Social Enterprise for Sustainable Urban Development

Parallel Events of PrepCom3 UN Habitat III Collaboration between United Nations, City Government of Surabaya and Universitas Surabaya

Surabaya, July 23 2016

ii Foreword

Excellencies, Distinguished Delegates, Ladies and Gentlemen It gives me great pleasure to extend to you all a very warm welcome on behalf of the Universitas Surabaya (UBAYA) and to say how grateful we are to all of you who have accepted our invitation to attend the discussion on Social Enterprise for Sustainable Urban Development. This event is called as parallel events of the PrepCom3 UN Habitat III. PrepCom3 will be held in Surabaya, Indonesia, from Monday, 25 July to Wednesday, 27 July 2016 at the Convention and Exhibition Hall Grand City Convex Surabaya. Stakeholders, programmes and projects, as well as global and regional networks of partners, can use this opportunity to meet and advance the debate on the New Urban Agenda. Prior to Third Preparatory Committee of the UN Habitat III Conference, the original motivation of this event is to share experiences and research finding from private sector, research institution, and non-government organization to promote issue sustainable urban development. Hence, the social enterprise has become our concern to better respond to the challenges of our time, to address issues such as inequality, informality, insecurity, and the unsustainable forms of urban expansion. All of the members of the local Organizing Committee from the Universitas Surabaya wish you a superb conference experience and a memorable stay in Surabaya.

Dr. Anton Tjahjo Anggoro Centre for Research and Community Service (LPPM) Universitas Surabaya

iii Table of Content

Foreword ...... iii

Table of Content ...... iv

Introduction ...... 1

PAKUWON JATI: Building A Sustainable Future ...... 3

Market-driven Upcycling of Urban Organic Solid Waste in Indonesia ...... 17

The Role of PUPUK to Support Local Creative Entrepreneurs in Shaping Creative Cities in Indonesia ...... 24

Social Enterprise Models: The Indonesian Case Studies ...... 40

iv Introduction

Urban development practice has been subject to changes pointing towards more private sector involvement in the build environment in the last decade. The role of private sector on promoting sustainable urban development has been acknowledged with the concept of market-oriented development practices (Heurkens, 2012). The UN Habitat has increased effort to promote re-establishing housing as a priority in debate around sustainable urbanization. The resulting models are leading to social, environmental and financial costs far beyond what the majority of cities can afford (Kacyira, 2016). The transformation of social economic system to deal with market failure has brought the emerging non-market based as a self-regulating market, which fails to prevail over market failures (Polanyi, 1944). This is different from Marx and Engels who draw a distinction between economic and political issues (Block, 2003). Since 1990s, the debate has expanded in various types of institutions. Major universities have developed research and training programs. There is a move from a welfare state to a new welfare mix in which public authorities, for-profit providers, and third-sector organizations share responsibility on the basis of criteria of both efficiency and fairness (Defourny J. , 2001). In Europe, the concept of social enterprise made its first appearance in 1990, at the very heart of the third sector, following an impetus that was first an Italian one and was closely linked with the cooperative movement. In 1991, the Italian parliament adopted a law creating a specific legal form for ‘social co-operatives’ and the latter went on to experience an extraordinary growth. In the United States, the concepts of social entrepreneur and social enterprise also met with a very positive response in the early 1990s. In 1993, for instance, the Harvard Business School launched the ‘Social Enterprise Initiative’, one of the milestones of the period (Defourny & Nyssens, 2010). International research networks have been set up, like the EMES European Research Network, which has gathered, since 1996, research centers from most countries of the EU-15, and the Social Enterprise Knowledge Network (SEKN), which was formed in 2001 by leading Latin- American business schools and the Harvard Business School. Various foundations have set up training and support programs for social enterprises or social entrepreneurs. In Asia, Mohamad Yunus is acknowledged as the pioneer of social business. Instead of profit maximization, business objective aims to poverty alleviation or other social problems, such as lack of education, poor health services, environment problem and lack of technological access (Yunus, 2009). It appears that the practices of social enterprise is quite familiar for us Indonesian people, while the concept of social enterprise has came into a dispute. Indonesian constitution even highlights the role of social economy as the most relevan business model for this country. Along with co- operative, many social works have been dedicated for basic education and health services. The seminar aims to share experiences and research finding from private sector, research institution, and non-government organization to promote sustainable urban development. The first case is Pakuwon Jati, which has been acknowleged with their effort to build iconic shopping center and housing at the business district of Surabaya City. This is not only building suppermall and high-class , but also to build environment as well as nurturing local creative industry to meet global market. The second case is EAWAG, a research centre with world-class research network in promoting waste management. The institution does not only focus on scientific research but also try to involve in market mechanism. The third case is PUPUK, an NGO with aim of enhancing small and medium enterprises. In this event, the institute has intention to share their experiences to promote creative industry, which involves various stakeholders including the national government. Fourth. There are some post doctoral researchers who aim to share their research. One of them is Ina Agustin Murwani, who conducts a research on networks for social enterprise. We expect that the discussion will contribute to the practices of sustainable urban development.

Dr. Aluisius Hery Pratono Centre for Business and Industrial Studies Universitas Surabaya

2 PAKUWON JATI: Building A Sustainable Future1

Tunjungan Plaza is the largest shopping center in East Java with net leasable area of 103,202 square meter. Until the end of 2015, occupancy rate at Tunjungan Plaza has reached 98% with the addition of several prominent tenants such Coach, Michael Kors, Mothercare, Birkenstock, First Love, Kate Spade New York, Hong Tang and Furla. Several promotional events were held in 2015 to boost traffic, particularly from the family segment, among others are Mulan the Warrior Princess Live Show, Alice in Wonderland Live Show, Dinosaur Adventures, Meet & Greet Barbie in Rockin Royals, and Barney’s Jukebox Party Live Show. The annual Surabaya Fashion Parade event returned to support the creative industry scene in 2015 and taking the theme of “Infinite Viyage”, comprises a string of events such as the Fashion Designer and , Kids Wear Design Competition and talent scouting event, the Surabaya Model Search. A number of fashion shows were held every day with the support of international fashion tenant in Tunjungan Plaza and the East Java branch of Indonesia Fashion Designers and Entrepreneurs Association (APPMI), and guest designers such as Deden Siswanto, Danjyo Hiyoji, Sofie and Gregorius Vici. The special shopping program Late Night Shopping returned to the delight of the customers. Various prizes were offered during the event such as hotel voucher and electronic equipment through gift voucher given to customers with a certain amount of spending. The management also held several discount programs including the Ramadhan Branded Sale with the participation of various tenants such as The Body Shop, Sogo and the Executive. The acquisition of PT Pakuwon Permai has strengthened recurring revenue in 2015 along with the recognition of revenues from Supermal Pakuwon Indah and Royal Plaza shopping centers in Surabaya as well as Blok M Plaza in Jakarta. In October 2015, the Tunjungan Plaza V shopping center or widely known as the Fashion Avenue was officially opened with new leasable area of 19,602 sq m. With the operations of the Tunjungan Plaza V, total net

1 This article is part of PT Pakuwon Jati Tbk, Annual Report 2015. For detail report, please kindly access http://www.pakuwon.com/public/files/file- investor/annual-report/annual_report_pakuwonjati_2015.pdf

2 PUPUK : Perkumpulan Untuk Peningkatan Usaha Kecil or The Association for Advancement of Small Business, a NGO that concern to develop small business in Indonesia. Early Rahmawati is a General

3 leasable area managed by the Company increased to 531,000 sq m.Additionally, Ascott Waterplace Surabaya and Sheraton Grand Gandaria City began operations in May and October 2015 respectively. The two hotels have a combined 476 rooms, therefore increasing the total hotel rooms under Company management by 94% to 982 rooms. The operations of Ascott Waterplace Surabaya and Sheraton Grand Jakarta Gandaria City as well as Tunjungan Plaza V shopping center will enhance the base for recurring revenue of the Company in the years to come. This is in line with the Company’s long term strategy namely reaching balance between recurring revenue and development revenue.

The Company PT Pakuwon Jati Tbk. was established based on Notarial Deed No. 281 dated 20 September 1982 of Kartini Muljadi, S.H., notary in Jakarta. The Deed of Establishment was approved by the Minister of Justice in his Decision Letter No. C2-308. HT.01.TH.83, dated 17 January 17 1983, and was published in the State Gazette No. 28, dated April 8, 1983 Supplement No. 420. The Company’s Articles of Association has been amended several times. The last amendment is conducted with Notarial Deed No 24 dated 21 October 2015 of Esther Mercia Sulaiman, S.H., notary in Jakarta, and stipulating changes and the re-drafting of principles in the Company’s Article of Associate as an adjustment to principles in the Regulation of the Financial Services Authority. The amendments were approved by Minister of Justice and Human Rights of Republic of Indonesia through Letter No. AHU-AH. 01.03-0974357 dated 23 October 2015.

In the implementation of good corporate governance, the Company adheres to the principles that are in line and integrated with the vision and mission of the Company and do not conflict with laws and regulations as follows: a. Transparency The Company submitted its Annual Report, Financial Statements, corporate actions (corporate action) and other important nd relevant information regarding the Company for the interests of the public, investors, shareholders and other stakeholders in an open and transparent ways, through the www.pakuwon.com website or through websites owned by the Financial Services Authority (OJK), the Indonesia Stock Exchange (IDXNet), KSEI or newspaper. Through the provision of information and assurance of ease in obtaining accurate information and adequate to ensure transparency, the Company creates mutual trust between the Company and its shareholders and other stakeholders.

4 b. Accountability The Company is committed to hold account for all of its undertaken activities to shareholders and stakeholders in accordance with the provisions of the applicable laws and regulations.

The Board of Directors has strategic business policies to promote the establishment of a performance-based work culture to improve the accountability of each business unit. On the other hand, the Board of Commissioners assisted by the Audit Committee conduct supervision on the Directors. All activities of the Directors and results of the Board of Commissioners supervision are reported to the Shareholders in the General Shareholders Meeting. c. Responsibility The Company has both internal and external responsibilities. The internal responsibility comprises responsibilities for human resources, both Directors and employees, which is realized with the enrolment of Directors and Employees of the government’s welfare programs namely BPJS Kesehatan, BPJS Ketenagakerjaan and BPJS Jaminan Hari Tua. In addition, to increase knowledge and working know-how, the Company also provides opportunities for Directors and employees to participate in trainings that can improve the ability of the Board of Directors and employees in performing their duties. The Company fulfils its external responsibility towards the environment and society through Corporate Social Responsibility (CSR) in areas adjacent to the Company’s business.

5 d. Independency The Company manages the company professionally and independently by always avoiding actions that could potentially trigger conflicts of interest among members of the Board of Directors, Board of Commissioners and Shareholders. e. Fairness Through compliance with laws and regulations, the Company can manage its assets according to the law in a forthright and fair by promoting the principle of prudence to avoid actions that could harm the interests of Shareholders and other stakeholders. Company’s experience in supplying market demands for more than three decades is an endowment for the Company to sustainably growing and expanding. The Company’s strategy to maintain the balance between recurring and development revenues will ensure stability in income and provide an opportunity to continue growing despite economic slowdown. The Company also strives to increase the competency of human resources in implementing the Company’s business plan. With this strategy, the Company has been able to maintain its basis of growth throughout 2015, which is dominated by challenges from inside and outside the country. Well-trained human resources are keys in the efforts to achieve opportunities in the mid- and long-term by utilizing the Company’s existing portfolio in Surabaya and Jakarta.

6 Environmental Responsibility In building its property products, the Company pay attention to the environmental aspects among others by using environmentally friendly materials and energy- efficient building designs. As part of the responsibility for products and services for residential housing and buildings, the Company has a specific department that focuses on estate management and consumer complaints. Meanwhile for commercial properties handling, the Company assigns Tenant Relations to handle operational communication with tenants.

The Company continues to place human resources as the main asset and partner in its endeavour to achieve targets. Competent human resources is the key for Company’s success in conducting its business and providing the best services for all customers. The Company always give opportunity each individual to improve ability and skills regarding their working field. With the expansion of Company’s operational activity, the Company ensures that each employee possess sufficient competence that meet the demands of their functions and obligations. The Company is fully committed to continue developing its human resources in intensive and integrated manner since the recruitment stage, orientation and training through counseling, promotion opportunities and other sustainable development program. Various internal trainings were conducted such as seminar, on-the-jon training and product knowledge training which includes technical and non- technical aspects that are required in each level at every units of the Company. General Manager and the directors are obliged to participate in educational program and seminars to keep updated on latestmarket development. The systematic and continuous training programs have helped the Company to create high quality leaders and reliable employees in order to maintain the sustainability and progress of the Company’s business. The Company always strives to create a conducive cooperation atmosphere that will enable employees to cooperate to achieve targets. Various employee activities were conducted in 2015, such as team building activity including outbound, marathon, Eid al Fitr celebration and Company’s outing. Routine activity such as monthly flag hoisting ceremony and Indonesia’s Independence commemoration were also held.

7 The Business Environment Domestic property investment possesses a large potential along with the growing urban population that are looking for high quality residential and retail shopping centers. Level of income continues to escalate in accordance with national economic projection. Pakuwon Jati Tbk. reaffirms its position as one of the best developers in the country amid challenges in Indonesian economy by selecting a business strategy that focuses on growth stability. The policy is materialized in the balance between investment and development for a sustainable future as implied in the Vision and Mission of the Company.

Indonesia’s economic situation that sees pressures from inside the country and overseas has also impacted national property industry in 2015. However, the Company remains able to maintain its positive achievement that it has been posted throughout the year. Determining focus and priority on the continuity of several ongoing projects are keys for the Company success amid unfriendly business climate in 2015. A slower property market that began in 2014 continued to the next year due to the remaining tight monetary policy of Bank Indonesia that keeps its benchmark interest rate (BI Rate) at 7.50% the whole year. Fluctuation in rupiah exchange value was still occurring in 2015, while the easing of the loan-to-value (LTV) policy in June 2015 only shows impact in the sales in the second half of 2015. To tackle the challenges, the Company strives to improve services, be it in its retail shopping centers and also services provided to the consumers who purchase property products of the Company. The Company is focusing on sustainable quality improvement, such as by constructing supporting facilities that give added values to the environment or to the residence, as well as providing better services at commercial buildings belonging to the Company. The Company also keeps launching products in accordance with growing market segment. The product selection is adjusted to the current demand and trend, among others by presenting products for the middle segment with attractive payment scheme. The combination between the strategy and the stable recurring income composition ensure stable cash inflow for the Company when the economy stagnates. Developments of existing construction projects are continued, such as the expansion of Tunjungan City superblock in Surabaya, marked by the operations of Tunjungan Plaza V in October 2015 and the construction of Tunjungan Plaza VI. The Company also expanded the superblocks of Supermal Pakuwon Indah in Surabaya and Kota Kasablanka in Jakarta.

