ministry of Public Works Ministry of Manpower and Housing →→Ensure that tertiary →→Incentivize employers to →→Deepen reforms education offers a minimum offer internships and off- to reduce entry threshold of foundational campus learning to students barriers to logistics “transferable” higher-order and transportation RESPONSIBLE AGENCIES: skills such as critical services and build thinking, problem-solving and Ministry of Education and Culture/ long-term investor Ministry of Manpower communication, even in STEM confidence, to expand fields warehousing outside of large metropolitan RESPONSIBLE AGENCIES: areas Ministry of Education and Culture RESPONSIBLE AGENCIES: Ministry of Transport, with →→Continue to develop data systems that allow for identification support from Ministries of Trade and Finance and of occupations and skills in demand, monitor educational the Coordinating Ministry institutions’ compliance with quality standards, and ensure of Maritime Affairs and that information on employability of individuals with various Investments degrees, wage profiles, and occupation-specific courses is available to jobseekers and workers →→Continue to modernize the National RESPONSIBLE AGENCIES: Post Service; Ministry of Education and Culture/Ministry of Manpower standardize addresses and postcodes RESPONSIBLE AGENCIES: Ministry of Communication and Informatics 66 PRIORITY OBJECTIVE Make the Digital Economy II Work for All CONTD. Promote supply of DFS/digital payment 3 solutions that cater to the unbanked and the underbanked →→Streamline the →→Standardize rules and licensing and procedures to enable registration processes interoperability of required to become a payment schemes provider of digital financial services RESPONSIBLE AGENCIES: SECTION — 04 Bank Indonesia RESPONSIBLE AGENCIES: Bank Indonesia OJK →→Incentivize the →→Increase use cases →→Strengthen the BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA private sector to of DFS products legal and regulatory innovate and develop in the delivery of framework for managing new DFS products that government services risks related to cater to the rural (including Government- data governance population to-person payment) to and privacy, cyber sustain the commercial security and RESPONSIBLE AGENCIES: viability of DFS operational risk, and Bank Indonesia agents financial integrity, in order to build Directorate General of Taxes RESPONSIBLE AGENCIES: consumer trust in DFS CMEA (Financial Inclusion products Council) RESPONSIBLE AGENCIES: Ministry of Social Affairs Bank Indonesia OJK Use tax policy instruments to 4 ensure a level playing field →→Complete the design of measures to reform →→Lower the overly tax policy and modernize tax administration generous VAT threshold in relation to DE transactions, ensuring to expand the digital adoption and communication of consistent economy tax base rules, institution of efficient IT systems to administer registration, filing, payment RESPONSIBLE AGENCIES: and use of digital transaction data with Ministry of Finance other third-party data and taxpayer data for (Directorate General of Taxes, Directorate General of Customs strengthened compliance risk management and Excise, and Fiscal Policy Agency) RESPONSIBLE AGENCIES: Ministry of Finance (Directorate General of Taxes, Directorate General of Customs and Excise, and Fiscal Policy Agency) 67 Use Digital Technologies to Provide PRIORITY OBJECTIVE III Better Services and Upgrade Citizen- State Interactions Develop a national digital 1 ID framework POLICIES TO LEVERAGE DTS →→Pass the draft Law →→Launch a whole- →→Close the coverage →→Introduce a national on Personal Data of-economy national gaps in the national digital ID system or Protection digital ID initiative population registry federated ecosystem to define the optimal database (SIAK), fit-for-purpose for RESPONSIBLE AGENCIES: model for Indonesia, streamline the new online transactions in Kominfo bringing together registration and the Indonesia context, government, private update processes, and building on the SIAK MoHA sector and civil introduce biometric- society based e-KYC processes RESPONSIBLE AGENCIES: Office of the President RESPONSIBLE AGENCIES: RESPONSIBLE AGENCIES: MoHA BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA Office of the President MoHA Kominfo MoHA Kominfo Reorient from a narrow Implement a whole- 2 3 focus on e-Government to of-government data a comprehensive national management policy digital transformation agenda →→Strengthen the →→Adopt a whole- →→Implement the →→Build alliances political and of-government One Data Policy with key institutions bureaucratic influence approach to digital comprehensively, in such