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SINGAPORE: The Indonesian parliament passed a new law that aims to boost employment prospects in the country.
The job creation law, passed on October 5, is a product of a “blanket” bill that seeks to be blanket legislation that revises a multitude of existing employment and investment laws and regulations.
In fact, the considerable weight of the new legislation, hundreds of pages long, is a direct consequence of the fact that it is amending up to 79 laws with more than 1,200 clauses in one go.
While the omnibus law touches on multiple aspects of the investment climate, a key area to focus on, and a lightning rod for protesters on the streets of Jakarta and elsewhere since then, is the series of revisions to the Mano de Work of 2003.
REDUCED SEVERANCE PAYMENT
Among other things, the above law contains provisions for the payment of compensation that potential foreign investors may consider too generous.
According to World Bank figures, only Sierra Leone and Sri Lanka offer workers the highest severance pay among the 135 countries surveyed.
However, under the new law, the maximum severance pay 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 salary paid under a new insurance plan. of unemployment funded by the government, known as the JKP.
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While the cut would appear significant, it is worth noting that the new severance payment is still quite high by regional standards.
Vietnam, increasingly seen as the leader in attracting FDI within the region, stipulates a severance pay of half a month’s pay for each year of service.
Furthermore, the previous law might not have provided as solid a legal basis for workers as was supposed, in part because it had been so burdensome.
According to the government itself, only 7 per cent of the companies practiced the payment of compensation as stipulated by law.
A protester holds an Indonesian flag during a protest against the government’s labor reforms in a controversial job creation law in Jakarta on October 8, 2020 (Photo: Reuters / Willy Kurniawan).
Of course, there is no guarantee that a lower, less burdensome pay amount will now improve compliance with the new law, as 19 months of wages that employers must pay are still expensive by many standards.
Therefore, the government will probably have to do more in terms of regulatory compliance to gain workers’ trust for the new scheme, even if its own direct involvement in severance payments through the JKP scheme should give it better visibility.
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In general, at least the new law has allowed Indonesia to reduce the gap with its regional competitors in the amount of compensation, allowing it to be more competitive than before in attracting FDI.
As the largest country in Southeast Asia, where roughly half of its 270 million people are under the age of 30, demographics should have been its biggest draw.
However, for too long, rigid labor laws have not allowed it to maximize the benefits of this demographic dividend.
This new law, if properly applied to maximize the stipulated protection for workers, should go some way to helping Indonesia unlock that demographic potential.
Time to lose weight
Another key aspect of the omnibus law is to provide a legal umbrella for the elimination of the multiple levels of regulation at various levels of government that impede investment.
In a speech earlier this year, President Joko Widodo (Jokowi) warned that Indonesia suffers from “overregulation” or “regulatory obesity.”
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The new law offers a potential weight loss pill. It stipulates that the central government has the authority to repeal any municipal regulation that contravenes higher laws and regulations, with the necessary sanctions, including the withholding of regional transfer funds from the central government.
To a large extent, the new law also states that local governments would have to offer a simplified “one-stop-shop” investment application process, using the same electronic system offered at the central government level.
Indonesian President Joko Widodo gestures during an interview with Reuters in Jakarta on July 3, 2017 (File Photo: Reuters / Beawiharta).
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 general blanket law to filter through and change things on the ground, given the multitude of overlapping rules and regulations in Indonesia’s 34 provinces and 514 regencies and cities, it would be the most serious attempt to rectify some. of the excesses of the devolution of power to regional governments, since the end of the era of former President Suharto in 1998.
IT WAS NOT SO NEGATIVE
On the other hand, the omnibus law also tries to boost investments by adopting a significant reduction in the so-called Negative Investment List (DNI), which details the industries in which FDI is not allowed.
Now it will be narrowed down to just six broad sectors. Casinos, narcotics, chemical weapons manufacturing, for example, would remain understandably banned.
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This is a considerable reduction from a list of more than 300 subsectors before, with industries such as the production of alcoholic beverages, land transportation terminals, air navigation services, as well as some tourism services now open to foreign investors.
In fact, having narrowed down the pessimistic sounding list of negative investments, the government will also issue a new positive investment list that provides additional incentives to encourage the development of high-tech, digital, and labor-intensive sectors.
Meanwhile, with a view to boosting Indonesia’s ailing real estate sector, foreigners are now allowed to own apartment units.
Previously, foreigners had to obtain a right of use, available for an initial 30-year lease period and extendable for another 20 years thereafter.
Riot police officers are seen during a protest against the government’s labor reforms in the “job creation” bill in Jakarta, Indonesia on October 8, 2020. REUTERS / Ajeng Dinar Ulfiana
Even if the current pandemic-plagued environment would limit the impact of this foreign-owned reform, it could be helpful in rejuvenating worst-hit tourist spots like Bali, in terms of retirement home potential, for example, in the future.
More generally, the omnibus law marks an attempt to boost investment in general and not just FDI per se, by formalizing the reduction of the country’s corporate tax.
Instead of the current 22 percent, the corporate tax rate will be reduced to 20 percent by 2023 with greater “discounts” for publicly traded companies. To incentivize reinvestment activities, dividend taxes will be eliminated if companies put their earnings back to work on new investments in Indonesia.
These changes could help drive investment, including from its large, cash-rich family corporations that will have the resources to take advantage of weak market conditions now by investing in new projects and infrastructure.
VERY OPTIMIST
Market reaction to the passage of the omnibus law has been largely positive so far, but going forward, their optimism could be relatively dampened and there is good reason for that.
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On the one hand, there is the understanding that although these new laws are a positive catalyst for investment activities, the implementation of the measures will take time.
Furthermore, it comes at a time when global FDI flows could be further hampered 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 they are positive developments for Indonesia.
Indonesia is grappling with weaker prices for key commodities like coal and palm oil as the global economy falters AFP / BAY ISMOYO
There is also the backlash from Indonesians on the streets of Jakarta and other parts of Indonesia to deal with. While there is hope that the demonstrations by the unions and the students were largely peaceful, any turn toward violence could spoil that assumption.
Furthermore, the possibility of a judicial review of the new laws by the Constitutional Court could also be an obstacle, as several labor and non-governmental organizations express their intention to do so, in a last desperate attempt to achieve it. stop the implementation of the omnibus law.
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Their concerns are that workers’ rights are being undermined by these new laws, minimizing the job creation opportunities they provide.
In fact, the very nature of the legal basis of the general law, through which multiple existing laws are revised through new legislation, could well become the point of discussion.
So while the market is likely to remain optimistic about the survival of the omnibus law and the positive medium-term impact on the economy, there may be some sharp swings to watch out for.
Wellian Wiranto is an economist at OCBC Bank.