8 The strategy is proven reliable as part of the Company’s efforts to maintain its work and position as one of the top developers in Indonesia that has skillful human resources in achieving its targets. The Company remains one of the largest retail shopping center owners in Indonesia, with seven malls spread in Surabaya and Jakarta. The Company also keep and build good relationship with its international anchor tenants. The Board of Commissioner, with the assistance of the Audit Committee, has reviewed the financial report of the Company for the year ended on 31 December 2015 and we assessed that the Company management has been displaying a good performance and succeeded in achieving targets that have been set previously. The Company remains to payout dividend amounted to Rp217 billion in 2015 amid ongoing construction project development. The dividend payment represents our appreciation for the Shareholders’ constant support for the Company and to improve the trusts and confidence of all Shareholders and all market players for the Company’s potential in the future. The Company is committed to continue delivering the best performance for all stakeholders and to provide additional values for all Shareholders. The Company booked revenue of Rp 4.625 trillion in 2015, or increased by 19,4% from the corresponding period a year before. The revenue consisted of a balance between recurring revenue and development revenue which stood at Rp 2.311 trillion for recurring revenue and Rp 2.314 billion for development revenue. The balance in revenues highlights the Company’s success in retaining its performance and providing excellent services for all clients and customers. Retail shopping centers were the largest contributors to the recurring revenue with Rp 2,094 trillion. Meanwhile, revenue from condominium sales, as many as Rp 1.515 trillion, were the largest for development revenue. This indicates the large potential in Indonesia’s property market despite the sluggish economy and weaker customer confidence index. The 2015 Global Retail Development Index conducted by international consultancy firm A. T. Kearney places Indonesia at the 12th of 30 developing countries for retail investment destinations. Indonesia steps up three ranks from the 15th a year before. According to the survey, the huge potential in Indonesia is due to three factors, namely the change in lifestyle and consumption pattern that follows rapid urbanization, the increasing volume of middle income group and a demographic structure that was dominated by productive age population with expectedly increasing disposable income.

9 The Board of Commissioners project a promising business prospect for the Company in the middle and long term. Apart from bearing a large market basis, the economy of Indonesia is estimated to improve on the back of the government strategic infrastructure projects that have been kickstarted at the end of 2015. The long- awaited infrastructure development is likely to boost customer growth in the future. The Board of Commissioners will continue supervising closely the management of the Company on behalf of shareholders. By completely adhering to the good governance and professionalism, we are certain that the Company can continue to grab all opportunity of growth in line with improved economic condition and a promising Indonesia property market. In 2015, the Board of Directors reported that the Company has again managed to achieve revenue target. The Company booked net income of Rp 4,625 billion, up 19.4% from Rp3,872 billion in 2014. Meanwhile, the amount of consolidated net profit in 2015 was Rp1,41 billion or 4% lower than Rp1,47 billion in 2014 (excluding profit from extraordinary post amounted to Rp1,120 billion) or consolidated profit before foreign currency losses and penalty from convertible bonds in 2015 still grow 18.8% compared to 2014. Along with the revenue growth, the Company’s assets also increased by 12% to Rp 18.778 billion at the end of 2015, while equity grew by 14% to Rp 9.455 billion. Thus, return on equity reached 17.5%, while the yield on assets reached 6.7%. The Company was succeeded in achieving a balance between development revenue of 50% and recurring revenue of 50% of the total revenue. The balanced composition will be maintained through the sales of property units and assets management to maximize the value of Company’s property. The balance between the two revenue compositions was also proven as one of the factors that ensure that Company’s cash inflow remains positive. The Company’s recurring revenue in 2015 reached Rp 2,311 billion, increased by 29,2% compared to Rp 1,789 billion in 2014. Revenues from retail unit leases at malls owned by the Company was the main driver for recurring revenue growth, reaching Rp 2,094 billion in 2015. Meanwhile, revenues from office and hotel units were also provided positive contribution in maintaining Company’s revenue. The Company booked Rp 2,314 billion in development revenue in 2015, up 11,1% from Rp 2,083 billion in 2014. The biggest development revenue came from condominium sales, reaching Rp 1,515 billion, followed by sales of landed house and office units. The Company continues to reaffirm its position as market leader in integrated superblock developer and management sector in Indoensia. In

10 2015, the Company was focusing on continuing the construction of existing projects, including the expansion of Tunjungan City superblock in Surabaya – marked with the operational of Tunjungan Plaza 5 retail shopping center in October 2015, and the expansion of Supermal Pakuwon Indah in Surabaya and Kota Kasablanka Superblock in Jakarta. The focus on quality improvement was realized through the development of supporting facilities and services that provide additional values for the Company’s assets. Although the sluggish economy has overshadowed growth in 2015, Indonesia property market still possess large potential along with the expected economic improvement and the stable income per capita growth. Demands for residential units and retail shopping centers are estimated to increase along with the growing population in urban areas. The government infrastructure development program is also expected to propel demands from property customers in the future. The balance between recurring revenue and development revenue gives assurance that the Company has strong financial condition amid economic stagnation. Challenges stemming from the tight monetary regime run by Bank Indonesia and the weak property demands in 2015 were addressed by presenting Company policies that withhold the principles of sustainable growth. Last year was also marked with depreciation of rupiah exchange value, down more than 11% against the US dollar compared to the end of 2014. The Company has taken preventive measure by hedging its US dollar denominated Senior Unsecured Notes. Opportunities for revenue growth are still available in projects currently still being constructed. The Company is speeding up the construction of existing projects, including the superblocks of Kota Kasablanka, Tunjungan City and Supermal Pakuwon Indah. The Company began operations of the Tunjungan Plaza 5 and Sheraton Gandaria City in October 2015, handed over units at the Peak and Pakuwon Center and launched clusters and sub- clusters at the Grand Pakuwon and Grand Island projects in 2015. Currently, the Company is continuing the second phase of the Kota Kasablanka condominium expansion project which is expected to boost revenue growth in 2016. With a total landbank of 450 hectare, which is sufficient for more than 10 years property development, the Company will push ahead with the development of existing projects while pursuing the development of new projects to maintain the Company’s financial balance and capital structure in the future. To boost the optimism of all Shareholders on the prospect and performance of the Company in the future, the Company has again paid cash dividend in

11 2015 amounted at Rp 4.5 per share, similar amount from Rp 4.5 in the previous year. The cash dividend payment reflects the Company’s appreciation for the trust and support that all Shareholders have been awarded for the Company over the years.

The Financial Performance Pakuwon Jati again posted an impressive result by booking a net revenue of Rp4,625 billion in 2015, up 19.4% from Rp3,872 billion in 2014. Net income in 2015 was Rp 1,401 billion (after extraordinary items), decreased by 5% compared to Rp1,480 billion in the previous year. Revenue in 2015 was evenly split between recurring revenue and development revenue, in line with the Company’s strategy to grow on a balanced revenues composition. In 2015, the Company was able to post 29.2% growth in recurring revenue and 11.1% in development revenue.

Revenues The Company’s revenue in 2014 consisted of 50% recurring revenue and 50% development revenue, balancing from 46% and 54%, respectively, in 2014. The performance reflected realization of the Company’s commitment to maintain the balance between the two sources of revenues. Recurring revenue is generated from the lease of units in shopping center and office towers, as well as revenues from hotels and serviced apartments. The recurring revenue grew by 29.2% to Rp 2,311 billion in 2015 compared to the previous year, mainly due to increasing recurring revenue from the acquisition of PT Pakuwon Permai in October 2014 and increasing revenue of Kota Kasablanka. The acquisition of PT Pakuwon Permai in October 2014 has strengthened the Company’s recurring revenue base with the addition of three retail shopping centers, namely Blok M Plaza in Jakarta, Supermal Pakuwon Indah and Royal Plaza in Surabaya, and the Somerset Berlian serviced apartment in Jakarta. Development revenue rose by 11.1% to Rp 2,314 billion in 2015 as results of the revenue recognition from condominium and office units at the Tunjungan City superblock, the Educity apartment, landed residential in Pakuwon City and units at the Orchard, Tanglin apartments and The Ritz Mansion in Supermal Pakuwon Indah, following the acquisition of PT Pakuwon Permai on 10 October 2014.

12 Shopping Center and Office Revenues from the lease of units at shopping centers and office towers reached Rp 2,095 billion in 2015, compared to Rp 1,614 billion in 2014. This was due to an increase in income from leasing, service charge and other revenues which reached Rp 481 billion, supported by the increase of net leasable area from 334,000 sq m to 512,000 sq m through the addition of three shopping centers namely Blok M Plaza in Jakarta, Supermal Pakuwon Indah and Royal Plaza in Surabaya, following the acquisition of PT Pakuwon Permai and the increasing income at Kota Kasablanka, Gandaria City and Tunjungan Plaza shopping centers. The operations of Tunjungan Plaza V provided additional net leaseable area to 531,000 sq m.

Hotel and Serviced Apartment Somerset Berlian serviced apartment enjoyed 62.8% occupancy rate at end of 2015. The combined revenues of Somerset Berlian and Ascott Waterplace contributed Rp59 billion to the Company’s revenue in 2015 along with the operations of Ascott Waterplace in 2015.

Residential Sales The revenue recognition in the sales of units at The Peak condominium and Pakuwon Center office in Tunjungan Plaza V, landed residential at Palm Beach and Grand Island Pakuwon City, as well as at Orchard, Tanglin and The Ritz Mansion in Supermal Pakuwon Indah, is the main contributor in the increase of residential revenue to Rp 2,314 billion in 2015 from Rp 2,083 billion in 2014.

Gross Profit In 2015, the Company recorded a gross profit of Rp 2,669 billion, increasing by 23.7% compared to 2014, over contributions from the Tanglin, Orchard apartments and The Ritz Mansion following the acquisition of PT Pakuwon Permai in October 2014, revenue recognition of condominium and office in Tunjungan Plaza V, Educity apartment, landed residential in Pakuwon City and increasing recurring revenue from Supermal Pakuwon Indah shopping center.

13 Operating Expenses Operating expenses comprise selling expense and administrative and general expense. Selling expense were mostly consisted of events organizing cost, advertising and promotion and sales commissioning. The expense rose 47% in 2015 to Rp 175 billion from Rp 119 billion, This was due to more frequent events organizing and intensified advertising and promotion efforts to boost income along with the launch of new products in the Grand Island, Grand Pakuwon, The Ritz and the Anderson apartment at Supermal Pakuwon Indah and Angelo and Bella apartments at Kota Kasablanka.

Table 1. Income Statement (million rupiah)

2015 2014 % Net revenues 4,625,052 3,872,272 0.19 Cost of revenues 1,956,524 1,714,247 0.14 Gross profit 2,668,527 2,158,025 0.24 Selling expenses (175,155) (118,953) 0.47 General and administrative expenses (228,809) (149,774) 0.53 Finance costs (250,648) (292,866) (0.14) Final tax expenses (316,182) (249,763) 0.27 Penalty ofmandatory convertible notes (105,532) Interest of income (176,160) 216,353 (1.81) Loss from foreign exchange (276,832) 40,128 (7.90) Equity in net loss of associates (2,915) (5,923) (0.51) Loss on derivative financial instrument (75,947) (32,850) 1.31 Gain on purchase of subsidiaries with discount 988,334 (1.00) Gain on previous held interest 131,726 (1.00) Other 12,478 5,052 1.47 Income before Tax 1,425,142 2,609,233 (0.45) Tax expense (24,587) (10,401) 1.36 Net Income 1,400,554 2,598,832 (0.46)

14 Table 2. Asset and Liabilities (million rupiah)

2015 2014 % Current Asset Cash and equivalents 2,071,163 2,809,034 (0.26) Other financial assets 211,781 367,521 (0.42) Trade account receivable 267,679 262,955 0.02 Other account receivables 33,848 40,392 (0.16) Inventories Real estate assets 2,244,082 1,665,195 0.35 Others 10,264 6,570 0.56 Prepaid taxes 64,224 26,059 1.46 Advances and prepaid expenses 505,516 329,262 0.54 Total current assets 5,408,561 5,506 981.30

Noncurrent Assets Other accounts receivables 1,362 1,362 - Investment in associates 18,055 20,971 (0.14) Other noncurrent financial assets 46,369 89,466 (0.48) Advance for purchase of land and property 1,288,370 532,346 1.42 Inventories - real estate assets 1,591,806 1,461,183 0.09 Investment properties 8,886,936 8,155,974 0.09 Property and equipments 1,457,275 964,375 0.51 Claim for tax refund 65,909 17,251 2.82 Deferred tax asset 94 Derivative financial instrument 10,136 20,275 (0.50) Other assets 3,337,337 112,632,751 (0.97) Total Noncurrent Asset 13,369,560 11,263,751 0.19 Total Assets 18,778,122 16,770,742 0.12

Current Liabilities Trade account payable 198,258 133,696 0.48 Other account payable 114,589 69,766 0.64 Taxes payable 50,444 76,753 (0.34) Accrued expenses 237,950 193,966 0.23 Reserve for replacement 12,905 9,312 0.39 Unearned income 12,903 623,490 (0.98) Advances from customers 657,379 2,291,970 (0.71) Current maturities 2,615,726 514,191 4.09 Total Current Liabilities 536,423 3,913,147 (0.86)

15 2015 2014 % Noncurrent Liabilities Longterm unearned income 130,333 138,702 (0.06) Deferred tax liabilities 22,560 21,533 0.05 Long-term liabilities Bank loans 1,650,947 956,489 0.73 Bond payable 2,720,722 2,440,339 0.11 Derivative financial instrument 21,173 22,486 (0.06) Other accounts payable 3,160 3,160 - Tenant's deposits 226,391 196,449 0.15 Mandatory convertible notes payable 124,099 685,377 (0.82) Post-employment benefit obligation 124,099 116,476 0.07 Total Noncurrent Liabilities 4,899,388 4,581,014 0.07 Total Liabilities 9,323,066 8,494,161 0.10

Equity Capital stock 1,203,990 1,203,990 - Additional paid-in capital 362,194 362,194 - Other comprehensive income (1,746) (9,062) (0.81) Retained earning Appropriated 4,000 3,000 0.33 Unappropriated 5,650,567 4,606,398 0.23 Total Equity attributed to the owner 7,219,005 6,166,520 0.17 Noncontrolling interests 2,236,050 2,110,060 0.06 Total Equity 9,455,055 8,276,581 0.14

Liability and Equity 18,778,122 16,770,742 0.12

16 Municipal Solid Waste Management

Market-driven Upcycling of Urban Organic Solid Waste in Indonesia

FORWARD is a research and development project in Sidoarjo, East Java, Indonesia. Driven by market opportunities for conversion products, Sandec is piloting the innovative Black Soldier Fly Larvae technology as the pivot of an integrated organic waste conversion system. Bart M. Verstappen1, Fictor Ferdinand Pawa5, Bram Dortmans1, Arseto Yekti Bagastyo3, Aluisius Hery Pratono4, Pradnya Rahmani5, Christian Zurbrügg2

The challenge There is a dire need for location-specific solutions for municipal solid waste management (MSWM) in rapidly developing small- and medium-sized cities where the authorities often cannot respond adequately to rapidly changing conditions. Indonesia, the fourth most populous nation in the world, is no exception. The island of Java has the highest average population density of all islands worldwide (1’000/km2) and the urban density approaches 10’000/km2. This has intensified the waste problem, and in many towns and cities, much of all generated waste is dumped, burned or discharged into rivers. Organic waste (OW) is around 60% of the total generated municipal solid waste (MSW), by far the largest fraction of MSW. Sustained solutions for this large OW fraction are rare, mainly due to the low (often negative) ratio of market value to processing cost of OW conversion products.