as MenPAN- needed to move the transformation, priority sectors RB,Kominfo, and MoHA agenda by placing a coordinated and relevant for managing to instill One Data central government spearheaded by an the post pandemic principles into the authority like agency that has multi- recovery (e.g., implementation of the the Office of the ministry oversight. education, health, digital government President in the social protection or and digital ID driving seat RESPONSIBLE AGENCIES: MSMEs). initiatives. Office of the President RESPONSIBLE AGENCIES: RESPONSIBLE AGENCIES: RESPONSIBLE AGENCIES: Office of the President Bappenas Bappenas BPS BPS and other line agencies and other line agencies 68 References 1 Alibaba Group and World Bank. 2019.  E-commerce Development: Experience from China (English). Washington, DC: World Bank Group. 2 Al-Rikabi, Jaffar, Khalil Rohman, and Hambali. 2021. “On the Macroeconomics of the Digital Economy in Indonesia”, Working Paper, World Bank. Forthcoming. 3 Annur, Cindy Mutia. 2020b. “Layanan Telemedicine Diprediksi Tetap Berkibar Usai Pandemi Berakhir.” Katadata. Retrieved from: https://katadata.co.id/ameidyonasution/digital/5f45270a9ad78/layanan- telemedicine-diprediksi-tetap-berkibar-usai-pandemi-berakhir (accessed November 16, 2020). 4 ASEAN and Plum Consulting. 2021. “ASEAN Digital Masterplan 2025”. Retrieved from https://asean.org/ storage/ASEAN-Digital-Masterplan-2025.pdf (accessed March 25, 2021). 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Smith. 2003. “Consumer Surplus in the Digital Economy: Estimating the Value of Increased Product Variety at Online Booksellers”. Management Science, 49(11):1580–1596. 13 Brynjolfsson, Erik, and JooHee Oh. 2012. “The Attention Economy: Measuring the Value of Free Digital Services on the Internet” Thirty Third International Conference on Information Systems, Orlando. 14 Burhan, Fahmi Ahmad. 2020a. “Strategi Anyar Ruangguru hingga Zenius Gaet Pengguna saat Pandemi,” Katadata. Retrieved from: https://katadata.co.id/desysetyowati/digital/5f6de371e728a/strategi-anyar- ruangguru-hingga-zenius-gaet-pengguna-saat-pandemi (accessed November 16, 2020). 15 Council of the European Union. 2017. “VAT on electronic commerce: new rules adopted”, Press Release, Council of the EU. Retrieved from: https://www.consilium.europa.eu/en/press/press-releases/2017/12/05/ vat-on-electronic-commerce-new-rules-adopted/ (accessed November 16, 2020). 16 Dolfen, Paul, Liran Einav, Peter J. Klenow, Benjamin Klopack, Jonathan D. Levin, Laurence Levin, and Wayne Best. 2017. “Assessing the Gains from E-Commerce”. Stanford University, mimeo. 17 European Commission. 2021. “New form of customs declaration for low value consignment”. Retrieved from: https://ec.europa.eu/taxation_customs/news/new-form-customs-declaration-low-value- consignments_en (accessed November 16, 2020). 18 Frank, Morgan R., David Autor, James E. Bessen, Erik Brynjolfsson, Manuel Cebrian, David J. Deming, Maryann Feldman et al. 2019. “Toward understanding the impact of artificial intelligence on labor”. Proceedings of the National Academy of Sciences, 116(14):6531-6539. 69 19 Global Mobile Suppliers Association. 2021. “4G-5G FWA Company Directory-2: Device Ecosystem – March 2021”. Retrieved from https://gsacom.com/paper/4g-5g-fwa-company-directory-2/ (accessed November 16, 2020). 20 Goldfarb, Avi and Catherine Tucker. 2019. “Digital Economics”. Journal of Economic Literature, 57(1):3-43. 21 Google, Temasek and Bain. 2020. “e-Conomy SEA 2020 – At Full Velocity: Resilient and Racing Ahead”. 22 Goolsbee, Austan, and Peter J. Klenow. 2006. “Valuing Consumer Products by the Time Spent Using REFERENCES & ENDNOTES Them: An Application to the Internet”, American Economic Review 96(2):108-113. 23 Hjort, Jonas, and Jonas Poulsen. 2019. “The Arrival of Fast Internet and Employment in Africa.” American Economic Review 109(3):1032-1079.   24 Hootsuite and We Are Social. 2019. Indonesian Digital Report 2019. Retrieved from https://datareportal. com/reports/digital-2019-indonesia (accessed November 16, 2020). 25 International Telecommunication Union. 2019. “Digital Infrastructure Policy and Regulation in the Asia- Pacific Region”. Retrieved from https://www.itu.int/en/ITU-D/Regional-Presence/AsiaPacific/SiteAssets/ Pages/Events/2019/RRITP2019/ASP/ITU_2019_Digital_Infrastructure_5Sep2019FNL.pdf BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA 26 Kop, Rita. 2020. “The challenges to connectivist learning on open online networks: Learning experiences during a massive open online course.” The International Review of Research in Open and Distributed Learning 12:19–38. 27 Minges, Michael. 