Can Indonesia’s Omnibus Law drive its Covid-19 economic recovery?

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Indonesia’s Omnibus Bill on Job Creation became law in October, with the government set to complete its implementation by the end of the year. While it has proved controversial in some quarters, many business leaders have welcomed this development, not least for its potential to help the economy offset the effects of the coronavirus pandemic.

The new law is aimed at reducing the red tape that characterises Indonesia’s current business and labour laws, which many see as unnecessarily complex.

According to the government, the new legislation will play a key role in boosting an economy that has been hit hard by the Covid-19 pandemic.

“The Indonesian legal system is one of the major weak points for the country's economic development. Laws overlap, contradict each other and are not enforced, plus the costs of justice are particularly high,” Doddy Tjahjadi, managing director of PTI Architects, told OBG.

Designed to cut through this byzantine system, the law constitutes an all-in-one, 821-page document that amends nearly 80 existing laws and 1244 articles. It covers a range of issues related to doing business in Indonesia, including employment law, government bureaucracy and environmental permits.

It is hoped that the law will increase the ease of doing business and stimulate economic growth.

While in recent years Indonesia has improved its score in the World Bank’s ease of doing business index, it still came in at 73 out of 190 countries in 2020, several places behind neighbouring Vietnam and far below the government’s target of 40th place. At the time, the bank highlighted the country’s rigid employment regulations as a factor that limits growth.

In particular, it is thought that the law will help to increase foreign investment in the country, with the streamlined restrictions providing more security for potential investors.

"The new Omnibus Law is complex and it allows for more flexibility in foreign ownership of real estate, which is very exciting for the sector,” Karolina Astaman, president director of the Indonesian branch of Singapore-based urban development firm Surbana Jurong, told OBG. “The key benefits are easier access to manpower, taxation of foreign inviduals, foreign direct investment and building permit regulations. The new conditions will certainly boost investor confidence.”

Supporters say that the need for broad-based reform has only intensified in light of Covid-19, with the IMF estimating that the economy will contract by 1.5% this year, albeit with an anticipated recovery to 6.1% growth in 2021.

Some estimates suggest that the law could provide jobs for 6m people who have been left unemployed by the pandemic.

Impact on employment

One of the landmark features of the labour-focused law is the abolition of the sectoral minimum wage, which will be replaced by minimums established by regional governors.

It will also reduce severance pay from the equivalent of 32 months’ salary to 25 months, with a 19:6 provision ratio between the employer and the government.

Meanwhile, the maximum allowable limit of overtime will be bumped to four hours a day and 18 hours a week, while businesses will only be obliged to give workers one free day a week, rather than two as stipulated under current legislation.

These and other measures are intended to increase flexibility and agility on the part of companies, as well as open the door to labour-intensive industry. It is thought that multinationals currently hesitate setting up in the country due to fears that they would be unable to increase and reduce the workforce as necessary.

Textile manufacturers, for example, have tended to opt for other South-east Asian countries, such as Vietnam, that have more flexible labour laws.

Furthermore, restrictions on outsourcing have been reduced and the number of jobs in which expats may work has been increased.

Criticism and support

While the new law has been welcomed by some, it had also sparked protests across the country.

Some critics fear that it will boost companies’ profits at the cost of undermining workers’ rights.

Others have argued that the law relaxes environmental standards. For example, businesses now only need to file an environmental impact analysis if their projects are considered "high risk".

It also includes various incentives for the coal mining industry, including an exemption from paying royalties if coal companies develop downstream facilities such as power plants.

Such concerns aside, however, the law has generally been welcomed by the business community.

“The omnibus law is good for investments and will have a positive impact on the business environment,” Nicolas Kesuma, marketing director of manufacturing firm Alsun Suksesindo, told OBG.

On a similar note, Tjahjadi told OBG that the law “has been positively received by the real estate and construction sector because it provides simplicity and clarity to the industrial system”.

Thus, while the Omnibus Law has proven controversial – like all far-reaching economic reforms – there is confidence that it will help Indonesia’s economy recover from Covid-19.

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