Closing the Gaps

Commentary by Wayne Forrest

“The thinking within the government is to use this Covid crisis as an opportunity to do much deeper and more accelerated reforming in Indonesia”. (Sri Mulyani, Minister of Finance, February 26, 2021)

The last 30 days have witnessed a flurry of reform activity in Indonesia. President Jokowi and his Cabinet have demonstrated an impatience with the status quo that feels unprecedented. An Indonesian friend commented to me: “This isn’t jam karet (rubber time) anymore”. The actions, which are to be celebrated, have one overarching purpose: closing several yawning gaps in financing and advancing Indonesia’s development. One exists between what needs to be spent on infrastructure and the financing currently available. Another is between the pool of unemployed and underemployed workers (upwards of 60% of the workforce) and available formal sector “jobs with benefits”. A third is the confidence gap that often prevents foreign investors from choosing Indonesia. One final one I would highlight is the gap between the nation’s founding ideals (Pancasila) that recognize freedom of speech and religion and their actual practice.

Among the actions:

  • Launching of a sovereign wealth fund: the Indonesia Investment Authority
  • Release of the implementing regulations for the Omnibus Law on Job Creation (signed in October 2020). Especially those governing allocation of labor, severance and business permits.
  • Redesign of the Negative Investment List (DNI) as a “Priority List” focused on the opening of dozens of sectors for 100% foreign ownership, many with incentives.
  • Ending religious attire requirements in public schools, curtailing abuses in enforcing the Electronic Transactions Act
  • Erecting SEA’s first drive through vaccination site in Bali

Sovereign Wealth Fund (Indonesia Investment Authority of INA): Created under provisions of the 2020 Omnibus Job Creation Law, the INA is designed to be a trusted partner for medium to long term infrastructure investments. INA is staffed and supervised primarily by private sector professionals. It is empowered by its own legal framework that allows it to operate according to international fiduciary standards rather than those governing Indonesian government enterprises. It is designed to bring confidence to foreign partners whose capital will be deployed to build infrastructure initially (toll roads, ports, and airports) and relieve the burden of the heavily indebted state construction companies. Funds at the master level will be from the Indonesian government as well as other governments but private sector finance will be recruited at the project level. The fund aims to tackle projects as a minority partner. One calculation I read is that between 2020-2024 Indonesia needs $451 billion but has only about 30% locally. The INA is a new and creative path to get there.

Labor Regulations: The 2003 Labor law, which imposed steep severance requirements on companies forced to downsize and impeded investment in labor intensive industries, is now history, replaced with a much more economic set of calculations governing not just how much is paid to a worker that is let go but also wage increases. The changes will ease the path for labor-intensive investments.

Negative Investment List: Probably the most significant “front end” reform to Indonesia’s investment climate is Presidential Regulation #10, 2021. The regulation significantly re-frames how local and foreign investment is viewed. 245 sectors are given priority and offered tax and regulatory incentives for investment. Foreign investment caps are lifted (i.e. power production and distribution) or eliminated in many of them. The government clearly states which areas are off limits in the 2019 Omnibus Law and indicates that the rest are open to foreign investment. The posture change is significant. It makes the list a priority or “positive list”. Other laws and regulations of course, can affect investment, so the reforms referred to in Regulation #10 will not have as much bearing on fields such as oil/gas, mining, construction, and capital markets which have their own governing laws. Among the sectors that have moved from 0 to 100% foreign ownership are: hospitals, real estate brokerage, motorcycle and car dealerships, exploiting forest products, onshore oil/gas services, equipment leasing, advertising, human resources (job placement).

Reaffirming Secularism/School Attire: Founded as a secular, pluralist republic, Indonesia has nevertheless allowed local authorities to impose religious mandates that contradict the Constitution and its the body of laws. In some districts public schools were allowed to impose a requirement that all female students (Muslim or otherwise) wear a head covering. These policies (or in some cases statues) have largely gone unchallenged until now, mostly due to politics. After a case involving 46 non-Muslim girls at a middle school in West Sumatra drew national attention three ministers (Education, Home Affairs, Religion) issued a joint decree that states that students may wish to wear religious clothing in school if they or their parents so choose, rather than the school or the government. The decree applies to public schools nationwide, except Aceh, which applies syariah law. The change reaffirms constitutionally-mandated civil rights and helps Indonesia’s reputation as a pluralist, tolerant society.

Electronic Speech: Both the new police chief and the President called for new guidelines and restraint in handling issues of on-line speech. Over-prosecution of defamation claims led to a toxic tit-for-tat on-line environment. The 2008 Electronic Transactions Law was designed to safeguard digital transactions but became an unwitting weapon of repression. If implemented properly the revisions will lead to better professional conduct by law enforcement and judicial officials strengthening legal certainty, part of the “back end” of reform.

Drive Through Vaccination Site: Indonesia’s vaccine drive roll out is underway, ahead of other countries in the region. It won’t be perfect, but Indonesia did make early contracts to purchase vaccines directly from countries as well as through the COVAX facility. It may eventually have its own. It has a decent public health infrastructure that can be mobilized to administer the inoculations but its archipelagic character and many off-grid hamlets present challenges. Targeting the tourists it desperately needs to return, Bali has opened Southeast Asia’s first mass drive-through vaccination site. Bali’s taxi drivers were among the first to roll though.

The sum of these measures is not “business as usual” and I hope and pray that they are implemented with the same spirit of professionalism in which they were promulgated. This is never a given in Indonesia, but maybe, just maybe, this time the gaps will be closed.

(The writer’s opinions do not necessarily reflect those of the American Indonesian Chamber of Commerce or its members)