In November 2020, Indonesian President Joko ‘Jokowi’ Widodo signed into effect the Omnibus Law, fulfilling campaign promises and one of the countries most significant pieces of legislation. The bill was intended to simplify the bureaucratic process of establishing and operating a business in Indonesia, while making the country a more competitive destination for foreign investment. Asian Insiders partner for Indonesia Primadi Soerjosoemanto looks closer.
Indonesia is a country blessed with a wealth of natural resources and with 274 million people spread across 6,000 inhabited islands. The world’s fourth-most populous country requires annual growth of 9 million jobs, leading President Jokowi to campaign on a promise of improving the economy. The Jobs Creation Bill -widely known as the Omnibus Law – offers opportunity to stimulate and improve outcomes for workers and businesses, both domestic and international. The bill simplifies permit processes covering fifteen different sectors including manufacturing, agriculture, mining and energy. It also removes the ‘negative investment list’ that previously restricted foreign investment in certain areas while still retaining some limitations, although the bill allows for more flexibility for the government to make further changes as opportunities, economic and political, arise.
However, more recently, in November 2021, Indonesia’s constitutional court ruled the law unconstitutional, ordering the government to amend the law within two years, failing which it will be ruled permanently invalid. This move followed significant labour unrest following President Jokowi’s announcement of the Bill, with millions of workers taking to the streets arguing it abolished sectorial minimum wage, cut severance pay and gave too much flexibility to employers. The Confederation of All Indonesian Workers (KSPI) named the law “modern slavery”.
In response the government in late 2022 reissued the Job Creation Law as an emergency government regulation, thereby evading the court’s two-year limit and essentially rephrasing much of the same provisions. From 31 March 2023, it commenced as the 2023 Omnibus Law on Job Creation, continuing to allow companies flexibility in hiring labour, on setting minimum wages and long leave rights.
Environmental activists argue that the provision of the law also allows for increased deforestation, a driver for Indonesia’s greenhouse gas emissions. The bill loosens requirements for environmental impact assessments for industrial and agribusiness projects and empowers central government to approve business and investment in officially designated forest regions, previously protected by a moratorium. While the Omnibus Law aims to promote domestic and international investment into the country, it is argued that the provisions contravene the current investment trend towards sustainability. Recently a group of 36 institutional investors representing some USD 4.1 trillion signed an open letter highlighting their concerns regarding environmental impact of the law. However the provisions of the law are in place, at least for now.
The Bill also brings tax reforms, party to address the particularly high incidence of tax evasion in the country. Tax for foreign private companies reduce to 20% and 17% for Indonesia-listed companies, while foreign workers will be exempt from paying tax on income derived from outside the country.
President Jokowi’s motivations have been to promote investment in, and development of Indonesia’s ailing infrastructure by encouraging investment and stimulating growth. Opponents argue that worker rights, environmental protections and to some extent, civil rights have been given a lower priority. The political gamble taken by Jokowi’s government has been to focus on developing a stronger infrastructure, essential to continuing employment growth and to reducing economic disparity. The slow and complex bureaucratic system, mired by a legacy of regional and local corruption has kept the country lagging behind neighbours such as Vietnam and China and but is now being considerably shaken up by President Jokowi’s efforts to attract fresh investment and development energy. Following a piece of legislation as significant as this, concerns and protests were bound to follow and we’ll be watching the ongoing development of this in coming years. As Indonesia seeks to improve its economy for the benefit of its people, it will need to tread a wary line between creating attractive conditions for international investors and protecting local concerns.
For further information on this and any aspect of business affecting your plans for Indonesia, Asian Insiders provides years of experience and hands-on practical knowledge. For a no-obligation call, please contact Jari Hietala, Managing Partner: jari.hietala(at)asianinsiders.com or Primadi Soerjosoemanto, Indonesia Partner: primadi.soerjosoemanto(at)asianinsiders.com