2016. “Exploring the relationship between broadband and economic growth” World Development Report background papers. Washington DC: World Bank. 28 Pazarbasioglu, Ceyla, Alfonso Garcia Mora, Mahesh Uttamchandani, Harish Natarajan, Erik Feyen, and Matthew Saal. 2020. Digital Financial Services. World Bank, Washington, DC.  29 Reuters. 2020. “Indonesia adds Twitter, Zoom to tech companies that must pay 10% VAT”. Reuters. Retrieved from: https://www.reuters.com/article/us-indonesia-tax-digital-idUSKBN25Z2CU (accessed March 25, 2021). 30 Tiwari, Sailesh, Virgi Sari, Imam Setiawan and Juul Pinxten. 2020. “Pandemic, Poverty and Policy: Ex Ante Poverty and Distributional Impact of the COVID-19 Pandemic” World Bank Policy Research Working Paper, forthcoming. 31 Tracxn. 2019. “EdTech Startups in Indonesia”. Retrieved from: https://tracxn.com/explore/EdTech- Startups-in-Indonesia (accessed March 12, 2021) 32 Wayan Purnomo. 2020. “Example of data fragmentation problems in Indonesia,” Tempo. Retrieved from: https://majalah.tempo.co/read/nasional/160237/mengapa-data-korban-covid-19-pemerintah-pusat-dan- daerah-berbeda (Accessed November 16, 2020). 33 Weil, David. 2014. The Fissured Workplace. Why Work Became So Bad for So Many and What Can Be Done to Improve It. Harvard University Press, Cambridge, Massachusetts, London, England.    34 White, Olivia, Anu Madgavkar, James Manyika, Deepa Mahajan, Jacques Bughin, Mike McCarthy, and Owen Sperling. 2020. “Digital identification: A key to inclusive growth.” McKinsey Global Institute. Retrieved from: https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/digital- identification-a-key-to-inclusive-growth 35 World Bank. 2018. March 2018 Indonesia Economic Quarterly: Towards inclusive growth. Retrieved from: https://www.worldbank.org/en/country/indonesia/publication/indonesia-economic-quarterly- march-2018 (accessed November 16, 2020). 36 World Bank. 2019. World Development Report 2019. Washington DC: World Bank Group. Retrieved from: https://www.worldbank.org/en/publication/wdr2019 (accessed March 25, 2021). 37 World Bank. 2020a. Indonesia Economic Prospects: The Long Road to Recovery. Jakarta: World Bank. 70 38 World Bank. 2020b. “How Covid-19 is affecting firms in Indonesia: Results from the 1st round of the Covid-19 Business Pulse Survey.” Policy Brief. World Bank. 39 World Bank. 2020c. Indonesia Systematic Country Diagnostic: Eliminating Poverty, Bringing Economic Security to All. World Bank Washington, DC. 40 World Bank. 2020d. “Impacts on Digital Merchants: Insights from the Bukalapak-World Bank Survey.” Policy Brief. World Bank. 41 World Bank. 2021a. Macro Poverty Outlook. Washington DC: World Bank Group. Retrieved from: https:// www.worldbank.org/en/publication/macro-poverty-outlook (accessed March 25, 2021). SECTION — 04 BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA 71 Endnotes 1 World Bank (2019) 2 Google, Temasek and Bain (2020). The same report also shows that two segments that have been affected negatively are online travel and transport, and ride-hailing services. 3 Indonesia’s internet economy measured by this metric grew five-fold between 2015 and 2019—a pace un- matched by any other country in the region. The estimated size of this economy, at US$44 billion in 2020, is roughly four times as large as Malaysia and five times as large as the Philippines and Singapore. REFERENCES & ENDNOTES 4 World Bank (2020a). 5 Tiwari et al. (2020). 6 World Bank (2020b). 7 Goldfarb and Tucker (2019). 8 Minges (2016). 9 There are various other statistics on the overall level of connectivity in Indonesia. Most estimates from the BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA industry tend to rely on mobile and fixed-line subscription data coming from GSMA and ITU. Although there is some effort made to identify multiple connections, multiple SIM cards, etc., arriving at this statistic from subscription data alone appears quite challenging. For example, the January 2020 edition of Hootsuite reports internet penetration at 64 percent of the population. The data used here and throughout the report are based on what is perhaps the most comprehensive socioeconomic survey Indonesia conducts on an annual basis, interviewing around 300,000 households across the country for each round. 10 This is a decision open to the MNOs, as all IMT spectrum is now technology neutral. Indonesia’s neighbors Malaysia and Singapore will use the 700 MHz band for 5G services. 11 Refer to www.gsma.com/spectrum/resources/legacy-mobile-network-rationalisation/ 12 Refer to https://vietnamnet.vn/en/sci-tech-environment/no-new-2g-3g-phones-in-vietnam-from- july-1-708163.html and https://mic.gov.vn/Upload_Moi/VanBan/43TT.PDF (in Vietnamese). 13 Hootsuite We Are Social (2019). 