What investors need to know about Indonesia’s Omnibus Law: Katadata Insight Centre Research Director and senior public policy specialist Dr Mulya Amri breaks it down

Katadata Insight Centre Research Director and Jakarta Property Institute Program Director Dr Mulya Amri is an Indonesia-based senior public policy and urban development specialist with over 20 years of experience working with government officials, businesses, and civil society groups through policy analysis, regional economic development, and city planning projects in Indonesia, Singapore, Brunei, the Philippines, China, and the U.S.

By SGN | 12 Oct 2020

Dr Mulya Amri draws on 20 years of experience working with government officials, businesses and civil society groups through everything from policy analysis to regional economic development to shed light on the Omnibus law and its implications on doing business in Indonesia.

Mulya is the President of the NUS LKYSPP Indonesia Alumni Chapter, and a member of the Singapore Global Network. Mulya first shared insights about business opportunities in Indonesia at the August’s edition of Coffee Connections.

First things first: what is the Omnibus law?

The Omnibus law aims to streamline Indonesia’s complex regulatory environment by unifying the many provisions in various industry sectors into one law. The draft bill was submitted to Indonesia’s parliament in February 2020, has wide-ranging implications for companies looking to operate or invest in Indonesia and has just been passed on 5 Oct 2020.

The law will ease restrictions in 11 critical areas, including labour law, capital investment, business licensing, corporate tax and land acquisition. These measures are intended to make Indonesia a more attractive destination for foreign businesses and investors.

To understand why this law is so significant, we must first understand Indonesia’s current regulatory and business environment.

Indonesia’s regulatory environment:

The World Bank rates Indonesia’s ease of doing business at 73, below Vietnam (70th), Thailand (21st), Malaysia (12th)and Singapore (2nd). President Widodo has his sights set on Indonesia achieving an ambitious rank of 40 in 2021.

As of 2020, the World Bank ranks Indonesia 73 among 190 economies globally in terms of ease of doing business (Ease of Doing Business Rankings, World Bank 2020). In the report, the World Bank highlighted Indonesia’s rigid employment regulations and minimum wage regulations as factors contributing to its ranking.

“Strict employment protection legislation shapes firms’ incentives to enter and exit the economy, which in turn has implications for job creation and economic growth.”

Aside from this, the complex regulatory network is difficult for businessmen and investors to navigate.

Indonesia used to be made of many kingdoms before they were colonised by the Dutch. Under this colonisation, and during the early periods of independence, the kingdoms were supressed and lost a lot of autonomy. After Indonesia adopted decentralization in the early 2000s, this autonomy has been gradually returned to provincial and local governments, with the central government moving away from power consolidation.

Currently, only six strategic sectors are firmly run by the government; even economic development is the domain of the local government, since it’s location determined.

Under decentralisation, licenses were distributed to the local and provincial governments. This included permits such as those related to natural resources such as mining permits. It became very confusing for investors because it wasn’t clear where these permits were to be obtained. You had to get different permits from different levels of government depending on your sector. Furthermore, laws and regulations keep changing; for example, the mining permits were eventually revoked from local government and given to provincial government.

What makes the law so controversial?

The Omnibus law amends 73 laws and is said to affect every Indonesian as it encompasses everything from regional government powers to Halal certification.

Indonesia’s economic growth reached a three-year low of 4.97% in 2019. The Indonesian Government is banking on the Omnibus bill to spur foreign investment and economic growth.

Businesses welcome the bill because it streamlines businesses licenses. This opens Indonesia up to foreign investment and creates a more flexible labour market, which is welcome by businesses since economic growth had reached a three-year low of 4.97% in 2019.

However, the extensive overhauls have invited strong protests from labour groups and environmentalists, among others. Labour groups protest the bill over potential reductions in their rights, remuneration and job security. Others are also unconvinced that the law would attract investors, arguing the labour strikes it’ll trigger and unaddressed problems in governance would keep investors at bay.

“The government makes the assumption that Indonesia’s biggest hurdle in terms of our competitiveness is labour costs. But there are issues like rampant corruption, complicated bureaucracy and high logistics costs which the government needs to address.”