Focus on market opportunities The From Organic Waste to Recycling for Development (FORWARD) project evaluates how OW treatment can be driven by local market opportunities for waste conversion products. The aim is to foster a business approach to incentivise private or community OW treatment solutions. FORWARD explores and develops technological and managerial innovations for OW management to generate employment and simultaneously facilitate a more complete recycling of the inorganic MSW fraction.

17 Current situation

Sidoarjo landfill

The Indonesian law 18/2008 regulates waste management (WM) at the national level. The national government fulfils a supporting and coordinating role, while implementation is a decentralised responsibility of Regency and City authorities. Besides “reduce, recovery and recycling” (3R) objectives, it describes the rights and obligations of all layers of society, and stipulates that all open dumpsites in the country should be closed or replaced by sanitary landfills before 2014. Today, sanitary landfills are still rare in Indonesia. Open dumpsites are reaching full capacity and local authorities face difficulties to establish new sites. The availability of suitable land, distances and cost of both waste collection and of properly operating sanitary landfills are the main reasons why this is the case. The rapid filling of landfills can be avoided if they would only need to accommodate the fraction of MSW left after recycling. Keeping the large

18 OW fraction out of landfills reduces waste transportation requirements, extends landfills’ lifetimes and reduces the costs of leachate treatment and methane control. Incineration of mixed MSW is economically and environmentally not feasible for small- and medium-sized cities of Indonesia given the high water content of the waste. Furthermore, controlling air emissions from incineration can only be ensured with sophisticated equipment, which is expensive to operate and maintain. A sustainable solution lies in source segregation of OW (kitchen, market and garden waste) to allow for appropriate decentralised treatment. This reduces the need for transport to landfills and also enhances the recycling of the inorganic fraction because source segregation increases the quality of recyclables. OW materials can be treated in different ways: they can be decomposed anaerobically into energy products (biogas, biochar), upcycled to animal protein as feed for a range of animals or decomposed aerobically into compost. Market potential of waste conversion products FORWARD evaluated the market potential of different OW conversion products. This market research complemented the assessment of OW generation and of current MSW management practices in the Sidoarjo regency. The steadily growing population and economy indicate a clear need for energy, protein and soil amendment, i.e., compost. However, these requirements do not necessarily translate into viable market opportunities. Compost production is relatively simple and can convert most OW fractions. Also, Javanese agricultural soils are low in organic matter due to the ongoing and decennia-long intense agricultural practices and the promotion and subsidising of chemical fertilizers. Thus, compost could play an important role to sustain soil fertility and structure. Yet, without governmental promotion and financing or preferential treatment in the marketplace, compost can barely compete with fertilizers and other soil amendments. Biogas and biochar production is complex and restricted to specific OW types and mixtures. In the Indonesian consumer energy market, biogas and biochar cannot compete with convenient, clean and subsidized Liquefied Petroleum Gas. OW-derived energy products are feasible only in very specific and rather small on-site applications. Protein production from organic refuse could meet the needs of the large Indonesian population. Currently, around 80% of the total soybean and 55% of the total fishmeal requirements are imported, which weighs on the Indonesian trade balance deficit and contributes to global environmental issues. Local meat production in Indonesia is well below consumption. Up

19 to 80% of the cost of meat or fish production is the cost of animal feed; thus, local animal production is restricted mainly by the availability of base protein. Indonesia cannot, for example, realise its huge aquaculture potential, which could also serve the export market. The government is eager to achieve food self-sufficiency and often regulates food and feed imports to boost opportunities for local farmers. Growing demand for locally produced base protein to increase local animal production and the relatively high value of protein make OW-to-protein conversion very promising from a market perspective. Direct feeding of selected kitchen and market residues to cattle, goats, fish (especially catfish) and poultry (chicken and ducks) is already common, particularly during the dry season when foraging and grazing are limited. Feeding organic kitchen and market waste to insect larvae of the Black Soldier Fly (BSF), Hermetia illucens, is an alternative solution, linking OW treatment to the production of base animal protein, namely the protein contained in nutritious insect larvae.

FORWARD pilot operations FORWARD has established an organic waste conversion site at the Puspa Agro vegetable market in Sidoarjo, where conversion by Black Soldier Fly Larvae (BSFL) has been developed as the core OW conversion technology. BSFL are fed dewatered fresh market waste, and the OW fraction not consumed by BSFL, i.e. the cellulose-rich “garden waste”, is composted. The biogas production potential of the liquid from waste dewatering and the residue after BSFL conversion are currently being explored. This on-site energy source could be used for post-harvest processing of larvae. The residue is also being tested for vermiculture.

Ongoing research FORWARD currently rears enough young BSFL to process 2 ton of fresh OW daily, and this can be flexibly scaled up. Our research now focuses on improving and streamlining the BSFL waste conversion operation, such as finding ways to remove excess water by dewatering and/or mixing different waste types. The goal is to have the final residue dry enough to allow for mechanical harvesting of larvae.

20

Research with Indonesian universities involves evaluating the feeding of larvae to fish, poultry and baby goats, as well as the biogas potential of the liquid and residue fractions. FORWARD also interacts with communities to obtain segregated household organic waste and with agribusiness companies to test industrial organic waste streams. The project is also doing market development with potential end-users and commercial partners.

Mating cages for adult Black Soldier Flies

21 Harvested Larvae of the Black Soldier Fly

Outlook Although BSF technology is still in its infancy, stakeholder interest is steadily growing, providing an incentive to explore source segregation of waste, a yet rare practice in Indonesia. To respond to the market potential and to meaningfully impact waste management, more knowledge on OW conversion by BSFL at different scales is necessary. Technology and business models need to be developed and evaluated according to these scale requirements. FORWARD is successfully demonstrating to governmental, private, social and academic partners that widespread decentralised OW conversion is key to the overall MSWM challenge and that OW resource recovery can contribute considerably to social, economic and environmental welfare in many ways.

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This article is currently in print for “Sandec News 2016”, a yearly research newsletter published by the Sandec department of Eawag and available online. Eawag is the Swiss Federal Institute of Aquatic Science and Technology and Sandec is the Department for Sanitation, Water and Solid Waste for Development.

22 Project FORWARD is funded by SECO (Swiss State Secretary for Economic Affairs) and works in cooperation with the Indonesian Ministry of Public Works & Housing and local Sidoarjo Regency government departments. The research is implemented with contributions from lecturers and students associated with Institut Sepuluh Nopember Universitas Surabaya, Universitas Airlangga (all located in Surabaya); Universitas Indonesia (in Depok) and Institut Pertanian Bogor. The pilot site is provided by PT Puspa Agro, a company of the East Java Provincial Government.

(1) Eawag/Sandec, FORWARD, Indonesia (2) Eawag/Sandec, Switzerland (3) Institut Teknologi Sepuluh Nopember, Indonesia (4) Universitas Surabaya, Indonesia (5) Project FORWARD associates, Indonesia

Contact & info: [email protected] www.eawag.ch www.sandec.ch

23 The Role of PUPUK2 to Support Local Creative Entrepreneurs in Shaping Creative Cities in Indonesia

Early Rahmawati

Background Creative industries, often referred to by economists as the creative economy, refers to a set of interlocking industry sectors and is regularly cited as being a growing part of the global economy3. The creative industries as mentioned by the Global Alliance for Cultural Diversity of UNESCO are involved in activities that focus on creativity. This may be through arts or design or by exploiting intellectual property products; such as music, books, film and games, or by providing business-to-business creative services such as advertising, public relations, and direct marketing. 4 Live aesthetic performances are also generally included, contributing to an overlap of the blurry boundaries of art and culture, which sometimes extends to include aspects of tourism and sport. Additionally, economic activities focused on designing, making and selling objects or works of art such as jewellery, fashion or haute couture, books of poetry or other creative writing, or fine art often feature in descriptions of the creative economic sector because the value of such objects derives from a high degree of aesthetic originality.

UNCTAD’s (United Nations Conference on Trade and Development) definition of the creative industry was as follows: “The creative industries (1) are the cycles of creation, production, and distribution of goods and services that use creativity and intellectual capital as primary inputs; (2) constitute a set of knowledge-based activities, focused on but not limited to arts, potentially generating revenues from trade and intellectual property rights; (3) comprise tangible products and intangible market objectives; (4) are at the cross-road among the artisan, services and industrial sectors; and (5) constitute a new dynamic sector in the world trade”.5

The UK Department of Culture, Media and Sport (DCMS) Task Force 1998, defined the “Creative industry as those industries which have their origin in individual creativity, skill and talent, and which have a potential

2 PUPUK : Perkumpulan Untuk Peningkatan Usaha Kecil or The Association for Advancement of Small Business, a NGO that concern to develop small business in Indonesia. Early Rahmawati is a General Secretary of PUPUK (2014 – 2017) 3 Cf. Cultural and Creative Industries Studies Center of RUC: w.P. online in Internet 4 Cf. Global Alliance for Cultural Diversity UNESCO: P. 3 online in Internet 5 Saputra, W. (2010): P. 10

24 for wealth and job creation through the generation and exploitation of intellectual property and content”.6 Therefore, the creative industry is one sector of the economy that emphasizes the importance of human resources to produce innovative works, in which Indonesia's diverse cultural background can play a significant role in creating various works of art.

Creative industries, as stated by DeBahia (2005), could produce and distribute goods and services centred on texts, symbols and images. They are a distinct cluster of knowledge-based activities that usually combine creative talent with advanced technology and whose output contains a comparatively large proportion of intellectual property7. The most well known examples of these activities are the performing and audio-visual arts, including music, film and TV, software, video games, publishing and broadcasting. However, the frontier of the creative industries is becoming blurred, as technological advances make possible a wider range of products and services, and creativity becomes an increasingly prominent input in the production process of more traditional industries and services.

Furthermore, DeBahia estimated that creative industries already contribute as much as 7 per cent of the world GDP, having exhibited a particularly rapid rate of expansion over the past decade and the forecast is for growth rates averaging 10 per cent per annum in the coming years8. The condition of the creative industries growth seems related to the data from UNCTAD9 stating that although developed countries continue to dominate the global market for creative products, exports of creative goods from developing countries increased sharply to US$136.2 billion in 2005 from US$55.9 billion in 1996.

On the other hand, there is no doubt that greater exchange of such products in developing countries will provide creative enrichment and the dynamic evolution of cultures. There is a lot of potential for creative industries from these diverse cultures and it may also allow a wider dissemination of expressions of their culture in the developed world. Creative activities can be put on a sustainable footing and these cultural ambassadors can make a key contribution to development and poverty reduction.

6 Saputra, W. (2010): P. 9 7 Cf. DeBahia, S. (2005): w.P. online in Internet 8 Cf. DeBahia, S. (2005): w. P. online in Internet 9 Cf. UNCTAD (2008): w. P. online in Internet

25 Fostering of the creative industries promises to generate employment and open new opportunities for international trade in developing countries10. It could be understood that the huge developmental potential of these industries lies in the fact that they do not draw on factors that most poor countries lack, such as capital or natural resources. Also the potential of these industries goes beyond the generation of income for the poor whereby the creative industries are also capable of becoming fundamental means of communication and socialization. In developed and developing societies where creative industries prosper in cities this can have an impact on the periphery of these cities. However, traditional community bonds are frail and forms of social participation are scarce. Lack of communication threatens the potential of creative industries in developing countries and they are currently going unrealized for a number of reasons, ranging from lack of awareness (e.g. of intellectual property rights), to inadequate institutions and lack of access to global media distributors. As Peter Coy said in one article in Business Week (2000) that to some extent, markets for creative goods also exhibit 'first mover' advantages, which make it difficult for follower countries to catch up.11 This situation encouraged the government to make targeted policy interventions to help the developing world gain a greater share of the global market for creative goods and services.

The following data is a profile of the creative industry and comparison of the economic contribution of the creative industry in several countries.