14 Google, Temasek and Bain (2020) “e-Conomy SEA 2020”. 15 Goolsbee and Klenow (2006) and Brynjolfsson and Oh (2012) 16 The methodology essentially entails using the time value of leisure to estimate the opportunity cost and value of internet use. We use data from Indonesia’s labor force survey to estimate the earnings function and the time spent on the internet from the Digital Economy Household Survey conducted for this report. 17 Ride hailing suffered in the early days of the pandemic, but as social distancing also intensified e-commerce and food delivery services, some of the “ride-partners” in these platforms adapted by switching to delivery. 18 Google, Temasek and Bain (2020). 19 See Brynjolfsson et al. (2003) and Dolfen et al. (2017), for example. 20 Hjort and Poulsen (2018); Bahia et al. (2020). 21 Income-earners include wage employees, casual workers and self-employers whose income data are available. Income data are not available for employers with workers and unpaid workers. 22 Note that this is just the average increase for all workers for that type. The actual increase based on other worker characteristics, such as the industry, occupation, and whether the worker herself also uses the internet at work, could be much higher. 72 23 World Bank (2020a). The first round of the World Bank COVID-19 Business Pulse Survey (COV-BPS) was conducted in June 15 to 23 with phone interviews on a nationally representative sample of 850 formal sector firms. 24 World Bank (2020b). This is based on data from the first round of the World Bank-Bukalapak Digital Mer- chants Survey conducted between May 20 and June 27, 2020, with a total sample of 1,020 respondents. 25 Google, Temasek and Bain (2020). 26 The 2018 number is based on the national labor force survey of that year, while the 2020 number is based on the Digital Economy Household Survey, a special purpose survey conducted specifically for this report during February and March 2020. SECTION — 04 27 SAKERNAS (2019). 28 Around 12.2 million workers alone were engaged in e-commerce activities as their primary job (SAKERNAS 2019). However, Indonesia’s National Social-Economic Survey 2019 (SUSENAS 2019) shows only 5.9 million online sellers (SUSENAS, March 2019). 29 Alibaba Group and World Bank (2019). BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA 30 SAKERNAS (2019). 31 World Bank (2020c). 32 LSPs include transportation companies (shipping lines, ferry lines, airlines, trucking companies), as well as third-party logistics companies that coordinate multiple transportation modes, together with warehousing and other value-added activities such as packaging and sorting. 33 There are other measures of financial inclusion, including in Indonesia. These numbers from the World Bank Digital Economy Household Survey appear to align well with these numbers. For example, the Global Findex Database, 2017 found that 49 percent of Indonesian adults had transaction accounts. Similarly, the Financial Inclusion Insight (FII) Survey in 2018 found that 56 percent adults were owners of a bank account. Likewise, the Global Findex Database also showed that 3 percent of Indonesian adults owned mobile money accounts and there were at least 7 percent of adults who used some form of mobile banking. The numbers from the DEHS—which are based on households—appear to be in a reasonable ballpark of these numbers and, as such, provides a useful updated triangulation on the picture of financial access in Indonesia. 34 Pazarbasioglu et al. (2020). 35 Under this new regulation, foreign-produced textiles, clothes, bags, and shoes that cost a minimum of US$3 will be subject to a range of taxes and import duties with a total rate of 32.5 to 50 percent of their value. For other products worth at least US$3, the taxes and import duties will be lowered from 27.5 to 37.5 percent of their value to 17.5 percent. Goods worth below US$3 will be exempted from import duties but still be subject to some other taxes, such as value-added tax. 36 Australia was the first to slash its GST threshold from AUD1,000 to zero from July 2018. The EU is set to follow suit, with its current exemption of consignments of less than euro 22 to be abolished from 2021 onwards. Indonesia is among the early movers in this space. But implementing these new rules without overwhelming the customs administration or creating unnecessary burdens on business will also be challenging and require effective risk management. 37 Existing roadmaps on e-commerce recognize the need to promote local products, catered both to the domestic as well as overseas market. However, currently these efforts are limited to co-branded promotion campaigns by the Government in partnerships with e-marketplaces to encourage Indonesians to buy local. 