The biggest overhaul of Indonesia’s investment regime in recent times has stirred mixed feelings as it boosts the country’s competitiveness without tackling unfair business practices while loosening rules on labour rights and environmental protection.
The so-called Omnibus law is a cornerstone of president Joko 'Jokowi' Widodo’s plan to move south-east Asia’s biggest economy up the Ease of Doing Business rankings from 73rd to 40th, and capture manufacturing business driven out of China by its trade war with the US.
The revision of nearly 80 laws contains no silver bullet, but it creates a much-needed paradigm shift by cutting bureaucracy and creating a more predictable business environment. The most helpful change is the replacement of the complex permit system with a tiered approach that allows low-risk businesses to register in a matter of minutes.
Another is the centralisation of decision-making in Jakarta. “Historically those decisions have been made at a provincial level where there is a lot more room for local negotiations and discretion, but also graft and corruption,” says John Evans, managing director of Tractus Asia. “Nowadays those are things that companies just aren’t willing to take a risk on.” Particularly given the extraterritorial reach of US and UK bribery rules.
The reforms were heralded for slashing the negative list from 300 sectors to just six, but the removed sectors are on a new positive list which will be subject to conditions. It is thought the government is still deciding the restrictions but, irrespective of the outcome, it is tipped to create greater scope for foreign investment.
Perhaps more importantly, the positive list will be the single source of sector limitations. “The overall purpose of the changes is to centralise any investment restrictions through the list, rather than through other instruments, as has happened in an ad hoc manner in several sectors over the years,” says Ed Ratcliffe, head of advisory at Asia House.
Local and international pushback
Employee protections have controversially been reduced, with severance pay cut and allowable overtime increased. Since early October tens of thousands have protested against these changes and the Confederation of Indonesian Worker Unions plans to challenge them in court.
But those on the ground say the protests lack political clout. “They aren’t supported by the military or police, which are the key powerbrokers, and most political parties support the current president,” said Primadi Wahyuwidagdo Soerjosoemanto, principal of Bright Indonesia. “The government’s popularity is still high, so I don’t think they are going to succeed.”
Some believe the labour reforms are most attractive to Indonesian conglomerates, but for foreigners making labour-intensive investments these changes make the world’s fourth most populous country more compelling.
The reforms also chip away at environmental protections by reducing the need for impact assessments and easing rules on land clearing. Foreign portfolio investors representing $4.1tn assets under management have signed an open letter criticising the move, but not all their peers are driven by environmental, social and governance agendas.
“There are other foreign investors that are happy to see the environmental and labour laws become comparable with some other countries in the region. So it depends on the type of the foreign investor,” says Mr Soerjosoemanto.
Overall, the reforms are a step in the right direction but they don’t tackle foreign investors’ top complaint: lack of a level playing field with local firms. A recent EU-ASEAN Business Council survey found that unfair business practices are more common in Indonesia than elsewhere in the region.
“In reality, there is a mindset to provide preferential treatment to local players, which already have a relationship with the influential players in Indonesia,” says Mr Soerjosoemanto. “And I’m not sure the Omnibus reforms address this.”