The passing of the Omnibus Law is the landmark legislative accomplishment of the Widodo administration and establishes the foundation for delivering on the president’s vision of Indonesia as an upper middle-income country by 2045.
1. What is the objective of the Omnibus Law?
The government intends the Omnibus Law to bolster investment and create jobs by reforming licensing, investment and labour laws.
On licensing, the Law introduces a ‘risk-based’ approach to licensing and reforms permits that is related to business location, environment and construction. Risks are to be assessed in relation to safety, health, environment, use and development of resources, and volatility.
On investment, the Law proposes that all business fields are open to investment, except for six sectors or activities which can only be undertaken by the central government. The six sectors closed to investment are: 1) all forms of gambling / casinos; 2) narcotics cultivation and production; 3) chemical weapons manufacturing; 4) ozone depleting substances manufacturing; 5) catching fish listed in the Convention on International Trade in Endangered Species of Wild Fauna and Flora; and 6) collection of coral from nature.
On labour, the Law delivers significant changes to ease of hiring and dismissal. The Law removes double employer-paid severance obligations, enables employers to carry out layoffs with greater certainty, while protecting workers through contract clarity and introducing a new unemployment benefit.
Measures such as establishment of a sovereign wealth fund, Lembaga Pengelola Investasi, provide investors with a new vehicle to invest in Indonesia’s development.
These measures combine to boost the competitiveness of the Indonesian economy and support the aspiration for strong and long-term economic growth.
2. When does the Omnibus Law come into effect?
The Indonesian House of Representatives passed the Omnibus Law on October 5, following eight months of deliberation. On November 2, President Joko Widodo signed the Omnibus Bill into effect. The Omnibus Law amends 78 laws and mandates the issuance of 44 new government regulations. As of November 20, the government had prepared drafts for 30 of these implementing regulations and drafts for the remaining 14 are being finalized.
3. Why did the Jokowi administration decide to do a broad Omnibus Law rather than several more targeted laws?
It is a question of speed. The Omnibus Law amends 78 laws; to address these one-by-one would have taken several years. That was time the Widodo administration didn’t have. President Widodo needed to move quickly in improving Indonesia’s competitiveness. The Omnibus Law was a path to immediate and significant improvement of the investment climate and labor market flexibility.
4. What does the change from a “negative list” to a “positive list” mean for foreign investment in Indonesia?
The Omnibus Law amends the business sectors open to investment under Law No. 25 of 2007 (Investment Law). Since 2007, Indonesia has had a Negative Investment List that limits foreign investment in specified business sectors. The Omnibus Law does away with the Negative Investment List, and says that all business lines are open for foreign investment except for those that are stipulated otherwise or "activities that are reserved only for the Central Government." The Omnibus Law lists six sectors which will continue to be closed for foreign investment, namely production of weapons, ammunition, explosive devices and war equipment, and business sectors explicitly closed or illegal by prevailing laws (e.g., narcotics). A new or revised regulation is needed to replace Presidential Regulation 44/2016 which is the current negative investment list.
5. Will the Omnibus Law bring increased trade with neighboring countries?
The Omnibus Law is not focused on trade but because it is focused on boosting foreign investment and improving the ease of doing business, it is expected to have a positive impact on trade. Opening up for more foreign investment, simplifying licensing processes, streamlining regulations and removing red tape in the bureaucracy, are all factors that should help Indonesia’s trading relationships.
6. Global investors have raised concerns that the Omnibus Law poses a new risk for Indonesia’s tropical forests. Does the Omnibus Law remove safeguards that can lead to environmental damage such as deforestation?
The government of Indonesia has for a long time demonstrated a strong commitment to sustainable development, and under the leadership of President Joko Widodo Indonesia has consistently shown a positive trend in terms of reducing deforestation and forest-degradation.
Under the Paris Agreement, Indonesia committed to reduce its carbon emissions by 29% by 2030, and by 41% with international assistance. This pledge is supported by REDD+, a result-based payment mechanism where Indonesia is rewarded for verified reductions in deforestation and forest degradation. Under President Widodo, Indonesia has also put in place a permanent moratorium on the development of primary forest and peatland, a moratorium on expansion of palm oil plantations in areas with good forest cover, and successfully implemented a number of measures to curb forest- and land-fires.
It’s against this background, the changes to the Environmental and Impact Assessment (AMDAL) in the Omnibus Law should be understood. By integrating the AMDAL with the business licensing, the process is streamlined without losing any regulatory oversight or environmental compliance. In fact, by combing the two the Indonesian government can more easily sanction violators.
7. Does the Omnibus Law change Indonesia’s commitment to the Paris Climate Agreement?
Under the Paris Agreement, Indonesia has committed to reduce its carbon emissions by 29% by 2030, and by 41% with international assistance. This commitment remains unchanged and is not impacted by the passing of the Omnibus Law. As many of you know, Indonesia has for a long time been at the forefront among emerging market economies in combatting climate change, and is today well under way to reach the CO2 emissions reduction targets it has set.
A majority of Indonesia’s CO2 emissions is linked to deforestation, so this is where Indonesia has focused its effort. Over the past decade, Indonesia has made great strides in reducing deforestation. Under President Joko Widodo all the hard work, and the focus on sustainable forestry management has really gained momentum. The international community has also recognized Indonesia’s achievement. In the last year, Indonesia has received more than US$150 million under the United Nation’s REDD+ program, a result-based payment mechanism that significant and measurable reductions in deforestation.
8. The Omnibus Law changes the Spatial Planning Law by removing the need for a spatial use permit. Why was this change necessary?
The changes to the Spatial Planning Law is a good example of the streamlining and simplification the Omnibus Law set out to accomplish. The Omnibus Law requires regional governments to issue a digital and standardized version of the regional spatial plan, to make this accessible to the public, and integrate it with a central government run online electronic licensing system. Going forward, spatial planning applications will happen via one online electronic licensing system. It will bringing increased transparency and uniformity to a system that in the past has been difficult to navigate due to regional differences in the spatial planning documentation as well as the application process.
9. The Omnibus Law is said to reduce workers rights in Indonesia. Why were the changes to the Manpower Law necessary?
The Omnibus Law looks establishes a stronger balance between the need to attract investment, create better quality jobs and protecting workers legitimate rights and conditions.
The Law delivers significant changes to the ease of hiring and dismissal including by removing the double employer-paid severance obligations and enabling employers to carry out layoffs with greater certainty. At the same time, it protects all workers through contract clarity and by introducing a new unemployment benefit. These measures will create an economy that works for all Indonesians including by encouraging informal activities to become formal and thus secure protection for worker rights.
10. Does the Omnibus Law impact the government’s infrastructure programs?
Since it took office in 2014, infrastructure development has been a priority of the Widodo administration. Infrastructure is the foundation for a growing and resilient economy, and the opening, streamlining and simplification of the Indonesian economy the Omnibus Law brings, should help drive more investment towards infrastructure. The Omnibus Law establishes a sovereign wealth fund that aims to attract foreign capital to invest in Indonesian infrastructure projects.