Table 1: Creative Industries Profile in Several Countries12

Country Value % of % Growth Rate % Growth Rate Number of Added GDP of Creative of Economic Workers (Billions) Industry (Millions) Britain 76.6 Pound 7.9 9 (1997-1998) 2.8 (1997-1998) 1.95 USA US$ 791.2 7.75 7 (1977-2001) 3.2 (1977-2001) 8 Indonesia IDR 104.73 6.28 0.74 (2000- 5.24 (2000-2006) 5.4 2006) Taiwan TWS 702 5.9 10.1 (1998- 10.1 (1998-2000) 0.4 2000) Australia AUS$ 19.2 3.3 5.7 (1995- 4.8 (1995-2000) 0.4 2000) Singapore S$ 48 2.8 13.4 (1986- 10.6 (1986-2000) 0.07 2000)

10 Cf. DeBahia, S. (2005): w. P. online in Internet 11 Cf. Coy, P. (2000): w. P. online in Internet 12 Cf. The Ministry of Trade - Republic of Indonesia (2008): P. 25

26

This data shows that creative industries in Indonesia gave a comparatively low contribution to the gross national product, but conversely the number of workers was high. Table 1 also shows that many creative workers (especially those in Indonesia) have not yet received enough value added for their products or services which have already been delivered. For example in many creative handicraft centres workers still follow the traditional mode of manufacturing their product and have yet to make interesting models/motifs, or create something new to get more market share for their products.

The creative industry has received increasing attention in many countries because it can actually provide a real contribution to the economy. In Indonesia, when the issue of creative industry began to rise the government needed to improve the national products’ competitiveness to deal with the global market. The Indonesian government through the Ministry of Trade in cooperation with the Ministry of Industry and Ministry of Cooperatives and Small and Medium Enterprises (SME), supported by the Industrial Chamber, formed the Indonesia Design Power Team for 2006-2010 which aimed to place Indonesia products as international, standardized products, but still has a national characteristic recognized in the world’s markets. After realizing the huge contribution of the creative economy to the country, the government afterwards conducted more a intensive study and launched a blueprint for the further development of the creative economy.13

Furthermore, the Indonesian government through the Ministry of Trade, Ministry of Industry and the Ministry of Cooperatives and Small and Medium Enterprises (SMEs) are conducting continued research as a basis for the development of creative industries. Major events are held to stimulate the growth of creative industries, such as: (1) Launching the Mapping Study of the Indonesian Creative Industry Contribution 2007 at Trade Expo Indonesia 2007, (2) the Week of Creative Products, (3) the Year of Creative Indonesia and (4) the Creative Economy Exhibition.14 These programs have run since 2007 and are indicative of the level of interest in Indonesia about the creative industry’s development. In 2012, the President of Republic Indonesia establised the Ministry of Tourism and Creative Economy (Kementerian Pariwisata dan Ekonomi Kreatif – Kemenparekraf), that strated to develop many creative industry center in Indonesia, especially batik as part of national pride in fashion industry. Now, becausee of changed president since 2014, Indonesia has Badan Ekonomi Kreatif (BEKRAF), a board of creative economy – separated from the Ministry of Tourism, that established since January 2015. This board/agent has many

13 Cf. The Ministry of Trade – Republic of Indonesia (2011): w. P. online in Internet 14 Cf. The Ministry of Trade – Republic of Indonesia (2011): w. P. online in Internet

27 program to develop creative industry sector in Indonesia including develop creative cities through give technical assistance of creative business development and many activities to share knowledge about creative city to many regions and cities in Indonesia.

Meanwhile, the government of Indonesia already had a policy to develop the creative industry and coordinated departments at the national level through the ‘Grand Design of the Creative Industry in Indonesia 2025’ initiative and encouraged all the local governments in Indonesia to develop the creative industry pertinent to their culture. The creative industry in Indonesia uses the definition which was developed by the UK DCMS Task Force 1998 which stated that the following constituted the industry: advertising, architecture, the art market, handicrafts, design, fashion, film- making, interactive playing, music, performance of art, photography, publishing & printing, software & computer services, television & radio, and research & development.

Creative industries in several other countries also became the main sector of economic development and in Indonesia the creative industry is very interesting because it has so far managed to contribute 6.3% of total GDP (2008). Data from Ministry of Trade of the Republic of Indonesia15 shows that even though the total growth rate of the creative industry growth is just 0.74 %, several separate sectors within the industry grew more than overall economic growth (5.4%) in 2007. Music grew by 18.06%, publishing & printing 12.59%, advertising 11.35%, architecture 10.86%, computer services & software 10.6%, television & radio 8.51%, interactive playing 8.24%, the art market 7.65% and performance of art by 7.65%.

Creative industries are also believed to be able to overcome some short and medium-term economic problems in Indonesia for a variety of reasons, such as: (1) the relatively low economic growth since the crisis (1997), which is only equal to 4.5% per year, (2) high unemployment (9 - 10%), (3) high levels of poverty (16 - 17% from total population), and (4) the low competitiveness of industries (manufacturers) in Indonesia. Besides that the creative industry is also expected to respond to various challenges such as global warming issues, deforestation, renewable energy and reducing carbon emissions.16

The following table is about the creative industry in Indonesia that showed industry development year by year.

15 Cf. The Ministry of Trade - Republic of Indonesia (2008): P. 10 16 Cf. The Ministry of Trade - Republic of Indonesia (2008): P. 11

28 Table 2: Profile of Creative Industries in Indonesia17

Indicator Unit 2002 2003 2004 2005 2006 % Growth Rate Value Added Million 102, 100, 108, 107, 104, 104, IDR 110 220 413 661 787 638 % PDB % 6.7 6.35 6.54 6.15 5.67 6.3 Number of Million 5.9 5.1 5.9 5.3 4.9 5.4 Workers (People) % Growth % - -3.16 20.59 10.74 4.67 8.21 Export from Total Export Number of Million 2.9 2.4 2.9 2.5 2.2 2.6 Companies

The data showed that the growth of creative industry in Indonesia was relatively stable but in 2004 there was a peak in the creative industry’s growth. This indicates that Indonesia is a huge market for creative industry products or services (because of the population) and still has the potential to develop its value added especially if the company (or small to medium enterprises) dedicated some of their market segmentation to young people.

Creative industries are expected to develop an environmental-friendly model, produce value-added products or services, and encourage people to love their culture. But to develop the creative industry at a local level (based on the decentralization of Indonesia since 2000), Indonesia still has the problem of making and implementing local policy in this sector. With this in mind, we need to address the question of how the local government went about formulating the policies for the creative industry to develop their local economies. They also had to implement these policies in order to create new enterprises within the creative industry and to make local people aware of industry issues such as supporting and sustaining the local creative community.

Creative City and the Challenge

The creative city as part of a creativity concept was developed around twenty years ago. The aim of city making is to think of our city as a living work of art where the citizens can involve and engage themselves in the creation of the transformed place. Moreover, according to Charles Landry18, a creative place or creative city has a strong culture, somewhere

17 Cf. The Ministry of Trade - Republic of Indonesia (2008): P. 8 18 Cf. Landry, C. (2010): P. 3

29 where people can express their talents and these talents are then harnessed, exploited and promoted for the common good. Also it’s a place with myriad high-quality learning opportunities, formal and informal, with a forward looking and adaptable and highly connected curriculum. Related with the creative industry itself, the cities that have planning creativity and culture often are subjected to hyped tunnel visions, in which the cultural creativity is viewed from the economic point of view mostly. “This is a shame,” says Charles Landry, “for culture is much more than economic value or the rise of the creative industries”.19 For a city to use its creativity it has to become the best and most imaginative city in the world and not just the most creative city in the world that needs a serious project to be implemented. The basis for a new urban agenda should focus on innovation, cultural revitalization and the built environment, attaching great importance to the contribution of the arts and the cultural sector to the economy. According to Richard Florida20, the general prerequisites to develop a creative city are tolerance, potential talent development and technology (3T). He stirred controversy with his surveys of cities of USA in which he surmised that cities without gay people and rock bands are losing the economic development race. Florida also explained many factors that influenced a city to be more alive and suggested giving chances to many communities to develop their talents and performances to make the cities more alive.

Charles Landry, in the Flemish Economic Scientific Conference on the 18th November 201021, stipulated more indicators to determine a creative city’s condition, within each were further defined domains that were identified as key indicators of creativity, resilience and the capacity to future-proof a city. These are: (1) political & public framework, (2) distinctiveness, diversity, vitality and expression, (3) openness, trust, tolerance & accessibility, (3) entrepreneurship, exploration & innovation, (4) strategic leadership, agility & vision, (5) talent & the learning landscape, (6) communication, connectivity & networking, (7) the place & place- making, (8) liveability & well-being, (10) professionalism & effectiveness.

Furthermore, similarly with Florida, Landry explained that a creative place has a strong culture, somewhere where people can express their talents and where those talents are harnessed, exploited and promoted for the common

19 Van Dalm, R. : w. P. Online in Internet 20 Cf. Florida, F (2002): w. P. Online in Internet

21 Cf. Landry, C. (2010): P. 1

30 good. Also it’s a place with myriad, high quality learning opportunities, formal and informal, with a forward looking and adaptable and highly connected curriculum.22 Although there are many critics about the method of how to develop a creative city, there are many examples of cities that have developed many ideas, creativities and made re-positioning of their cities based on Florida or Landry’s research and analysis. According to Tom Borrup in his paper from the 2010 City, Culture and Society Conference in Munich23, he mentioned that experiences of creative cities could be separated into several kinds, such as (1) creative port cities at opposite poles, for example Singapore and Rotterdam, (2) creative cities which develop all of the parts of city including the suburbs (from entre to edge), for example Tokyo and Toronto, (3) re-branding in the public interest, like in Croydon (part of London), Auckland and Tokyo, (4) inclusivity in post-industrial space, for example Osaka and (the former) East Germany, or (5) centralization or de- centralization of cultural investments like in Mexico City.

From those cities we can learn about how to shape conditions that can support all of the components in cities to become creative. Many experiences from the best practices of creative cities showed that the local government had decided on the focus of the city then developed it and worked together with companies, local people and included local communities. Therefore a strong commitment is needed from the top of the local government (the mayor), the local representatives, and all of local people together to make a creative city project that can be consistent in creating new policies (about the creative city) and deciding how to implement them.

In the financial crisis era since 2009, especially in developed countries, Jonathan Vickery24 said the creative city idea asserted a challenge to the ideational basis on which policy decisions were made about the shape, function and development of the urban environment. Those conditions have already dispelled the assumption that a deductive, linear conceptual trajectory proceeds from the political public policy objectives of national government right through to the urban policy implementation of particular cities. Moreover, the creative city was a challenge to the rationalist epistemologies that still seem to underpin the varied processes of political deliberation that determine our cities’ evolutions.

22 Cf. Landry, C. (2010): P. 3 23 Cf. Borrup, T. (2010): w. P. Online in Internet 24 Vickery, J.: w. P. Online in Internet

31 The UK's concept about creative cities and creative industries, is interesting to implement in other countries, but it’s not really reliable if we implement it 100% in developing countries. We took the idea of a creative city because it is an alternative to current city development and it counters the idea that creating a city is just about how to create blocks – with urban buildings or the urban ethos. There are some reasons why implementing the concept of a creative city from the UK is still relevant in developing countries including Indonesia with some caveats. We should determine the uniqueness of creative industries and place them as part of the urban generation that shapes the city.

The creative city concept emphasized conditions in the city or certain areas through the development of facilities such as infrastructure, common space, which helps people to always create something new from their conditions/environment. It encouraged potential, positive habits and cultures that already used their environment in daily life and to then optimise it to their economic benefit. The main point that is really relevant with developing countries is that they sometimes still depend on ‘traditional concepts’ to develop their countries (usually using natural resources as their main resource). In these terms, we could say that design, architecture, movie, art performances, movie and music are still main sectors within the creative industries, even though other sectors in the creative industries like cuisine, publishing, and software also have important responsibilities to develop cities to be creative and innovative areas.

In some developing countries some professions such as becoming civil servants (in Indonesia for example), or traders are more interesting for young (also well educated) people and professions as creative workers or creative entrepreneurs still suffer from the inability to get transparent and legal business licenses or to get credit (from banks). This puts off those who become interested in developing their own business based on the creative communities. For example there are many groups of teenagers from small cities in Indonesia who are interested in making movies or music groups who then try to monetize it to get money from their hobbies. To some extent, there are some local movie festivals that held by talented directors (and their network) that give chances to young directors/editors/script writers to make short movies (in various genres: animations, thrillers, or documentaries) and broadcast them in those festivals.

Some cultural performances in regional cities have already made those cities more 'live' especially as the local government supported them. It needs more effort from those creators to develop those ideas, creativity, and innovations into a business model. In some cases the performers enjoy the full support of the local government. In Indonesia, for example, the local governments

32 that have already supported creative business entities are Solo (Surakarta), Jember, and Bandung.

Some ideas relating to creative cities and creative industries from the UK are still not suitable if we would like to implement them in other countries. Creative cities and creative industries need strong political will from the government and it means we need special allocation from local budgets. This is really difficult to implement in cities in developing countries overall, but in certain cities we can see that the mayor is concerned about these issues and has then allocated a special budget to develop their city to be more creative and innovative with various programs/projects. Most of the cities in developing countries are still struggling with how to improve the basic needs of local people such as education, health, and infrastructure. In these conditions, ideas about creative cities are still not really relevant, especially in rural areas that have few educated people and still depend on agriculture as their main economic sector.

The concept of a creative city has to adjust based on a city’s real-life conditions. In the cultural context whereby some developing countries in Asia (especially Indonesia) have a thousand subcultures and habits (tolerance for others i.e. religion, talents, new ideas) it’s easy for both local people and local government to develop their creative city. In Indonesia’s case, every citizen already understands that we have to be tolerant of various ethnicities, appreciate different cultural performances (at carnivals, performances, and festivals) and have to develop their potential to shape their city to be more attractive.

The Role of PUPUK to Support Indonesia’s Creative Young Entrepreneurs

As Landry25 said, that strong commitment to be part of the city also comes from local people who are under forty (for example in Perth, Western Australia) who feel a deep longing to be part of something larger, and to be connected to their city. Furthermore, if we would like to shape the city to be more creative and attractive in the future, today it’s time to start seeing the city as a collective enterprise where people want to feel a connection with the location. Then the local government can use their energy for the benefit of the city. It could become a sustainable model, whereby the young people contribute to their social-city making, and become part of the innovation and creativity in cities. This concerns who we would like to be for the world (or for our own community) and now is the right time to develop it.