On the other hand, environmentalists are concerned that loosening the ropes on building permit requirements and environment-related restrictions would fuel unsustainable growth. This is especially so because a large part of Indonesia’s GDP is driven by businesses related to natural resources, which are land-intensive and punishing on forests.

They each have their own standpoint, and it’s a matter of the government reaching a good middle ground. Progress economically but deal with these concerns in a sustainable way.

Moving on to the softer aspects of working in Indonesia – could you share some unique characteristics of doing business in Indonesia that perhaps aren’t intuitive to foreigners?

In developed countries and countries more ‘Western’ in nature, people are used to more direct processes and defined ways of working. They may find working in Indonesia to be confusing as a result.

Take relationship building with potential clients for example. In more ‘direct’ business cultures such as Singapore, clients are straightforward. They’ll give you a yes or no, so you know whether you should allocate resources or not to nurturing this lead. This is much less defined in Indonesia.

Indonesians value chemistry and invest time into relationship-building before deciding if potential business partners are a good fit. This often involves multiple meetings, meals and other social gatherings.

In Indonesia, a lot of emphasis is placed on ‘feel’. Clients value chemistry and whether you’re a right fit for them. To nurture a relationship and find out if you’re a right fit, you’ll need to go to more lunches or meetings. This is something that’s difficult to grasp for Western-based employers. Is this lead on? Why meet them again if they haven’t confirmed their interest? That’s hard for both the individual working in Indonesia and their client to say, because the client is still deciding.

“Indonesian clients tend to take their time and they value face time too. This translates to a lot of time and attention in cultivating relationships, so this phase can stretch longer in developing relationships in Indonesia.”

Indonesians are also reluctant to say ‘no’. They prefer to give you indirect hints, such as not answering your emails or calls. Even if they do this, it may not be a definite no. They may be going out of their way to help, but they are hesitant to overpromise and would rather respond after because they don’t like to underdeliver on their promise.

Any closing remarks for those seeking opportunities in Indonesia?

The Omnibus law is unprecedented and a lot of good stands to come out of it. However, because it’s so all-encompassing and there are so many stakeholders to address, the jury remains out on whether it will truly reform the business environment.

Regardless, it is a positive step towards building more certainty to doing business in Indonesia. It’s a matter of striking a balance between streamlining regulations and addressing the concerns of stakeholders, which the government would have to grapple with. It’s not necessarily a zero-sum game.

Dr Mulya recently moderated a panel discussion for the Sustainability Action for the Future Economy (SAFE) where Krakakoa Founder and CEO Sabrina Mustopo discussed sustainable farming and productivity in the cocoa farming industry. For the full discussion, click here and start playing at the 20:00 mark.

Take the environmentalists’ concerns for example. We have data that shows that companies can incorporate sustainable practices without compromising on profit. Krakakoa is an Indonesian company that produces environmentally-friendly, ethical and award-winning chocolate that sells at a higher price. The cost of protecting the environment evens out with high quality and value products.

With stronger partnerships between the private and public sector, we can work towards more of these positive outcomes with companies across industries. The Omnibus Law is a positive step in the right direction for streamlining Indonesia’s regulatory landscape, and we’ll come to see the outcomes more clearly as the law starts to take effect.

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About Dr Mulya Amri

He is a Research Director at Katadata Insight Centre and a Program Director at the Jakarta Property Institute, based in Indonesia. He is a senior public policy and urban development specialist who has co-written 19 books and book chapters, and numerous peer-reviewed journal articles on subnational economic development, regional competitiveness, and urban governance.

He has 20 years of experience working with government officials, businesses, and civil society groups through policy analysis, regional economic development, and city planning projects in Indonesia, Singapore, Brunei, the Philippines, China, and the U.S.

Mulya has a Ph.D. in public policy from the National University of Singapore, a Master’s in urban planning from the University of California, Los Angeles, and a bachelor’s degree from Institut Teknologi Bandung, Indonesia.

Connect with Mulya here.

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