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04/12/2019

Reform or Die! Indonesia’s Business-friendly President Widodo Reaffirms Economic Transformation Agenda

 

Second Term, Same Challenges

 

President Joko Widodo, a former businessman and entrepreneur who was officially inaugurated for a second term as Indonesia’s president on 20 October 2019, has strongly reaffirmed his commitment to the economic transformation process that he launched upon his election as president for the first time back in 2014.

 

The pro-business president’s latest commitment appears to have been sparked by Indonesia’s stagnant ranking in the recently published 2020 iteration of the World Bank’s Ease of Doing Business (EODB) Index,[1] which remained unchanged from 2019 at 73rd (down from 72nd in 2018), despite a raft of reforms that were instituted during the president’s first term. The country’s 2020 ranking also falls far short of the Government’s earlier target of securing at least the 40th spot in the EODB Index.

 

Among major Southeast Asia economies, Indonesia is now ranked behind Vietnam (70th, down from 69th in 2019), Thailand (21st, up from 27th in 2019), Malaysia (12th, up from 15th in 2019) and Singapore (2nd, same as 2019).

 

Indonesia’s 2020 EODB ranking shows that the various economic reforms instituted by President Widodo during his first term have been insufficient to leapfrog the country ahead of its main regional competitors, given that they too are diligently engaged in ongoing economic reform processes.

 

Since the publication of the 2020 EODB Report, there has been a flood of statements and comments by the President, ministers and officials on the need for further reforms to improve the country’s EODB ranking. As regards the precise nature of these reforms, it is often difficult to gauge what precisely is in the pipeline, given the sheer volume of background noise in the media. Indeed, a number of senior officials whom we talked to also seem rather confused as to the precise extent or scope of the likely reforms.  What is clear, however, is that the following initiatives are currently being pursued:

 

  1. Enactment of Omnibus Law to Eliminate Statutory Obstacles to Investment

 

The idea of enacting an omnibus law[2] (or even a number of omnibus laws focused on different sectors) to eliminate statutory obstacles to investment and job creation was first mooted by President Widodo in his inauguration speech on October 20, during which he also mentioned that at least 74 statutes would be need to amended.

 

Then, speaking on November 29, Law and Human Rights Minister Yasonna Laoly said that the draft omnibus law(s) would be ready to be submitted to the House of Representatives (DPR) by the end of December 2019 or beginning of January 2020.

 

From a purely legal perspective, this appears to be an inordinately short space of time for the drafting of what will undoubtedly be highly complex legislation, given that the idea of enacting an omnibus law(s) was raised publicly for the first time only on October 20, unless of course the groundwork for the legislation was quietly being prepared behind the scenes by the previous government.

 

  1. Overhaul of Foreign Direct Investment Regime, including Abolition of Negative Investment List

 

According to Coordinating Minister for the Economy Airlangga Hartarto (as quoted by the media on November 21), the Negative Investment List (Daftar Investasi Negatif / DNI) will be abolished and replaced by a “Positive Investment List” by not later than the end of January 2020. Under the new regime, according to Airlangga, only six sectors will be subject to foreign direct investment (FDI) restrictions (all of which involve either illegal or environmentally damaging products), compared with 20 restricted sectors at the present time. As with the proposed omnibus law(s), the end of January appears to be a rather precipitous target for the completion of such a fundamental overhaul of the existing system (unless preparatory work was undertaken by the previous government).

 

If the DNI is abolished, this will obviously be good for both foreign investors and the Indonesian economy overall. However, before people start reaching for their checkbooks and pens, it needs to be remembered that far-reaching reforms of the DNI have often been announced in the past, only to be thwarted at the last minute by the intervention of vested interests, particularly local business players who have long enjoyed virtually captive markets in protected sectors. In addition, there continues to be quite a high level of antipathy to foreign investment in some sections of Indonesian society that can be traced back to the colonial period, when access to capital was viewed as the preserve of the colonialists, and foreign investors were seen as being interested in nothing more than pillaging the country’s resources.

 

Nevertheless, given the unprecedentedly strong support enjoyed by the Widodo administration in the national legislature, plus a growing awareness of the importance of foreign investment to Indonesia’s future development and prosperity, there appears to be a real chance that the Government will be able to get its way on the DNI this time around.

 

  1. Transfer of Greater Business Licensing Authority to Investment Coordinating Board

 

So as to overcome the obstacles related to licensing that have impeded Indonesia’s further progress up the EODB rankings, the Government has said that it plans to transfer full responsibility for business licensing from the relevant line ministries and state agencies to the Investment Coordinating Board (BKPM).

 

While this makes eminent sense, it is not yet clear whether the authority that will be transferred will extend to financial services, mining, and oil and gas – licensing in these sectors is currently specifically excluded from the BKPM’s Online Single Submission (OSS) System (an internet–based business licensing system), and thus continues to be administered by the Financial Services Authority (OJK) in the case of financial services, and the relevant line ministries / state agencies in the case of mining, and oil and gas.

 

An initial step was recently taken towards transferring greater licensing authority to the BKPM with the issuance of Presidential Instruction No. 7 of 2019 on November 22, the key provisions of which may be summarized as follows:

 

First, the BKPM is instructed to: coordinate measures that need to be taken to improve Indonesia’s EODB ranking; evaluate processes related to business licensing and the granting of investment facilities by ministries / state agencies; and provide recommendations based on such evaluations to the relevant ministers and heads of state agencies.