25 Van Dalm, R.: w. P. Online in Internet

33 Meanwhile, to develop the creative industry at a local level in Indonesia is not easy. They still have problems, especially with implementing creative policy in order to shape creative cities. The cities have to develop local creative communities and to encourage creative entrepreneurs to participate more in order to answer to the lack of communication between local government and the common people to ensure local economic development. There is a different role between creative entrepreneurs and the creative community in this situation. The creative community is important to help local government to implement creative industry policy in order to encourage new enterprises growth and to make local people aware of creative industries issues. The creative community, which regularly gathers to finalize the development plan activities to support member activities and create a campaign model, could be a partner of the local government to improve the quality of the creative industry environment. Furthermore, they could improve many public policies that still don’t fully consider the interests of the local society.

As previously described each of the cities or regions in Indonesia have unique characteristics that are representative of the rich culture and traditions that come from hundreds or even thousands of potential sources. But for big cities like Jakarta, Surabaya, Bandung and Yogyakarta, developing the creative industries is not only based on the region’s own native culture but also a synthesis of knowledge gained from school, university or places where courses are provided such as workshops offering certain specialized skills such as graphic design, animation, film, music and others. The courses not only offer an attractive program to learn skills in brief at an affordable price, but also provide an opportunity for the students and the general public to show their work through a variety of events or festivals that are made by the institutions.

The directives issued by the government do not necessarily indicate that the government is more understanding of how to develop the creative industries. There are many new themes and new innovations especially among the young and well educated. There are still gaps of knowledge and a lack of ability to implement that policy among lawmakers or public servants. If we want to create a business we should do so without expecting too much from the government. In fact, the creative industries businesses are in some ways a better source of ideas to develop programs. Their ideas challenged by the government, especially local or city governments where they also have to establish dynamic and tolerant cities wherein people could appreciate the new innovations produced by the creative people and support them by giving some facilities which are related with creative activities.

34 The role of young business people in the creative industry is to stimulate development through creative community activities that have the capability of colouring and shaping the city to be more dynamic. Various activities based on culture and arts are held in many cities that have made local people begin to be more open to new ideas. These activities require good management to organize them in order to achieve the objectives of providing good education that encourages creativity and innovation among the students or young people. PUPUK, as a NGO that concern to develop small business in Indonesia, since 2014 also concern to support creative communities as embrio of creative entrepreneurs as main program. Actually, PUPUK that has many offices in Indonesia, in Bandung (as headquarter), Surabaya, Jogjakarta, Tegal and Makassar, already started in 2008 to give technical assistance for some communities in Surabaya to develop their creativity in order to encourage them to shape Surabaya as a creative city through some activities i.e. established creative corners, develop local festival in car free day (especially in Taman Bungkul), and other activities. PUPUK also gave technical assistance to many creative industries center (ceramics, bamboo and rattan handicraft, etc) in many area in Indonesia; Cirebon, Magetan, Purwakarta, Yogyakarta, and other cities, since established in 1988, even that time there was not identified as creative industry yet. However, even in 2008 Indonesia had Grand Design Indonesia Kreatif 2025 then there was President Decree about Creative Industry in Indonesia (2009), the running of creative city development in Indonesia still limited. The leading of creative city concept and came from communities was in Bandung that already set up a statue of BDG (an abbreviation of the word 'Bandung') with the tagline : Emerging Bandung Creative City at the Dago (a nice and attractive area in Bandung). Various communities in that city initiated the Bandung Creative City Forum (http://bandungcreativecityforum.wordpress.com/tag/helar-festival-2012) lead by Ridwan Kamil (an architect and now is Major of Bandung since 2013). BCCF held the Helar Festival (a festival of the creativity and culture of the Sundanese society) since 2008, a festival featured a variety of performances typical of young people (film screenings, music performances, and other traditional arts) and a bazaar for the sale of creative products. BCCF also created an art village to invite local youth to makeover their village with mural paintings, established by the Creative Entrepreneur Network (CEN) which supports creative entrepreneurial movement especially among young people, and initiated gardens around office buildings in urban areas (Indonesian Gardening). In other cities like Surakarta (better known as Solo, in Central Java) they have also mobilized community-based creative activities and cultural history, whereby Mataya Heritage, a local heritage community which

35 consists of many young people, carried out many activities that encouraged the growth of new businesses in the area such as creative design and tourism agencies. They are concerned with the upkeep of various corners of the city's historic areas such as the palaces (Kasunanan and Mangkunegaran) and also the historical places in Solo through their monthly Blusukan Solo (Solo Heritage Trails). Solo, also known also as Batik City, was lucky because the local government was very much more concerned about creative issues than other medium-sized cities in Indonesia. In addition to the various communities, Surakarta Municipality also organizes annual events such as the Solo Batik Carnival (SBC) (http://www.youtube.com/watch?v=rTV6PQsC9xo), the Solo Jazz Festival, Festival Film Solo, Solo International Ethnic Music (SIEM), and also the Solo International Performance Arts (SIPA). The SBC team this year was chosen to represent Indonesia to perform in the Flower Parade in Pasadena, US which is held every year on New Year’s Day, and it was a chance for Solo Batik Carnival Community to promote their city as one of best cities in Indonesia and impress upon tourists that it is really worth visiting. Besides that, the Solo government also provided many facilities that made local people more encouraged to use their talents such as installing free Wi-Fi along several main streets to allow access to the internet connection, its functioned as educational tools for society because also opened many public parks. Since 2015 some creative entrepreneurs and communities also established Solo Creative City Network (SCCN) that developed many activities included held the first Indonesia Creative City Congres (ICCC) in October 2015 and the result of that congres, some creative cities declared Indonesia Creative City Network (ICCN) as partner of government to develop creative cities in Indonesia. Another example is the success of East Java Province, particularly in Jember, a medium-sized city that had not been known well on Indonesia’s ‘creative industry map’ before (compared with Jakarta, Bandung, Jogja, Solo or some places in Bali). Ten years ago (2002) it became known for its artistic carnival, the Jember Fashion Carnival (JFC): http://www.jemberfashioncarnaval.com/main.php. The carnival was initiated by a young and talented local designer, Dinand Fariz, who loves his hometown, since 2001. Public interest grew a few years later as many newspapers, magazines, TV stations and social media locally, nationally and internationally, leapt on the bandwagon and reported about this carnival and its similarities with the parades in Rio, Brazil. In 2008 the local government officially put JFC on the annual agenda and it became part of the Month of Visit Jember (sic). JFC is already widely known for his team's participation in attending various carnivals around the world and has inspired many creative communities in Indonesia to create artistic and thematic carnivals that have been developed from Indonesian cultures.

36 From various activities organized by creative young people who are scattered in various cities in Indonesia the economy of cities has grown. We are not necessarily able to say that the creative nuances of the various activities initiated by creative people in various cities in Indonesia impacted wholesale and increased revenue in that society. But a variety of activities that appeal to many thousands of people to come to the cities which organize creative activities have had a positive impact on other sectors like hotel occupation, local transportation, local cuisine, many local performances and the souvenir industry.

Although the characteristics and patterns of the creative industry are not easy to determine, the policy that has to be taken must not allow the communities to go static. It is still necessary to watch for conditions that develop in the cities where the creative industry is starting to grow. Some things that must be considered in order to develop the creative industry cluster that has probably not been properly addressed by the city government are the supporting the increased competitiveness and ability of entrepreneurs in the creative sector. They must develop a network of creative entrepreneurs, build the education sector to support the growth of young entrepreneurs, develop a creative business marketing sector (they could work together), and initiate transfer of knowledge between actors and communities in the creative sector. It is also important that the provision of adequate infrastructure supports to develop creative business innovation and creativity, and provides financial support, especially for start-up entrepreneurs (such as giving soft credit facilities) in cooperation with banks.

Creative entrepreneurs have shown that creativity and innovation has multiple effects on the local and national economy, and this economic benefit should make the governments of cities in Indonesia realise that they should create a competitive environment to attract business, smooth the process of accessing government and international resources and strive to attract and keep talented people26 in order to shape creative cities.

Conclusion As part of ICCN and active in many event of creative city, PUPUK with main program to develop creative entrepreneurs also make collaboration with BEKRAF to develop many aspects to improve enabling business for

26 Landry, C. (2004): P. 5

37 creative industry sector in Indonesia. PUPUK that has many experiences to give technical assistance in small business development and public policy and services has faced challenges in order to develop creative entrepreneurs in many cities especially keep up-dating knowledge and informations about creative industry. For local government, there are also has challenges to adopt, to adapt and to implement national policy to local policy in order to shape creative business enabling environtment in local area. Especially for cities that have various communities it’s remain easy because of many cultures and tolerance of people, but for small cities that remain has homogen communities, it will not really easy to shape a local creative environment for creative entrepreneurs development. However, for all situations PUPUK already commited to support them (both for creative local entrepreneurs and local governments) as our mission to develop small business in Indonesia.

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38 http://www.kabarindonesia.com/berita.php?pil=15&jd=Peresmian+Ga leri+Melaka+Bersejarah+di+Sawahlunto&dn=20091023180159 (retrieved: 19.09.2012) Landry, Charles (2000): The Creative City – A Toolkit for Urban Innovators. London. Landry, Charles (2010): The Creativity City Index: Measuring the creative pulse of your city. In: http://www.charleslandry.com/index.php?l=creativecityindex (retrieved: 26.06.2011) The Ministry of Trade - Republic of Indonesia (2011): The Era of Creative Economy In: http://www.indonesiakreatif.net/index.php/en/page/read/definisi- ekonomi-kreatif (retrieved: 08.06.2011) The Ministry of Trade - Republic of Indonesia (2008): Grand Design Indonesia Creative 2025. Jakarta UNCTAD (2008): Press Release – Creative Industries Emerge as Kay Driver of Economic Growth with Trade Nearly Doubling in Decade In: http://www.unctad.org/Templates/webflyer.asp?docid=9467&intItemI D=1528&lang=1 (retrieved: 09.07.2011) Van Dalm, Roy: The Intercultural City and City-making, Interview with Charles Landry In: http://www.stipo.info/Artikel/Interview_with_Charles_Landry (retrieved: 26.06.2011) Vickery, Jonathan: After the Creative City? Part One In: http://www.labkultur.tv/en/blog/after-creative-city-part-one (retrieved: 30.07.2011)

39 Social Enterprise Models: The Indonesian Case 27 Studies

Aluisius Hery Pratono (Universitas Surabaya, Indonesia) Pauline Pramudija (Ruhr University, Germany) Ari Sutanti (British Council, Indonesia)

Abstract This article aims to identify the social enterprise models in Indonesia using EMES indicators. As there is no specific legal form dedicated to social enterprises in Indonesia, it is a challenge to such third sector to select the most appropriate legal form along with many aspects ranging from the accountability and governance structure, the funding structure under each of the option. We conducted interview and a forum group discussion with several organizations in Indonesia. This paper also indicates five general social enterprise models that are currently operating in Indonesia, namely, integrated non-profit organisation, profit generator non-profit organisation, non-profit cooperative, and community enterprise.

Keywords: social enterprise, cooperative, social mission, economic project and governance

1. INTRODUCTION Over the last decade, Indonesia has been witnessing emerging social enterprises. The initiatives come from civil society organizations with intention to deal with social problem. The structural unemployment, the greater deficit in Indonesia government budget, and the fear of national disintegration raise the intervention from the third sector. The role of such sector has been acknowledged with a wide range of public good and public service providers, including economic initiatives. The literatures have long been acknowledging the pivotal role of Indonesia third sector, especially the cooperatives (Chaniago, 1979; Baswir,

27 This is article is part of the project of “International Comparative Social Enterprise Models” (ICSEM), which was launched jointly by the EMES Research Network (www.emes.net) and an Interuniversity Attraction Pole Programme on Social Enterprise (IAP-SOCENT, www.iap-socent.be), funded by the Belgian Science Policy Office.

40 2010). The Indonesian Constitution mentions that Indonesia economy shall adopt the cooperative principle. However, there is a lack of precise view of social enterprise model in Indonesia for some reasons. First, the existing literature has relied so far on case presented as heroes or policy frameworks, such as Dacanay (2004), Idris and Hati (2013), Pratono et al (2014). Secondly, there is no specific legal form to social enterprises in Indonesia. Hence, more in-depth analysis is required for such works to understand the social enterprise model in the context of Indonesia. This study aims to build alternative grouping of major social enterprise models. Hence, the analysis comes with comparison of Indonesia social enterprise models. On account of limited literature or document about social enterprise in Indonesia, this study uses data analysis with interpretative approach. The qualitative data collection involves documentation reviews and focus group discussion. The 15 organizations contribute to the focus group discussion, while document review relies on the online report. To identify the characteristics of Indonesia social enterprise, this analysis uses main EMES criteria: economic project, social orientation and governance structure.

2. LITERATURE REVIEW The concept of social enterprise refers to the not-for-profit private organizations that provide goods or services with explicit social aim of benefiting the community with collective dynamic stakeholder (Defourny & Nyssens, Conception of social enterprise and social entrepreneurship in Europe and the United States: Convergences and divergences, 2010). The social enterprise model comes with wide range of definition, such as the vision perspective, the organizational approaches, and the Asian models.

2.1. Social Enterprise Models There are various approaches to underline the concept of social enterprises. Business model refers to the way in which a firm achieves its performance. The concept of business model comes with various definitions on account of dynamic value creation as well as stiff competitiveness. However, it is necessary to draw distinction between BM and strategy (Sahut, Hikkerova, & Khalfallah, 2013). Business model is a conceptual tool, which determines the certain aspect of business strategy. This refers to business system logic of making value (Krstov & Krstov, 2011).

41 2.1.1 Vision-based models As business model refers to means and methods in which a firm make profit in order to survive and growth, the model of social enterprises may come from vision and type of intervention. According to Alter (2006), there are three alternative models in the context of vision-based review: embedded, integrated, and external models. In addition, Cheng and Ludlow (2008) consider those three models as profit generator model, trade-off model, and lock-step model. Embedded social enterprise or trade-off model: An organization is considered as embedded social enterprise model if it runs business activities as social program. In this model, organization mission is achieved through self-financed in which social benefit and business activities undergo simultaneously (Alter, 2006). Locked-step model or integrated social enterprise refers to the integration between social program and business activities allow sharing costs and assets, including expertise, brand, and infrastructure (Alter, 2006). Engaging in social activity does not only bring social impact, but also generates an income to gain sustainability (Cheng & Ludlow, 2008). Meanwhile, the Profit Generator Model or External Social Enterprise Model refers to that business activities and social mission are separated. Under similar organization’s umbrella, the business activities support social mission. The business activity brings no direct impact on social value, but it generates income then transfers it to another social activity (the ‘profit generator model’) (Cheng & Ludlow, 2008).

