Can the omnibus law do what its drafters claim, and bring investment and jobs to Indonesia?

The law has sparked mass demonstrations by labour unions concerned about the law’s dilution of workers’ rights. Photo by Aditya Pradana Putra.

 

The Indonesian national legislature passed the controversial omnibus Law on Job Creation on 5 October, immediately triggering widespread protests in Jakarta and many other cities across the country. The law revised hundreds of articles in 76 existing laws related to Indonesia’s investment climate and ease of doing business, covering a wide range of areas, including small and medium enterprises, coastal areas and small islands, industrial parks, oil and gas, forestry and environment, and labour.

 

The government submitted the first draft of the law in February 2020. For a law that revised so many existing laws within its 900-plus pages, discussion in the legislature was suspiciously brisk and involved very little public engagement.

 

President Joko Widodo has said disinformation and hoaxes are the main drivers of the protests. Even if this were the case, the government has hardly helped to clarify matters. The legislature did not share the final draft with the public, even after it was signed into law on 5 October. On 12 October, a new 1,035-page draft was circulated, 130 pages longer than the original draft. The next day, the legislature announced that, sorry,  the final draft was actually only 812 pages.

 

Despite this flawed and far from transparent drafting process, the government and legislature have insisted that the omnibus law is essential to boost investment, with the end goal of creating more jobs for Indonesians. But can it actually do this?

Can the law attract foreign investment?

The omnibus law is not the first policy reform package advanced by Jokowi, and it won’t be the last.

 

From 2015 to 2018, Indonesia launched 18 economic policy packages, with the first package announced in October 2015 and the last in November 2018. These packages revised technical regulations to remove bureaucratic barriers and ease permitting process. They also offered fiscal incentives to attract investors. But they have all largely failed to produce results. Why?

 

The problem was that the earlier policy packages did not address the core concerns of the global business community: rising protectionism and economic nationalism; the advantages given to state owned enterprises (SOEs) and the trend toward SOE-driven economic development; local content obligations, under which foreign companies are obliged to purchase materials or services from local suppliers; and foreign ownership caps, which make foreign companies minority shareholders.

 

The new omnibus law does not address these concerns either. The law did remove the “negative list” detailing the sectors closed or restricted to foreign investment. But it did nothing about foreign ownership caps and only further strengthened the role of SOEs, raising concerns about unfair competition between the private sector and SOEs. The trend toward SOE-led growth actually creates risk for the SOEs, as the government pushes them to engage in risky or non-viable business ventures.

 

The other issue affecting foreign investment is, of course, Covid-19. The pandemic has seen investors prefer to send their business to countries with strong public health responses to the pandemic, unlike Indonesia. Investors are also increasingly looking to invest in countries with strong environmental policy and sustainability practices. The omnibus law does nothing about these key concerns – in fact, it dismantles many key environmental protections.

 

It is too early to say that the omnibus law will be an outright failure. It allows foreigners to buy apartments in Indonesia, simplifies land acquisition processes, relaxes environmental permit requirements, eases labour laws, and offers fiscal incentives. Investors love these reforms, especially in capital intensive industries such as automobile manufacture, technology, finance and banking, and mineral processing.

 

But because the law ignores the fundamental concerns of the business community discussed above, it will not be able to reach its full potential.

Can the omnibus law create jobs?

One positive aspect of the law for job creation is that it relaxes permitting processes for SMEs. The government hopes that this will allow informal workers to formalise their businesses on the SME model, providing them with easier access to finance, health insurance, overtime payments and more. Given that the informal sector is estimated to employ about 74 million workers, these changes could have significant impacts for millions of Indonesians.

 

But this is outweighed by the omnibus law’s relaxation of labour laws, which involves considerable risk, especially in the short term. Under the omnibus law, it will be cheaper for companies to get rid of permanent staff – they now need only pay 19 months of severance pay, down from 32 months. The law could therefore have the perverse effect of leading to job losses, rather than job creation.

 

Labour-intensive manufacturing companies in Indonesia have been hit hard by slumping demand because of the Covid-19 pandemic. Many are now looking to layoffs and debt restructuring to stabilise their financial positions, recognising that the recovery from the pandemic will likely last until at least the fourth quarter of 2021. Companies realise that if economic conditions improve, they can simply rehire staff via outsourcing firms, with less liability. The omnibus law makes this easier and cheaper.

 

The government seems aware of the risk that the omnibus bill will lead to mass layoffs, and has prepared a unemployment package that will support newly laid-off staff for six months. However, this means that if the scenario of mass layoffs occur, an even greater burden will be placed on an already strained state budget.

Managing expectations  

One of the goals of the omnibus law might be to simplify the regulatory environment but it will require at least 35 to 45 implementing regulations for it to actually be applied. These implementing regulations are notoriously prone to political intervention. In fact, there is every chance that protectionist narratives could see implementing regulations actually undo some of the reforms designed to open up Indonesia’s economy.

 

Yes, the omnibus law will attract some investors. It provides a wide range of investment opportunities and will improve the ease of doing business in Indonesia. But the problems of economic nationalism and protectionism, regulatory uncertainty, weak transparency, limited or complex access to majority shareholder status, and local content obligations, all remain.

 

The omnibus law is no game changer. It won’t make Indonesia into the open economy that western investors want. But it has created serious political difficulties for the government. They must be wondering if it was really worth it.

 

Ahmad Syarif Syechbubakr is a public policy consultant working in Indonesia. He holds a master's degree from the University of Birmingham, where he wrote his thesis on the rise of hadrami religious authority in Palembang, South Sumatra.