October 6, 2020

Asia

INDONESIA: Parliament approves jobs bill early, but verdict will have to wait

BY Bob Herrera-Lim

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To head off protests planned for this week by the labor unions, the lower house of parliament (DPR) on Monday evening approved the omnibus bill on job creation; it will now go to President Joko Widodo for his signature. Some protests were reported in different parts of the country Tuesday and these may continue for the next two days, but they are not expected to reach the scale that would cause the administration to reconsider the passage of the law. The bill received the support of political parties representing 81% of parliament.

The full text of the final legislation has not yet been released, and much of the media coverage has been on the controversial provisions on the environment and the watering down of labor law reforms. Nonetheless, the bill will initially be seen as reducing the regulatory burden on investors and businesses — even if not to the extent emphasized by the administration.

Widodo has made the bill the centerpiece of his reform agenda for his second term, especially since the government wants Indonesia to compete with Vietnam and Thailand as an alternative for “China + 1” investments. The administration is now also highlighting it as one way of helping the economy recover from the downturn spurred by the pandemic. With business sentiment uncertain, however, and the need to still issue some regulations regarding its implementation, the law’s actual effects on FDI flows are likely to be gradual.

Of its 15 chapters, seven deal with streamlining and consolidating rules for investors and companies, as well as easing foreign ownership rules. The law will also gradually reduce the corporate income tax rate to 20% by 2023 and exempt some dividends from taxation. It will also increase the centralization of government powers over regulation and licensing, to address common concerns about the fragmented system now in place between Jakarta and regions.

Business groups and parliamentarians have highlighted how specific parts of the bill would encourage the growth of small and medium enterprises, which account for the bulk of employment in Indonesia, by, for example, reducing the membership requirement for cooperatives and mandating designated spaces for SME products at public transport terminals.

Two changes seem to be significant in this regard. The first is the relaxation of the environmental permitting rules found in Law 32/2009 on Environmental Protection and Management for those industries considered to be low risk. The new law removes the procedures for community consultation contained in Law 32 before an environmental impact statement (amdal) can be issued. There is now a more general statement that only those directly affected need to be consulted, and community involvement will instead be regulated through a government order. In addition, the public’s ability to appeal an amdal has been removed. This may create some reputational risks for firms, because Indonesia’s track record on environmental management is uneven and compliance with the reduced rules, while legally defensible, would be insufficient to insulate investors from public scrutiny.

The second change, which is arguably the most awaited part of the law, are the labor reforms. It has lowered the maximum severance pay requirement, from 32 months to 19 months (lower than the 23 we wrote in a note last week), although the state will add another six months. The law also removes the time restrictions on the use of contract workers.