2.1.2 Organizational models There are at least seven alternative social enterprises models: embedded social enterprise, integrated social enterprises, external social enterprises, entrepreneur support model, market intermediary model, employment model, fee-for-service model, service subsidization model, market linkage model, organizational support model (Alter, 2006). (1) Entrepreneur support model allows income generation through sales of services to its target group who has access to open market. A huge number of targeted clients are allowed to accessing the service of such model, which typically includes financial institution, technology providers, and professional services. (2) Market intermediary model focuses to mediate the targeted clients to the markets. The typical organization with this approaches are Fair Trade organization, handicraft group. (3) Employment model highlights employment opportunities. The popular target groups are those who have barrier to labor market, such as difable, homeless, at-risk youth, and ex-offenders. (4) Fee-for-Service Model allows the organization to sell its social services for cost recovery purposes. (5) Service subsidization model considers fund-raising activities come from selling the

42 products to an external market. The commercialization allows the organization to achieve its mission. (6) Market linkage model comes from an organization, which focuses to provide support to its target group in order to get access to an external market. The organizations become a broker through supporting market information, connecting between buyers and its target groups. (7) Organizational support model is external model in which social program and business activities are separated.

2.1.3 The Asian model In the context of Asia, government plays pivotal role on the emerging models of social enterprises. There are at least five typical models of social enterprise in Asia: (1) Trading non-profit organization, (2) community-based enterprise, (3) non-profit co-operation, (4) work integration social enterprises (Defourny & Kim, 2011) First is trading NPO. Instead of stemming from a large non-profit organization, the government plays prominent role in promoting civil society in order to deal with social challenges. The governments go partnership with NPO to deliver various public services. This model embraces commercialization of public services, which may provide opportunities for NPO to set up new for-profit entity for financial viability reason (Defourny & Kim, 2011) Secondly, work integration social enterprise model shows how the governments in Asia encourage organizations with aims to take care of vulnerable people. This social enterprise model may fulfil the mission through various resources, such as government support, co-operative movement, private companies, and community-based activities. These approaches may belong to other categories but with specific target group (Defourny & Kim, 2011) Third is non-profit co-operative model, which is different from models in USA or Germany. The western co-operatives focus to serve their member. In Asia, co-operative institutions come with broader social purposes. New co-operatives also emerge by target group, who find ways out by themselves (Defourny & Kim, 2011). Credit union is a typical non- for-profit financial institution, which adhere to cooperative principle. The “social enterprise stemming from non-profit/for-profit partnerships” show how the governments encourage partnership between private companies and NPOs. The initiative also comes from private companies with their CSR (Corporate Social Responsibility). This may come up with new social enterprise to fulfil a social mission (Defourny & Kim, 2011). In 1990s, the CSR model comes with powerful agenda to

43 response the demand of international community with ecology and human rights movement (Diaz-Foncea & Marcuello, 2012). The community development enterprise model is associated with local economic development, especially in disadvantage rural areas. The term of community refers to diverse group, who establish community-based ownership firm to manage their local resources (Defourny & Kim, Emerging models of social enterprise in Eastern Asia: a cross-country analysis, 2011). Community-based organization is typical social movement in Asia, which opens up important windows for all community level. This provides access especially for women, which affecting their livelihood (Asian Development Bank, 2014). From source of fund, cross-subsidization model, income-generation model and jointly developed business are acknowledged as main driving forces among social enterprise in South Asia (Krlev, 2012). In Asia context, the role of market is relatively weak and unrecognized by social enterprise; subsequently, the interface between the state and civil society are stronger in the social entrepreneurial activities. It is in contrast to the European context, where the social entrepreneurship is mainly driven by the state (Nicholls, 2006). Communality is the most distinctive culture in Asia, which originating from families virtues. Hence, communality value is acknowledged within social enterprise, namely community-based social enterprise. Strong relationship between the organization and local communities is acknowledged as a cornerstone for organization strategy to understand customers as marketing channel refers to simultaneous practices of offering information to customers. Hence, social enterprises should be able to manage their capability to adapt the changing external environment through transforming their role and position in their target groups. The greater complexity of target groups prompts such organization to increase marketing alignment by enhancing strategy fit of performance measures and to develop market knowledge by focusing on cause-and-effect relationship between strategy and performance (Homburg, Artz, & Wieseke, 2012).

2.2 Assessment on Social Enterprise Models We would assess the social enterprise model based on EMES three dimensions: social mission, economic project and governance. Those dimensions become main EMES indicators.

44 2.2.1 Social Mission The creation of ‘social value’ is the fundamental issues for all of schools of thought. This is about providing benefit the community rather than the distribution of profit. The EMES conception also highlight that social impact is key motive for all types of social enterprise (Defourny & Nyssens, Conception of social enterprise and social entrepreneurship in Europe and the United States: Convergences and divergences, 2010). However, the organizations with real weight of social concern come to the challenging mission to adopt market orientation behaviour. Social mission for business organization brings such organizations with more pressure on ‘double bottom line’ between economic project and social purposes. The ‘social innovation’ school of thought highlights the social change in whatever the type of organization (Defourny & Nyssens, Conception of social enterprise and social entrepreneurship in Europe and the United States: Convergences and divergences, 2010). It seems that the observed NGOs belong to ‘commercial non-profit’ school and consider that the economic risk refers to the amount of income generated through trade. Social innovation and market demand doesn’t always go in the same direction. In fact, most of them are new social venture with poor proactive behaviour. In Indonesia, volunteerism and reciprocity has been a long tradition in various hierarchical communities. At the lowest level of community, providing supports to the weakest of the weak has been common activities, especially at the village level (Verhenzen, 2009). Social mission may provide opportunity for any innovation. Innovation refers to a new production function, which covers both new commodities and new form of organization such as a merger, organization restructuring, business expansion, or opening up of new markets (Schumpeter, 1939). Proxy of innovation can refer to the number of patent citation, business expansion, and types of acquisition (Li, Maggitti, Smith, Tesluk, & Katila, 2013). This is about ‘original and unique’ concepts in businesses, which spring from their capacity for creativity and responsiveness to knowledge, which enable to create competitive advantage (Altinay & Wang, 2011). Scholars have typically interpreted innovation as Schumpeter’s idea that an entrepreneurial function takes place outside of the large incumbent firms and in small firms (Audretsch, 2012). In addition, Schumpeter’s thought indicates that capitalism could be doomed to destruction, since the process of innovation as creative destruction comes from new ventures or even small business. This issue has become an essential fact in capitalism society (Harvey, Kiessling, & Moeller, 2010).

45 2.2.2 Economic project Shifting from social activities to a sole market orientation seems to be the most challenging issue for a new social venture. This brings such organizations with more pressure on ‘double bottom line’ between economic project and social purposes. The ‘social innovation’ school of thought highlights the social change in whatever the type of organization (Defourny & Nyssens, Conception of social enterprise and social entrepreneurship in Europe and the United States: Convergences and divergences, 2010). In entrepreneurship theory, there are at least two dominant strands, i.e. Kirznerian and Schumpeterian. Kirzenerian considers discovery process over business possibilities while innovation is associated with Schumpeterian entrepreneur (Sundqvist, Kyläheiko, Kuivalainen, & Cadogan, 2012). For Schumpeter, external variables are considered to uncontrollable at the micro-level, while the idea to seize opportunities spring from internally induced change (Betta, Jones, & Latham, 2010). This entrepreneurial behaviour refers to initiative respond to exploit existing market opportunities with new products or services instead of responding it. This is about challenging the status quo to strong orientation with aim of identifying new market opportunities and responds quickly to be the first mover advantages (de Jong & de Ruyter, 2004). Accordingly, social enterprises, unlike some non-profit organizations, are normally neither engaged in advocacy, at least not as a major goal, nor in the redistribution of financial flows (as, for example, grant-giving foundations) as their major activity; instead, they are directly involved in the production of goods or the provision of services on a continuous basis. The ‘social innovation’ school of thought highlights the social change in whatever the type of organization (Defourny & Nyssens, Conception of social enterprise and social entrepreneurship in Europe and the United States: Convergences and divergences, 2010). Organizations with less proactive actions tend to fail in gaining market opportunities due to poor unique and competitive innovative activities for their competitive advantage (Li, Guo, Liu, & Li, 2008). Firms tend to expand into an industry with ties to firms’ core business and similar value chain linkages (Nefke & Henning, 2013). It is necessary for new social ventures to consider economic risk for determining the likelihood of potential risk being outweighed by both social and economic benefit. Risk-taking behavior refers to willingness of firms to take decision with high risk in order to gain high profit. The risk-taking dimension is associated with a higher risk of failure. The higher risk indicates that firms cease to exist from the industry. Establishing a small business is associated with high-risk business. Park et al (2012) indicate that greater risk, limited resource fewer numbers of projects are common characteristics of small business. The size of company also determines the effect of human capital risks. Technology innovation and commercialization

46 is risky in which managers tend to refer short-term target for personal interests instead of long-term development for the company (Li, Guo, Liu, & Li, 2008). Firm with greater social intention generally do not see themselves as risk-takers and tend to perceive lower levels of risk than others (Andersén, 2010). Risk taking behaviour refers to the effort of firms to create innovative products or new form of organization through bearing a costly commitment with a certain level of uncertainty in the future (Pearce II, Fritz, & Davis, 2010). The most expansive of firm to get novel idea or new method, the greater likelihood of risk that firms has to bear. The extend to which the top management undertaking distant searches of wasting their efforts compare to other activities which may promote innovation (Li, Maggitti, Smith, Tesluk, & Katila, 2013). In economics, a utility function has become common approach to understand how people deal with at least economic risk. Specifically, individual consumer makes choices with maximizing expected utility, though critics have emerged with the assumption (Bernoulli, 1954). Potential bias occurs that risk assessment tends to consider that potential risks greater than potential gain, which brings into misjudge the likelihood of it occurring (Kahneman, 2011).

2.2.3 Governance The governance structure is the set of organizational devices to pursue the mission of organization. According to the EMES definition, social enterprise is typically voluntary-based governance structure in the framework of an autonomous project (Defourny & Nyssens, Conception of social enterprise and social entrepreneurship in Europe and the United States: Convergences and divergences, 2010). Autonomy is believed to foster innovation and increase competitive advantage level. Firms, which strive to be autonomous, have capability to carry out collaboration when they access valuable resources and deal with uncertain level of business environment (Li, Maggitti, Smith, Tesluk, & Katila, 2013). The social enterprises may receive public or private support, but the management has to take up position to deal with the stakeholders. Autonomy is associated with the degree in decision-making process. Autonomous decision-making plays a pivotal role for entrepreneurial outcomes. This factor comprises four items, i.e. working autonomously, belief for the best result, no intervention from supervisor, the role of leaders (Lumpkin, Cogliser, & Schneider, 2009). Autonomy is very diverse at different context. In the context of organization, autonomy refers to the relationship between units and sub-units on making decision and goal setting for them, which refers to the theory of self-determination. This theory tries to understand types of motivations, which spring from

47 autonomous motivation and external motivation (Moran, Diefendoff, Kim, & Liu, 2012). The theory views that autonomy brings about satisfaction, followed by a strong commitment with quality and productivity of team to achieve the goal. Secondly, the ideal-typical social enterprise defined by EMES is based on a collective dynamics and the involvement of different stakeholders in the governance of the organization. The various categories of stakeholders may include beneficiaries, employees, volunteers, public authorities, and donors, among others (Defourny & Nyssens) In 1980s, the concept of participation was emerging among the activists and scholars. In 1990s, donors began actively promote participatory approaches in their development program, such as structural adjustment program to protect the most vulnerable (Mansuri & Rao, 2013). The criteria state that the decision- making power reflects economic democracy that characterizes the field of social enterprise in Europe, in the tradition of cooperatives.

3. POLICY CONTEXT 3.1. Third sector in the New Order Regime The founding father of Indonesia introduced cooperative as the most relevant business model in this country. Specifically, Article 38(1) of Indonesia Constitution states that national economy should be organized on a co-operative basis. The principle of free competition is considered as irrelevant for the Indonesian business model. The reason of such initiative comes from the Indonesia experiences that foreign company controlled over the top of economy, while the local indigenous people had no education and experiences to set up firms (Hatta, 1957). In 1965, Soeharto with the New Order Regime came to power along with bloody revolution, as hundreds of thousand people who were considered to be communists were slaughtered. The government tried to control civic social organizations and introduced press censorship for anti- communism policy (Hill, 2007). The government also changed its foreign policy by strengthening ties with Western country, which allowed foreign investment. This was a contrasting policy to the Sukarno government that tended to build connection with the socialist countries such as Russia and China. Gaining benefit from oil boom, the government organized extensive village-level voluntary organizations to promote birth control and food self- sufficient program (Vatikiotis, 1993). The cooperatives became partners of government t as distributor for the stated-owned fertilizer companies (Ilham, 2001).However, the ruling party managed a complex patrimonial system as the economy grew strongly as the regime ruling with a heavy hand. The

48 ruling parties managed both state-owned companies and foundation, while Soeharto’s family controlled over 564 companies and hundreds of overseas companies (Johansson, 2014). The World Bank called that Indonesia conglomerations seek “to capture rents created by policy-created market distortions.” Both offering a gift and receiving a gift implies on obligation one day in the future. The reason lays behind the exclusive lavish community may be the intention to enhance social status as well as the reinforcement of social relationship. Conspicuous consumption may indicate interplay between socio-economic benefit and the obligation (Weichart, 2007). In 1990s, the Ministry of Home Affairs issued a regulation that formalized the role of CSOs in the country i.e. CSOs and selected NGOs were encouraged to establish cooperative to go partnership with the government in development projects. They acted as complementary service provides and/or as implementing agents of government programs that could not reach the lowest segment of society. The development programs covered were included education, health, cooperative, microcredit, small medium enterprise, and the like (Hadi, 2014) Microfinance sector emerged dramatically. Cooperatives also played pivotal role as loan providers for household units. In 1998, there were reported to be 1,164 saving and loan cooperatives and 35,741 units of loan enterprises. In fact, People’s Credit Bank (BPR) and Bank Rakyat Indonesia BRI dominated at the greater market level (Leinbach, 2004).

