Commentary: Indonesia has amended 79 laws to boost investment and jobs. But that may yet not be enough
The omnibus law touches on multiple aspects of the investment climate and the near two-decade old manpower laws, says OCBC economist Wellian Wiranto.
SINGAPORE: The Indonesian parliament has passed a new law that aims to boost employment prospects in the country.
The Jobs Creation law, passed on Oct 5, is a product of an “omnibus” bill that seeks to be a catch-all legislation that revises a multitude of existing laws and regulations concerning employment and investment.
Indeed, the considerable heft of the new legislation, at hundreds of pages long, is a direct consequence of the fact that it is amending as many as 79 laws with more than 1,200 clauses in one fell swoop.
While the omnibus law touches on multiple aspects of the investment climate, a key area to focus on – and a lightning rod for protesters in the streets of Jakarta and elsewhere since then – is the host of revisions to the 2003 Manpower Law.
SEVERANCE PAY REDUCED
Among other things, the previous law contains provisions for severance payment that may be deemed over-generous by would-be foreign investors.
Going by World Bank’s numbers, only Sierra Leone and Sri Lanka offer workers higher severance payments among the 135 countries it surveyed.
Under the new law, however, the maximum severance payment will be reduced from 32 months of pay to a total of 25 months, with 19 months paid by the companies and the remaining six months of wages paid out of a new unemployment insurance scheme funded by the government, known as the JKP.
While the cutback would appear significant, it is worth noting that the new severance payment remains quite high by regional standards.
Vietnam, which has been increasingly seen as the leader in attracting FDI within the region, stipulates severance payment of half a month of pay for every year of service.
Moreover, the previous law might not have offered as strong a legal basis for workers as assumed, in part because it had been so onerous.
By the government’s own admission, only 7 per cent of firms practiced the payment of severance as stipulated by the law.
Of course, there is no guarantee that a lower, less onerous payment amount now would improve the compliance of the new law since 19 months of salary to be paid out by employers remains costly by many standards.
Hence, the government will probably have to do more in terms of regulatory enforcement to win the trust of workers for the new scheme, even if its own direct participation in the severance payment through the JKP scheme should offer it better visibility.
Overall, at least the new law has allowed Indonesia to narrow the gap with its regional competitors in the amount of severance payments, allowing it to be more competitive in attracting FDI than before.
As the largest country in Southeast Asia whereby about half of its 270 million population are under the age of 30, demographics should have been its biggest draw.
For too long, however, the rigid labour legislation has not allowed it to maximise its benefits from this demographic dividend.
This new law – if properly enforced to maximise its stipulated protection for workers – should go some way in helping Indonesia unlock that demographic potential.
TIME TO SLIM DOWN
Another key aspect of the omnibus law is to provide a legal umbrella for the removal of the multiple layers of regulation at various levels of government that impede investment.
In a speech earlier this year, President Joko Widodo (Jokowi) warned that Indonesia is suffering from “hyper-regulation” or “regulation obesity”.
The new law offers a potential slimming pill. It stipulates that the central government has the authority to strike down any municipal regulation that runs counter to the higher laws and regulations, with requisite penalties - including the withholding of regional transfer funds from the central government.
For good measure, the new law also states that the local governments would have to offer a “one-stop-shop” streamlined investment application process, utilising the same electronic system offered at the central government level.
If the rules are not followed despite repeated warnings, the central government has the recourse to take over the administration of the investment approval process eventually.
While it will take some time for the overarching umbrella law to trickle down and change things on the ground – given the multitude of existing overlapping rules and regulations across Indonesia’s 34 provinces and 514 regencies and cities – it would mark the most serious attempt at rectifying some of the excesses of power devolution to the regional governments, since the end of former president Suharto’s era in 1998.
NOT SO NEGATIVE ERA
Elsewhere, the omnibus law also tries to boost investments by adopting a significant reduction in the so-called Negative Investment List (DNI), which detail industries that FDI is not allowed into.
It will now be reduced to just six broad sectors. Casinos, narcotics, chemical weapons manufacturing, for instance, would remain understandably off-limits.
This is a considerable reduction from a list of over 300 subsectors before, with industries such as alcoholic drinks production, land transport terminal, flight navigation services, as well as some tourism services being made open to foreign investors now.
Indeed, having narrowed the downbeat-sounding negative investment list, the government will also issue a new positive investment list that provides extra incentives to encourage the development of high-tech, digital and labour-intensive sectors.
Meanwhile, with an eye on boosting the flagging property sector in Indonesia, foreigners are now allowed to own apartment units.
Previously, what foreigners had to to obtain a right of use, available for an initial stretch of a 30-years lease and extendable for a further 20 years thereafter.
Even as the current pandemic-ridden environment would limit the impact of this foreign ownership reform, it could be helpful in rejuvenating hard-hit tourist haunts such as Bali, in terms of retirement homes potential, for example, down the road.
More broadly, the omnibus law marks an attempt to boost investment overall and not just FDI per se, by formalising the reduction of the country’s corporate tax.
Instead of the 22 per cent currently, the corporate tax rate will be reduced to 20 per cent by 2023 with larger “discounts” for listed firms. To incentivise re-investment activities, dividend taxes will be scrapped if firms put their earnings back to work in new investments within Indonesia.
These changes could help boost investments, including from its large and cash-rich family-owned corporations who will be well-resourced to take advantage of weak market conditions now by investing in new projects and infrastructure.
Market reaction to the omnibus law passage has been largely positive thus far, but going forward, its optimism might be relatively curbed and there is good reason for it.
For one, there is the realisation that, although these new laws are a positive catalyst to investment activities, the measures will take time to implement.
Furthermore, it comes at a time when global FDI flows might be more impeded given the recent global economic slowdown and lingering uncertainties, even as the structural trend of factories relocating out of China due to cost and geopolitical considerations are positive developments for Indonesia.
There is also the backlash from Indonesians on the streets of Jakarta and other parts of Indonesia to contend with. While there remains hope that the demonstrations by labour unions and students have been largely peaceful, any lurch towards violence might mar that assumption.
Moreover, the potential for a judicial review of the new laws by the Constitutional Court could throw a spanner in the works, as well, with a number of labour and non-governmental organisations voicing their intention to do so, in a last ditch attempt to stop the omnibus law’s implementation.
Their concerns are that workers’ rights are being undermined by these new laws, downplaying the job creation opportunities they bring.
Indeed, the very nature of the omnibus law’s legal foundation – through which multiple existing legislations are revised by one new legislation – might well become the point of contention.
Hence, as much as the market would likely remain optimistic about the survival of the omnibus law and the positive medium-term impact on the economy, there are potentially some speedbumps to look out for.
Wellian Wiranto is an Economist at OCBC Bank.