A Game Changer in the Indonesian Investment Realm

Rahmat Soemadipradja

Soemadipradja & Taher, Jakarta

rahmat_s@soemath.com

Aurora Aldwita Mariel

Soemadipradja & Taher, Jakarta

aurora_aldwita@soemath.com

Introduction

To boost the domestic economy and bolster investment, the Indonesian government has gradually introduced new measures that support ease of doing business. The effort started in 2018 by the introduction of the online single submission system, an integrated electronic-based system to streamline business licensing.

In 2020, the government made a breakthrough by the promulgation of the greatly anticipated Law No 11 of 2020 on Job Creation, known as the Omnibus Law. The law deregulates, streamlines and simplifies a large number of overlapping regulations with the objective of job creation and improving the foreign and domestic investment ecosystem.

Investment into Indonesia – promising but challenging

Indonesia has two and a half to three million people every year who reach working age. To address the issue of workforce absorption, the government wishes to create jobs through attracting more investment in and into the country (among other things). One of the hurdles to immediately address is licensing bureaucracy. According to the latest World Bank’s Ease of Doing Business Index, Indonesia came in at 73 out of 190 countries.[1] With major reforms, hopes are high that Indonesia can promote investment and make Indonesia more competitive in the global economy.

Favourable investment climate

Establishing a business-friendly ecosystem is key to accelerating economic growth and thus creating jobs. At the regulatory level, the Omnibus Law, with its amended 76 laws and revocation of two laws, shows great promise in improving the ease of doing business in Indonesia, as indicated in these major points of change:

Easing foreign investment restrictions

Many major business sectors can now be 100 per cent foreign-owned. The number of business sectors that are subject to certain conditions has significantly decreased from 350 to 46. Closed business sectors are reduced from 20 to six sectors. Note that 245 business sectors are given priority that would allow the investor to receive fiscal and non-fiscal incentives.

Simplification of licensing process

A revamp of the licensing regime to risk-based licensing (four risk levels, ranging from low to high, each of which is subject to different licensing requirements) reduces the complexity of licensing requirements under the previous regulatory framework. Further, the Omnibus law eliminates the need for several previously required licenses that were cumbersome to obtain (such as a nuisance permit, location permit and company registration certificate).

Enhancement of the business environment in special economic zones (KEK) and free trade port zones (KPBPB)

In addition to the facilities and incentives which can be enjoyed by investors in KEK and KPBPB, through regulatory reform, the government is enhancing various facilities such as ease of land acquisition and expansion of permitted businesses in a KEK to now include the health and education sectors. There are 15 KEK and five KPBPB in Indonesia.

In addition to regulatory reform, another encouraging development is the advent of numerous integrated industrial estates as an investment relocation destination for foreign investors. These industrial estates offer the investor integrated infrastructure and facilities, including easy and cost-effective access to electricity, water, gas, roads and major transportation routes. Companies located in the industrial estates will also be entitled to tax incentives and certain local government incentives (in some regions).

Conclusion

Although these changes send a hopeful message to investors, the hard reality of the ongoing pandemic makes any realisation of a vastly improved investment climate challenging. Attempting to adjust to new ways of administering new procedures during current travel restrictions is no easy matter. However the government remains optimistic that this can be achieved, so that by the time the travel restrictions are withdrawn, the new investment infrastructure will have already been operational and tested in time to process incoming investment under the new rules.