73 38 For example, data from the Digital Economy Household Survey show that 77 percent of app-based food deliveries in Indonesia are found to be substituting physical restaurant experiences. This was a survey that was done before the onset of the pandemic in March 2020. 39 Indonesia’s VAT threshold of IDR 4.8 billion stands out in international comparisons of VAT thresholds to GDP per capita, a metric commonly used to compare the generosity of VAT thresholds worldwide. Less-de- veloped economies tend to have higher thresholds, in part because of weaknesses in tax administration and in part because they have larger informal economies. However, even when compared against low-income REFERENCES & ENDNOTES economies, Indonesia’s VAT ratio stands out as being too generous. A high threshold means that a vast share of businesses whose annual turnover is below the VAT threshold are excluded from the VAT system, narrowing the base and distorting the tax. 40 Frank et al. (2019), Banerjee and Duflo (2019). 41 Autor et al. (2017). See also Weil (2018), p.9: “Where lead companies once shared gains with their internal workforce, fissuring leads to growing inequality in how the value created in the economy is distributed.” And Banerjee and Duflo (2019) p.242: “The increase in concentration (among superstar firms) thus helps explains a part of why wages are not keeping pace with GDP. The rise of superstar firms also offers an explanation for BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA why overall wage inequality has been rising…” 42 The human capital gap is magnified by restrictive government policy in hiring foreign workers, limiting the ability of employers to fill the skills gap with global talent in areas where local skills are in short supply. The recently promulgated Law on Job Creation (the “Omnibus Law”) includes a provision to relax this. 43 Tempo (2020). 44 Between April and May 2020, almost 80 percent of Posyandu (integrated maternal and child health and nutrition posts at the village level) were closed. Community-based outreach activities also reported signifi- cant disruptions with more than XXX percent ceasing operation. It is also reported that 86 percent of child growth monitoring activities, 55 percent of immunization services, 46 percent of Vitamin A distribution and ante-natal services were suspended or ceased due to these health posts closing down. 45 Bhardwaj, Yarrow, and Cali (2020). 46 Asosiasi Healthtech Indonesia (2020) 47 The most updated data on health-tech funding was prepared in September 2019 by Tracxn. (https:/ /tracxn. com/explore/HealthTech-Startups-in-Indonesia). Since then, there has not been any major announcement of health-tech funding, except for Alodokter’s follow-on funding by MDI Ventures in November ’20 (https:// theinsiderstories.com/indonesias-alodokter-raises-series-c-funding-from-mdi-ventures/) . In October 2019, Grab and Ping An announced a joint venture to launch Grab Health / Good Doctors Indonesia, but the value of the investment to Indonesia was never disclosed. 48 Katadata (2020a). 49 Katadata (2020b). 50 World Bank conducted mobile phone based high frequency survey of households to track the evolving impact of the COVID-19 pandemic. 51 Education experts and practitioners argue that online learning cannot replace offline face-to-face learning. To avail of it one requires sufficient means and technology, which can be exclusive in some countries, and there are psychological and social factors that prevent online interactions from being as effective as offline (Dhawan 2020). 74 52 The experience of massive-open-online-courses (MOOCs) provides one illustrative example. Once regarded as one of the groundbreaking educational innovations of the past decade, they have had very limited success. Completion rates have remained below 5 percent for many years now, with lack of coordination and direction considered to be among the main contributing factors (Kop, 2020). 53 Indeed, the Government has been experimenting with several of these efforts in both education and health. Portal Rumah Belajar is an online learning platform equipped with complete multimedia education content managed by MoEC. Universitas Terbuka, a state university focused on distance learning also offers extensive open education resources. Similarly, in health, Sehatpedia is a Government tele-consultation platform. 54 McKinsey (2020). SECTION — 04 55 Aadhar, India’s digital ID system, contributed to significantly expanding financial inclusion (from 35 percent in 2011 to 80 percent in 2017), by making it cheaper and easier for people to satisfy know-your-customer (KYC) requirements for bank account opening. 