 

Second, ministers and heads of state agencies are instructed to: identify and review legislative and regulatory provisions that impede business and investment; reduce and simplify licensing procedures and requirements and accelerate the issuance of licenses; act on the recommendations provided by the BKPM; and delegate authority over business licensing and the granting of investment facilities to the BKPM;

 

Third, the BKPM is instructed to formulate norms, standards, procedures and criteria for the administration of business licensing and the granting of investment facilities for those areas of authority that are assigned to it by ministries/state agencies.

 

  1. Tax Reductions and Facilities

 

Separately, Finance Minister Sri Mulyani Indrawati has suggested that the Government is also considering an omnibus law to overhaul the tax system so as to make it more attractive to investors and to boost job creation. She has hinted that the mooted legislation could, among other things, reduce income tax for expatriates working in Indonesia, reduce or even abolish the dividend tax, and further reduce corporate income tax. It is not clear, however, whether the suggested further reductions in corporate income tax are already covered by, or are in addition to, the Government’s previously announced plan to gradually reduce the rate of corporate income tax from 25 percent to 20 percent by the end of 2023.

 

The finance minister also suggested that the omnibus legislation could be used to provide a legal basis for the introduction of a new digital-economy tax, which has been under consideration for some time.

 

The Government recently moved to further boost the tax facilities available to investors with the issuance of Government Regulation No. 78 of 2019 on Income Tax Facilities for Investments in Particular Sectors and/or Particular Regions,[3] which provides tax reductions for certain types of investments, including high-value and export-orientated investments; labor-intensive investments; and investments that involve a high level of local content. Regulation No. 78 of 2019 enters into force on 13 December 2019 (30 days subsequent to its promulgation on 13 November 2019).

 

ABNR Commentary

 

While the Government’s focus on making things easier for business is to be warmly welcomed, care also needs to be taken to ensure that it does not come at the expense of prudence and proper planning. Excessive focus on achieving a “quick fix” by rapidly improving the country’s EODB ranking, whatever the cost, could result in precipitous, unplanned and uncoordinated action by ministries / state agencies as they attempt to outdo each other by setting unduly optimistic reform targets.

 

Lack of proper planning is actually a long-standing and recurring problem in Indonesia, where unrealistic targets are frequently set from on high for projects of all types (including the enactment of legislation). Such haste often results in more problems than it solves. Indeed, it is one of the key reasons for a general lack of coordination and synchronization in Indonesian legislation at all levels, which also helps to partly explain the frequent regulatory changes and U-turns that businesses have to cope with.

 

On a more general note, Indonesia’s score in the EODB’s “enforcing contracts” sub-index[4] continues to be particularly worrisome (49.1 out of 100, compared with, for example, 81.2 out of 100 for the “starting a business” sub-index). In fact, the “enforcing contracts” sub-index has consistently recorded by far the worst score of all the sub-indices for Indonesia over the years. There is little doubt that if the Government really wants to get the country into the top league in EODB terms, then the nettle of root-and-branch legal reform and modernization will need to be firmly grasped. Despite this, little has been done to date.

 

Other issues, such as whether it is just and equitable, or indeed economically beneficial, for the public sector to dominate so many areas of the economy to the detriment of the private sector, barely feature in the public discourse in Indonesia thus far. So, the country clearly still has a long road to travel.

 

Overall, however, there appears little doubt that the Government is very serious about economic reform. The first big test to be faced now will be the reaction of powerful vested interests to the proposed changes to the FDI / DNI regime and whether they will be able to exert sufficient pressure to have the changes watered down? Should the Government get past this hurdle unscathed, then there seems to be a very real possibility that President Widodo’s second term could emerge as one of the most significant eras of economic reform in Indonesia’s modern history, provided that the Government remains faithful to its current agenda, of course.

 

By Giffy Pardede (gpardede@abnrlaw,com) and Adri Dharma (adharma@abnrlaw.com)  

 

 

[1] Doing Business 2020, available at: https://openknowledge.worldbank.org/bitstream/handle/10986/32436/9781464814402.pdf

[2] An “omnibus law” is a single statute that addresses a range of disparate or unrelated issues. The word “omnibus” means “everything” in Latin.

[3] Peraturan Pemerintah No. 78 Tahun 2019 Tentang Fasilitas Pajak Penghasilan Untuk Penanaman Modal di Bidang-bidang Usaha Tertentu dan/atau di Daerah-daerah Tertentu.

[4] A nation’s overall EODB score is aggregated from its scores for the following 10 sub-indices: Starting a business; Dealing with construction permits; Getting electricity; Registering property; Getting credit; Protecting investors: Paying taxes; Trading across borders; Enforcing contracts; and Resolving insolvency.

 

This ABNR News and its contents are intended solely to provide a general overview, for informational purposes, of selected recent developments in Indonesian law. They do not constitute legal advice and should not be relied upon as such. Accordingly, ABNR accepts no liability of any kind in respect of any statement, opinion, view, error, or omission that may be contained in this legal update. In all circumstances, you are strongly advised to consult a licensed Indonesian legal practitioner before taking any action that could adversely affect your rights and obligations under Indonesian law.