3.2. The emerging third sector Post New Order Regime The effort of Indonesia Government to promote income redistribution has dramatically changed since decentralization policy in 1999. After President Soeharto stepped down in May 1988, political reform allows local authorities to manage their own resources. The policy reform was designed to allow participations in development and public service delivery is expected to be more responsible to local demand to respond the widening gap between urban and rural area as well as between Java Island and Eastern Indonesia. Social responsibility becomes popular among private sectors. They allocate more resources to community foundations. The program provides opportunity for companies to make ethically correct decisions and wield social power within politics (Mueller, 2014). Indonesia government enacts Law 25/2007, which requires all investments to carry out CSR program. In addition, Law 40/2007 outlines that CSR is a mandatory for natural resource-based companies. However, this regulation raises debate between

49 those who support CSR as mandatory and those who consider that CSR is voluntary. In third sector issue, the government tried to reform the regulation for cooperative and foundation. The new regulation, namely Law No 16/2001, outline the definition of foundation as a legal entity constituted by a founder by dedicating the assets to social activities (act 1). Foundations have no members but do exist exclusively of legally independent assets. Foundations are set out with its own governance bodies, i.e., the foundation board. In 2004, this regulation was amended by Law No. 24/2004, which among other things added articles on the payment of salaries to the staff and management of NGOs. The reason lies behind the amendment is that such many foundation are supposed to be non-profit organizations, but in fact many of them have become for-profit institutions. In 2005, Indonesia ratified the International Covenant on Civil and Political Rights (ICCPR). This brings fundamental freedom and allows citizen engagement, including public consultation and city-hall meeting. Government invites CSOs to work together with certain state institutions, such as the Supreme Court and the police. Hence, Law No 17/2013 requires all societal organization to apply through the Home Affairs Ministry for official approval to operate. The law imposes a variety of vague obligations and prohibitions on societal organization activities, and severe limitations on the creation of foreign-funded organizations. The societal organization law specifically states that organization must “maintain the value of religion and belief in Almighty God,” regardless of their religious or secular orientation (Human Rights Watch, 2013). The institutionalization process requires a registration certificate, issued by Ministry of Home Affair. (Council on Foundation, 2014). Non-membership organization refers to Law No 28/2004. Previously, Law No 16/2001. Association is about a number of constituents. This represents fractional interests in the entity’s assets (members) who have decision-making power. The articles of association may be changed in the general meeting. In 2012, a new law for cooperative was been introduced to replace the 1992 law and should have been implemented by 2015. However, this regulation was amendment in May 2014, as the public did not accept the concept of cooperative. Law No 17/2012 defines cooperative as legal form, which established by people or legal form along with separated liability from the owners, which aims to run a business to fulfil aspiration in economic, social and cultural value. Moreover, the Indonesia Ministry of Cooperatives and SMEs is the one who has responsibility to perform policy formulation, implementation coordination, monitoring and evaluation upon the cooperative in Indonesia. Under the new government regime, the

50 ministry has intention to empower cooperatives in traditional markets to help distribute rice from the State Logistics Agency (Bulog). This policy is for cooperative with marketing capability to distribute the rice. This policy aims to prevent monopolistic practices in rice distribution. The price at vendors will follow the price from the government. The rice will not be mixed with low-quality products as is normally conducted by the mafia,” (Jakarta Post, 2015).

4. SOCIAL ENTERPRISE MODELS BASED ON THE LEGAL FRAMEWORKS In general, social enterprise model in Indonesia is associated with the legal form. As of today, there is no specific legal form dedicated to social enterprises in Indonesia. Social enterprise must follow the laws on commercial-based enterprise, which remains unchanged since Soeharto government. Social enterprise must weigh various aspects when choosing an appropriate legal structure. It must take into account many aspects ranging from the ownership/governance structure, the funding structure/access to capital as well as the taxation scheme available under each of the option. The commercial entities can adopt the legal form of a limited corporation, a sole proprietorship or cooperative. While non-profit organizations can opt legal form of foundation or societal organization.

4.1. Limited Corporation The common legal institution of for-profit organization in Indonesia is incorporated limited liability company, or called PT. Most investors also prefer to invest into such kind of legal form business. There must be two parties holding shares in this kind of company. These can be a legal entity or an individual. Hence, one director and at least one commissioner need to be appointed by these shareholders. According to Law No 40/2007, Article 16: “the name of the Company must be preceded by the phrase ‘Perseroan Terbatas’ (Limited Liability Company) or the abbreviation “PT”. This Article also mentions that the abbreviation “Tbk” shall be added at the end of the Company’s name for public company, which exercise a public offering to shares, in accordance with the provisions and legislations in the field of capital market. This limited liability company structure has increasingly adopted by social enterprises in Indonesia. Social enterprise normally establishes a limited liability company once the commercial business activities is already successful. PT Kampung Kearifan Indonesia (Javara) is for-profit social enterprise that aims to assist local food producers and assist them in developing and marketing their products worldwide. Javara products have

51 received international recognition and are currently sold across Europe and the US. In some cases, the social enterprises consider establishing limited liability companies in order to separate their social and business entities. The commercial business focuses on generating economic value to fund their social programmes. The profit is likely to return to the not-for-profit parent institutions.

4.2. Sole Proprietorship The Indonesian commercial code considers CV and UD as small business entities. CV stands for “commanditaire vennotschap”, which is adopted from the Dutch Colonial Law. The code also lightly regulate firm with CV legal form under partnership between at least one investor and one manager with full liability on the investor. While, UD stands for Usaha Dagang (trading business), is normally established by a private individual who becomes the sole proprietor of the business. Only Indonesian citizenship may apply for UD business form. It is the simplest business form under which one can operate a business. As a sole proprietorship, he/she is personally responsible for its debts. In the case of default, creditors can bring lawsuit against the owner of the business; and he/she must prepare to settle the lawsuit with his/her own money. Sole proprietorship model appears to be less favourable choice, because it is hard to be viewed as social enterprise if it is owned solely by an individual. Public funders are likely reluctant to provide funding to this type of social enterprise.

4.3. Cooperative International Cooperative Alliance (ICA) defines cooperative as an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically controlled enterprise. The main principles of cooperatives are voluntary and open membership, democratic organization controlled by its members, equal capital contribution by all members, offer education and training, and put priority on community interests. Cooperative is highly regulated in Indonesia. During the Soeharto Era, the cooperation played pivotal role as agriculture development agent to promote food self-sufficient program. Law No 25/1992 defines cooperative as membership-based institution with cooperative principle and collegiality. In fact, the Government allocated more resources to cooperative to handle farm credit scheme, supplying agriculture inputs (fertilizers and new varieties of rice), and marketing of farm commodities. The government protected market price to boost the growth of cooperative. However, the incorporation of the village cooperatives had something against the

52 cooperative principles that cooperative should be based on joint economic need of the members. In fact, the government granted all the equity capital and members contributed a very small amount or paid even nothing (Zanden & Marks, 2012). In 2012, a new law Cooperatives Act No. 17 of 2012 has been introduced to replace the 1992 law; however, the Constitutional Court amended it in May 2014. The main reason why public did not accept the new concept of cooperative may come from the minimum asset requirement. In addition, the 2012 law defines cooperative as a legal form of business, which is established by people or legal form along with separated liability from the owners. The cooperative aims to fulfil economic, social and cultural value aspirations. The Indonesia Ministry of Cooperatives and SMEs is the one who responsible to perform policy formulation, implementation coordination, monitoring and evaluation upon the cooperative activities in Indonesia. Cooperative is one of the most popular social enterprise models in Indonesia because it embraces the characteristics of social entrepreneurship.

4.4. Foundation (Yayasan) In Indonesia, foundation is another most common legal form of third sector organizations including among civil society organizations (CSOs) and social enterprises. Foundation refers to non-membership organization. After the Soeharto Era, the regulation on foundation keeps on changing. It begins with Law No 16/2001, which stated that foundation is a legal entity constituted by a founder that is dedicating assets into social activities (act 1). Foundations have no members; however, do exist exclusively of legally independent assets. Foundations are set out with its own governance bodies, i.e., the foundation board. The new regulation comes with Law No. 28 of 2004, which defines foundation as a non-membership legal entity. Its establishment is based on the separation of assets, and it is intended as a vehicle for attaining certain purposes in the social, religious, or humanitarian fields (Council on Foundation, 2014). This regulation was amended, which among other things added articles on the payment of salaries to the staff and management of NGOs. The reason lies behind the amendment is that such many foundation are supposed to be non-profit organizations, but in reality many of them have become money-earning institutions. Many social enterprises adopt foundations as their legal institutional form. In their early establishment, they prefer to select foundation as their legal forms due to the fact that it is tax exempted and open access funding to public institutions such as the government, and development agencies, as

53 well as public donation. From the administrative perspective, it is simpler registration process than limited liability companies, and moreover it requires less initial capital than a PT. In addition, foundation offers flexible options for the social enterprise to change into another organizational structure and focus as the institution grows.

4.5. Association and Societal Organizations Association refers to a membership-based organization with a number of constituents. This represents fractional interests, which determines decision-making process. Associations allow members to join forces politically with specific concern that affects business owners. The larger number of members that organizations manage, the more powerful of the association. In addition, business associations may provide opportunities to networks, information, and resources. Between 1966 and 1998, the Soeharto regime controlled civil society organizations. Through Law No 8/1985, the Government considered that the concept of societal organization is applied to all type of membership organizations, including activity, profession, function or religion. This regulation allowed the government to dissolve any civil society organizations, which considered disturbing security and order, go partnership with international organization without the government’s concern or support any foreign institution, which “harm the nation”. In 1990s, the Ministry of Home Affairs issued a regulation that formalized the role of CSOs in the country i.e. CSOs and selected NGOs were encouraged to establish cooperative to go partnership with the government in development projects. They acted as complementary service provides and/or as implementing agents of government programs that could not reach the lowest segment of society. The development programs covered were included education, health, cooperative, microcredit, small medium enterprise, and the like (Hadi, 2014). The story dramatically changed after the Soeharto regime collapsed in 1998. Indonesia undergoes constitutional amendment in that human rights provisions refer to Universal Declaration of Human Right. In 2005, Indonesia ratified the International Covenant on Civil and Political Rights (ICCPR). This brings fundamental freedom and allows citizen engagement, including public consultation and city-hall meeting. Government invites CSOs to work together with certain state institutions, such as the Supreme Court and the police. Hence, Law No 17/2013 requires all societal organization to apply through the Home Affairs Ministry for official approval to operate. In addition, this law specifically states that organization must “maintain the value of religion and belief in Almighty God,” regardless of their religious or secular orientation (Human Rights Watch,

54 2013). Societal organizations are formally recognized with certificated published by the Ministry of Home Affairs for a national-level organization, or governor for a provincial-level organization, or mayor for a city level organization (Council on Foundation, 2014).

5. ASSESSING SOCIAL ENTERPRISE MODELS IN INDONESIA USING EMES INDICATORS In order to explain the social enterprise model in Indonesia beyond the legal status, we used combined secondary data and primary data collected through forum group discussion (FGD). The objective of the FDG is to extend research on identification and understanding social entrepreneurship phenomenon in the country. Our purpose is to find patterns using three dimension indicators i.e. social mission, economic project and governance across multiple case studies. The FDG participants are relatively new established social enterprises; except for Bina Swadaya which was established during Suharto era. Subsequently, the pattern indicated that social entrepreneurship in Indonesia is still in infancy. Few social enterprises such as Bina Swadaya, SE01 and Javara are well established and have achieved dual social and business objectives. Most participating social enterprises in the FDG revealed similar challenges that are divergent to the current study of social entrepreneurship. Please refer to Appendix 1: Profile of participating social enterprises.

5.1. A Social Mission It appears that the observed organizations come with an explicit aim of benefiting the community as their core mission. This meets the EMES conception that social impact on community is the key motive of the organizations. Social innovation doesn’t always meet market demand. We observed that most of these participating social enterprises are in the form of foundation and association. They start their activities from social activism, which generally focus on social value than economic value creation. The economic value creation aims to support the social mission.

SE01: “Our organization is dedicated to provide electricity infrastructure for poor people in remote area. I strongly believe that social enterprise should come from social initiative fist, and then followed by business approach. Rich people tend to be thrifty..”

SE04: “We provide training activities to promote rights for women. We sell souvenirs made by our target groups…”

55

SE05: “We established online shop to provide market access to our target group, women. Our office also becomes shelter for women who experienced family conflict. It is multifunction office. ..”

SE06: we provide help to street children and prevent child prostitutions.

SE07: “… we run a restaurant business to provide jobs for ex-offenders (former convicted terrorists)…”

SE02: “We are an NGO. Over the last years, we conducted community development program for farmers with support from various funding organizations. We identified some business opportunities in seaweed, chocolate, and cassava. Then we invested in a new venture with sole proprietorship legal form…”

SE03: “…We run local economic development program with partnership and support center activities for small businesses. Our financial resource does not only come from funding organization but also come from participant fee. We also run a cooperative.” 5.2. Economic Projects

The nature of the economic activity is closely connected to the social mission: the production process involves communities/marginalized group of people with lack of knowledge, skills and financial capacity to help themselves. Shifting from social activities to a sole market orientation seems to be the most challenging issue for the observed organizations. This brings such organizations with more pressure on ‘double bottom line’ between economic project and social purposes. It seems that the observed NGOs belong to ‘commercial non-profit’ school and consider that the economic risk refers to the amount of income generated through trade. EMES approach considers that a significant level of economic risk as main criteria for social enterprises, which assumes that the one who establish the enterprise has to deal with the risk of initiative (Defourny & Nyssen, 2014). Social innovation and market demand doesn’t always go in the same direction. In fact, most of them are new social venture with poor proactive behaviour and lack of business acumen.