56 Although the law does not significantly affect One Data, it will provide guidance to data stewards in particular when managing personal information. Bappenas as the coordinator of One-Data implementation is expected to monitor closely the development and incorporate elements of the Personal Data Protection Law in the One-Data technical implementation guidance. BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA 57 Although there is no specific mention of One Data in the Omnibus Law, there are several provisions regarding data that are relevant. For example, the decision on wages for MSMEs is mandated to be based on consump- tion aggregates calculated by BPS. This means that data published by one GoI agency, BPS, will be used to set wages. Lack of clarity on due process and transparency in data production may weaken the legitimacy of official statistics and leave them vulnerable to being politicized. 58 For example, institutions such as the Directorate General of Civil Registry of MoHA and the Directorate General of Tax of MoF traditionally control and establish relatively more mature data management for civil registry and taxpayer datasets. 59 ITU (2019). 60 Global Mobile Suppliers Association (2021). 61 ASEAN and Plum Consulting (2021). 62 ASEAN (2021). 63 World Bank (2019). 64 World Economic Forum (2020). 65 World Bank (2019) 66 Ibid 67 Ibid 68 The indirect revenue gains are potentially much greater, as data from the digital economy can be combined with other third-party data and used by the revenue authority, the Directorate General of Taxes (DGT), to boost compliance and raise higher revenues across Indonesia’s main taxes, i.e., value-added tax (VAT), cor- porate income tax (CIT) and personal income tax (PIT). 69 World Bank (2021a). 75 70 For some of the companies covered, see: “Indonesia adds Twitter, Zoom to tech companies that must pay 10% VAT”, Reuters (September 8, 2020), accessed online at: https://www.reuters.com/article/us-indone- sia-tax-digital-idUSKBN25Z2CU 71 The newly appointed VAT Collectors are provided with a VAT Collector ID and a tax registration letter. These VAT Collector are required to create VAT collection slips providing information on VAT collection and payment, which can take the form of a commercial invoice, billing, or order receipt to ease the burden of complying. VAT payment is made electronically using a billing code that is provided by the DGT, and can be REFERENCES & ENDNOTES made using IDR, USD dollar, or all other foreign currencies accepted by the DGT system. VAT Collectors are required to file quarterly reports, with at minimum data on: (i) number of users in Indonesia; (ii) amount of payments (excluding the VAT); (iii) amount of VAT collected; and (iv) amount of VAT settled to the govern- ment. The DGT is permitted to request further detailed filings on an annual basis with transaction-level data. 72 Australian Taxation Office (2019). 73 Council of the European Union (2017). 74 European Commission (2021). BEYOND UNICORNS: HARNESSING DIGITAL TECHNOLOGIES FOR INCLUSION IN INDONESIA 75 The large number of ‘informal’ MSMEs, not registered with government entities, and/or entrepreneurial households increasingly active on e-commerce represent significant challenges in the Indonesia context. Data from digital platforms can be a very powerful enabler of enhanced risk management when combined with customs data. Indonesia’s Directorate General of Customs is looking to do this, with an ongoing pilot involving several digital platforms focused on using e-commerce transactions data to tackle compliance risks including under-invoicing and missed declarations. 76 Revenue authorities with limited capacity to handle large numbers of monthly VAT filings (e.g., because they remain reliant on manual filing, and/or have limited ICT capacities to manage VAT e-filing nationwide) may set a higher VAT threshold so that fewer companies would need to register and file. An informal economy may be defined as one with characterized by firms that are not registered, and/or whose employees work without a formal contract. Informal companies have been traditionally hard to tax, since they are often ‘hidden’ from government reach. 77 “Box B.1: Why is Indonesia’s tax-to-GDP ratio so low?” in The Indonesia Economic Quarterly: Towards Inclusive Growth” (March 2018), pp. 50. 78 Al-Rikabi, Khalil Rohman, and Hambali, “On the Macroeconomics of the Digital Economy in Indonesia”, Working Paper, World Bank (forthcoming, 2021). 79 The group of leading digital nationals: https://leadingdigitalgovs.org/ 76 78 WORLD BANK INDONESIA FLAGSHIP REPORt