Three things investors need to know about Indonesia's new Omnibus Law

In early October, Indonesia’s parliament passed the controversial omnibus bill on job creation (the Omnibus Law), which amends 79 laws and repeals thousands of regulations. The President, Mr. Joko Widodo, signed the Omnibus Law in the first week of November, meaning that it has now come into effect. The Omnibus Law is designed to create jobs and increase foreign investment by overhauling, among other things, the industrial relations regime, the investment framework and environmental safeguards.

The full details and implications of these changes (as well as the many others provided for under the Omnibus Law) will only become clear once implementing regulations are issued – which are due by January 2021 – and certain procedural irregularities involved in the process of the Omnibus Law’s passage through parliament are resolved.

1. A more flexible industrial relations regime

Until now, Indonesia has had one of the world’s most employee-friendly industrial relations regimes. The Omnibus Law retains many of the aspects of this regime, while easing some of its stricter provisions. For instance, under the old regime:

• employers who wished to dismiss permanent employees could only do so in very limited circumstances. The Omnibus Law provides that an employer may, in its employment contracts, set out its own reasons for dismissal (beyond the limited reasons previously permitted);
• there were several categories of severance entitlements, which were required to be doubled in certain dismissal circumstances. The Omnibus Law reduces these entitlements, on an overall basis, by about 13% from previous levels, and no longer contemplates their doubling;
• the length of fixed-term employment contracts was limited to two years in most cases. The Omnibus Law removes this limit; and
• companies were only allowed to outsource “non-core activities” to third parties. This restriction meant that very few activities could be outsourced, without the outsourcing employer running the risk of remaining liable as the employer of the outsourced employee. This restriction has been removed, which may result in a boom in the use of outsourcing arrangements.

2. A more open investment framework

The Omnibus Law contemplates that, in the coming months, the President will issue a regulation to convert the “negative investment list” into a “positive investment list”. The latter will only prohibit domestic and foreign investment in six sectors, while defining three categories of sectors that will be open to such investment, namely:

• prioritised sectors, participants in which will be entitled to certain tax and financial incentives;
• conditionally open sectors, which will include businesses reserved for domestic investment, businesses conditionally open to foreign investment (with such conditions likely to include foreign ownership percentage caps, as is the case under the current negative investment list), and businesses with special licensing regimes; and
• sectors unconditionally or fully open to both foreign and domestic investment.

3. Less strict environmental safeguards

The Omnibus Law modifies a range of environmental safeguards by simplifying permitting processes. For example:

• the involvement of environmental experts and affected communities in environmental impact assessments has been curtailed; and
• the requirement for parliamentary approval for releasing conservation forests for commercial use has been removed, reserving decision-making solely to the executive.

The Omnibus Law is a potential game changer for foreign investors interested in Indonesia. The intention is clear: open Indonesia up by fundamentally rejigging the regimes that have made the nation less competitive than its regional counterparts. Time will tell whether this intention can be realised. We will closely monitor the passage of the Omnibus Law’s implementing regulations and provide further updates in due course.