56 Social Enterprise 01 (SE01): “We begin with social activities, then move to business activities for sustainable purposes. Our product is a micro power plan for people in remote area…”

SE 02: “We are establishing a social enterprise as the second step of our business expansion. We begin with a project funded by government and international NGO. Hence, the idea to run social enterprise comes from business opportunities. My team has responsibility to get financial support. Our staffs do not only enjoy salary but also bonus from project and business activities. We use activity-based costing, which considers the various contribution of each staff, from marketing to administration level…”

SE03: “..we developed programmes that are adhere to our mission. Also, we are careful in building our image. We must maintain our identity that makes us different from art or advertising agency. Therefore, we are selective in accepting new works. Often, we work on projects that fit on the client’s budget; because we want to help them. We do not discuss about pricing/budget; because we are more interested to learn more about the proposed works. It is hard to put the price on the social value…”

SE04: we have been running a business with three divisions, namely services, partnership and support center. Our activities gained financial support from funding for over 30 years. We also run community development program and microfinance. However, the microfinance found serious of non-performing loan. Then, we established cooperative with more autonomy. Our staffs received various sources of income.

SE05: “It is impossible to hire our target group, as they are abandoned young children. We run cake shop and hire our ex-target group to make a cake…”

SE06: “We provided showrooms for local handicraft with natural dyes. We had tried to run some businesses but unsuccessful. We even hired a business professional with greater bonus. However, we failed in this attempt…”

57 SE07: “.. It is enormous challenges for us, as activists, to get familiar with business. We neither focus on social activities nor business. We run publication firm and microfinance, but those businesses have not yet come to our expectation. With greater human resources in training and capacity building, we set a plan on running a consultant firm. …”

SE08: “We are nearly desperate to promote innovation among our targeted group, who are women with experiences on family violence..”

SE09: to run up against non-performing loan and an economic risk, we go partnership with local leaders. We recruit them as front liner executive staff. They do not only introduce the value of our SE to people, but also build trust and deal with such risk. In a case of non- performing loan, we avoid to take over the collateral...”

SE10: “.. we need to conduct extensive collection process by visiting the borrowers individually, otherwise, they would be angry. In many cases, our loan officers had no heart to ask for collateral against the loans, as a result, we made losses when the borrowers defaulted their payment.

SE 11: “ …we run a microfinance cooperative. We access our target group based on trust and our social networks. However, the non- performance loan occurs when one of group members fails to pay on time, and the others follow the behavior. Hence, this involves police intervention…”

It appears that opportunity recognition is an essential process of social enterprise establishment. The existing theory of opportunity recognition in the entrepreneurial studies indicated that there are two approaches i.e. rational/economic approach and effectuation process. The rational approach allows recognition process upon new products or services a tangible opportunity, namely a tangible opportunity. Hence, the normative decision occurs along with all gathered information and evaluation. On the other hand, effectuation opportunity becomes apparent with an intense process from initial ideas to implemented idea. The best approach requires time and effort with the available resources (Corner and Ho, 2010). Many of our observed organisations appear to follow effectuation process. The idea of business venture/income generating activities come with the idea in the mind of the founder and management, and often the

58 ideas are not backed by appropriate skills and knowledge. As a result, many of them have frequently changed their business strategy from one entrepreneurial activities to another. The organisational strategy evolves through trial and error. Some organisation found difficulties in finding the right business venture that can generate sufficient income. As a result, they have suffered financial losses. SE02 as an example struggled to identify the right business opportunity. In 2005, they established a limited liability publishing and printing company. However, their activists found it hard to do both business and social activities together. Then in 2011, they established a microfinance institution. The microfinance programme could not run properly, and experienced repayment default due to lack of borrowers’ credit worthiness study. Now, they are thinking of establishing a limited liability consultancy company that seems fit within the organisation work, by deploying their senior managers to act as consultants. The rational approach may be a better way to ensure successful business venture. SE01 is one social enterprise that used this approach. The opportunity was discovered around persistence problem electricity supply in the country. Only 40% of the population particularly in Java has access to electricity. The founders were inspired a farmer who built mini hydro electrical power plant for his house and his plantation. The idea appeared to be doable particularly because the couple have the necessary skills and education background that compliment each other. The founder of SE01 was an engineer and had working experience in utilized hydropower as rural development tool. They conducted careful analysis before the establishment of SE01 from the technical perspectives (e.g. hydropower technical analysis, environmental assessment), community perspective (e.g. poverty and needs analysis) as well as the government perspective because the PLN (stated- owned company) controls over such power sector. Moreover, during Suharto regime, many power-building contracts were tied-up with the Suharto family. SE01 used a cooperation ‘win-win solution’ approach with the PLN instead of creating competition with the firm. The argument is that the local hydro electrical power plants can assist the government (PLN) in providing electricity supply particularly to the unreachable remote areas. By conducting risk assessment and feasibility study at the social enterprise formation stage, SE01 are able to overcome obstacles and reduces business risks in the later stages. Lack of entrepreneurial success may be affected by fear of mission drift, i.e. away from social objective and focus on economic value creation. Some observed organisations are careful in selecting their business activities to ensure that they are not violating their social missions. We observed that there is a tension between two identities as a social activist and as an entrepreneur. Subsequently, the economic activities could not grow/generate

59 income effectively, and the organisations may have missed business opportunities.

5.3 Governance The emerging social enterprises in Indonesia are associated with a demand for higher democracy in the economy, especially during the political reform after the Soeharto era. This involves a collective dynamism with different stakeholders in the governance of organization. The organizations meet EMES criteria that decision-making power is not based on capital ownership but tradition participation approach.

SE01: “… Financial report is essential for our business. To build trust among our stakeholders, we provide accountable financial report with support from international public accountant…”

SE02: “… establishing new ventures allows us to develop social enterprises with various ways, such as investment to local company, establishing a trading house, workshop, and so on. We consider a participatory nature, with various parties affected by the decision- making power, such as farmers. This is not based on capital ownership, but on mutual trust …”

SE03 “…we run a limited liability corporation, which belongs to three organizations. The most challenging issue is to establish a rule of the game, which actually comes from different organization cultures…”

SE04: “…As part of local economic development program, we establish a cooperative with different management and more autonomy. This allows us to deal with non-performing loan…”

From the internal governance point of few, most of the observed organisations prefer institutional separation between the non-profit (social mission) and for-profit (economic) activities. Beside fear of mission drift, they also have to deal with uncertain about many aspect of business management, including the tax regulation on profitable non-profit organisation. From their perspectives, it is more manageable to have two separate but affiliated institutions, i.e. the foundation manages the social

60 mission; while the limited liability company deals with the economic activities. The foundation will have representation in the Board of Members as well as some stakes in the limited liability company, to ensure that the profit generated from the company will be allocated to finance the foundation’s social mission. In addition, the foundation owns the overall assets of the limited liability company. They also found that the institutional separation would allow them to hire employees with specialised skill, knowledge and experience. Social activists often do not have the business/entrepreneurial skills and knowledge needed to manage the economic activities. It is the fact that they found it hard to do both roles at the same time.

SE02: “.. separation model between the for-profit and non-profit activities will allow us to expand our businesses in the region and to diversify our business activities such as investing in various businesses such as seaweed, and cacao farming industry.

SE05: “ it is double works to manage research and publishing. Since we have limited human resource capacity, we have to arrange our task assignments accordingly by checking their performance track record. In some cases, the staff may work cross sectors. For example if we receive works from National Bureau Statistics, we may assign finance staff to work on that research projects. We also found our staff are not working at their optimal capacity, for instance in sales and marketing. They are not risk takers; and not eager to generate income.

Besides the employees, the skills and characteristics of the founder affect the performance of the organisations. The observed organisations were mostly established by vision of individuals rather than a group of community. These people are agents of change. They are persistence in pursuing a vision regardless the limited supportive environment and resources. However, their abilities and characteristic as well as their personal thinking, belief and ideology determine the proposition of ideas, and approaches; as well as the success of the institutions as a whole. Subsequently, this also affects the direction and quality of the social entrepreneurial activities.

61 6. DISCUSSION From the FDG findings using EMES indicators as discussed above, we attempt to analyse social enterprise models in Indonesia based on several existing studies such as vision based model, operational model and Asian model. We found that the vision model proposed by Alter (2006), Cheng and Ludlow (2008) could explain better our observed social enterprises; because most of our participating organisations are relatively newly established social enterprises. They emerged from NGOs in the attempt to transform into social enterprise. Their social enterprise activities begin from social activism and vision of the founders. Apparently, the majority of observed social enterprises follow locked-step or integrated models. This model indicates that the integration between social mission and economic activities occurs under a single institutional form. The purpose to engage in economic activities is to generate income to gain sustainability and to finance its social mission. Almost all of our participating organisations started from social activism. Hence, they embraced higher social value creation beyond their economic value. However, they face greater financial sustainability challenges, which push them move to profit generator model that separate their social mission from economic activities They expressed difficulties in managing ‘conflicting social and business activities’ under one organisational structure. From this governance point of view, the observed organisations indicated their preference in establishing a limited liability company for their business activities. Several social enterprises have successfully used the profit generator model. Meanwhile, there are two organizations, i.e. SE01 and SE02, that embrace the embedded social enterprise or trade-off model though running business activities as social program. Both achieve their social mission through its financial self-sustainability activities. Both social mission and economic activities undergo simultaneously. Meanwhile, we found that it is harder to classify our observed organisations within the ‘organisational model’ proposed by Alter (2006) due to the fact that some observed social enterprises have multiple social missions and business activities. One social enterprise may fit into several models. In addition, the economic analysis above explained that our observed social enterprise face greater challenges in implementing concept of social entrepreneurship within their organisation. They are still in the early stage in finding the right products and services. Many of them offer products and services that are in line with their social activities. They also change or diversify their business products/services frequently, in the attempt to find appropriate business opportunities that can generate stable income for the organisation as well as achieving their social objectives.

62 Some of our observed social enterprises fit into fee-for-service purpose (i.e. a model that offer services in order to cover their cost) and service subsidizing model (a fund raising model by selling products to external market). Others are following entrepreneurship support model, market intermediary model, employment model,and market linkage model. These models are focusing on providing support to their target groups to gain access to external market, and to support the growth of their targeting group businesses. Similar to the Asian models proposed by Defourny and Kim (2011) are not entirely fit into our observed social enterprise characteristics. One striking difference is on the role of government in the emergence of social entrepreneurship. The trading non-profit organisation and the work integration social enterprise models emphasis on the prominent role of government in promoting CSO in solving social challenges through establishment of government-CSO partnership. These ‘top-down’ models are appropriate for the social enterprises established during Suharto era; however, after the fall of Suharto, the government direct intervention in CSO has been reduced. The government assists the emergence of third sector organisations by creating conductive environment for the organisations to develop via policies and regulations. International development organisations play higher role in strengthening CSOs in Indonesia as they provide substantial funding than the government. Moreover, ideas for solving social issues mostly come from individual founders (agents of change) ‘bottom up’ rather than from the government. This makes distinct comparison between the emergence of social enterprise before and after Suharto regime. Meanwhile, the social enterprise steaming from non-profit/for-profit partnership model also has not been widely recognized in Indonesia. CSR movement has been ineffective in Indonesia (Koestoer, 2007). Social enterprise in Indonesia has not established strong interaction (partnership) with the private sectors due to high of mistrust among them. We only found several social enterprises fall under non-profit cooperative and community development enterprise. Inspire by the three types of models explained above, we attempt to categorize general social enterprise models in Indonesia. First is integrated non-profit organisation model, which refers to a social enterprise model that integrates social mission and economic activities (similar to integrated/locked-step model). Under this model, social enterprise run simultaneously both social and business activities. The business activities aim to support the social mission. There is no separation in the governance structure and resources (e.g. finance and human resources). The second model is profit generator non-profit organisation model, i.e. an organisation that owns separate not-for-profit institution and for-profit business entities. The non-profit entities hold the main control. There is strong governance

63 relationship (e.g. position as Board of Directors) between the for-profit and non-profit entities; although they are managed separately. This will help the non-profit organisation to stay in control over the business entities and to ensure profit sharing. This is similar to profit generator/external social enterprise model. Third model is a non-profit cooperative model, a not-for-profit cooperative. This model follows general concept of cooperative such as membership fee based and members play greater role in governance of cooperative. The forth model is community enterprise. This study indicates that social enterprise emerges from the local initiative and managed by the local community. The last model proposed is social corporation model. It is similar to embedded model i.e. a for-profit social enterprise that run its business as social mission.

7. CONCLUSION The emerging social enterprise in Indonesia becomes apparent during the transition from authoritarian regime to democratic regime. This political context provides opportunities to the third sector with support from international funding organizations. Challenges in transformation process from NGO to social enterprise- due to lack of capacity and skills, as well as appropriate legal form to accommodate social enterprise model. There is no specific legal form dedicated to social enterprises in Indonesia. This remains a challenge to select the most appropriate legal form for the social enterprise, taking into account many aspects ranging from the accountability and governance structure, the funding structure as well as the taxation scheme available under each of the option. This study contributes to the criteria of social enterprise within EMES context. We found that the social enterprise model is dynamic and evolved over time depending on various internal and external factors. In general we found that social enterprise in Indonesia take non-profit model. Based on our FGD, we categorize social enterprise models in Indonesia into five categories, namely, integrated non- profit organisation, profit generator non-profit organisation, community enterprise, non-profit cooperative, and social corporation. However, there are some limitations, as the data analysis relies on a focus group discussion with limited number of organizations. Future study should carry out a survey with larger number of organizations from wide range of business activities.

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69 APPENDIX 1

Profile of participating social enterprises

The Legal form Social activities Target group organizations SE01 NGO Policy advocacy on women Women rights, training for women, Business activities: sales on handmade crafting business and books SE02 Association Various SME business Small medium development, and corporate enterprises, social responsibilities farmers program

Business activities: marketing agent for SMEs’ products, i.e. agriculture products, handicraft, and furniture. SE03 Foundation Business activities: lending Poor people and saving financial activities. SE04 Foundation Business activities: Limited Indigenous liability publishing people company, microfinance and consultant firm SE05 Foundation Hold exhibition, festivals, Local artist art labs, workshops, research, and journal publication.

SE06 NGO Women crisis intervention Women from centre domestic conflict

Business activities: online second-hand products shop SE07 Foundation Policy advocacy Children

Business activities: cookies shop SE08 Credit Union Business activities Lending Poor people Cooperative and saving financial activities SE09 NGO Microfinance, retailer from Women their target groups, i.e. entrepreneurs handicraft SE10 Foundation Provides electricity Poor people in infrastructure remote area

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