What the Omnibus Law Changes for Startups in Indonesia

Startups in Indonesia may be faced with an ethical dilemma with the omnibus law

For Indonesia, the week gone by was marked by wins for business realpolitik, leading to an outcry in the country’s public sphere.

The point of contention: Indonesia’s newly-passed Omnibus Law on Job Creation Bill.

An omnibus law is a law that proposes reforms across several diverse verticals of governance. The legislative process on Indonesia’s omnibus bill culminated on Monday last week. Now a law, it reforms over 70 existing laws and rules, including Labor Law, the Spatial Planning Law and Environmental Management Law, in a dramatic change to long-standing pieces of legislation.

On the whole, the law is intended to bring business, jobs and funding into Indonesia, and bump up its flagging economy by making Indonesia’s commercial climate more attractive. However, the omnibus law has far-reaching controversial implications for worker rights and environmental concerns.

At the same time, the law is expected to give the country’s tech startup ecosystem a leg up. Not only is the law expected to bring in foreign investor money, it also introduces changes in some of the rules for startups doing business in the archipelago.

Easing licensing and foreign investment permits

The omnibus law has been a landmark decision for the Jokowi government in Indonesia, with President Joko “Jokowi” Widodo noting that it is meant to simplify the process of doing business in Indonesia.

One of the most prominent ways it does this is by reforming requirements for acquiring a business permit in the country, a lengthy process that he said could currently take up to two weeks.

The omnibus law disentangles some of the complexities of this process across several sectors such as maritime and fisheries, energy and mineral resources, electricity, infrastructure, and transportation–a significant move in that also simplifies doing business for startups in Indonesia.

While some licenses have either been combined or scrapped, the law also categorizes business per the level of risk involved. Low risk business will only need a registration number and mid-risk businesses will need to attain a standard certification, but only high-risk businesses will need to obtain a business license.

The omnibus law also eases the path to direct investment, including an online single submission (OSS) system for obtaining licenses, and possibility of making direct investments across “all business lines… save for those that are designated as closed to investment or which constitute activities that are reserved to the central government.”

Moreover, Indonesia’s list of industries banned from obtaining foreign investments have been reduced from 300 such industries down to the following–controlled drugs, gambling, catching of endangered fish, harvesting of corals, and chemical weapons and industrial chemicals manufacturing.

Relaxing foreign investments in this manner will require a presidential regulation, and it is not clear yet how it will be implemented, but it is expected to further liberalize the country’s FDI mechanisms.

This will reflect especially in Indonesia’s relationship with China. Foreign direct investment (FDI) from Chinese investors into Indonesia has grown faster than FDI from other countries, growing at a rate of 43% in the past few years.

Out with the minimum wage, in with the poverty line as a base

The omnibus law exempts micro and small enterprises (MSMEs) from paying workers according to the minimum wage, but mandates that they pay workers above the poverty line.

While this does free up working capital that can help MSMEs maintain liquidity, this is worrisome because the poverty line in Indonesia is RP440,538 or $32.2 per capita per month. This amounts to about RP14,700 or $1 a day, just about the price of a kilogram of rice.

In fact, going by some calculations, this amount only covers about a sixth of what one would expect to spend on food, not to mention living and transportation expenses, utilities such as electricity, and essential services such as healthcare.

Startups and governing bodies alike will need to seriously consider the implications of such a move, especially since the poverty line is set too low, and yet the poverty rate in Indonesia post COVID-19 is expected to reach 11.5%.

A transfer of knowledge and technology

According to research by Morgan Stanley, the omnibus law is expected to be a boon for tech startups in Indonesia.

Indonesia already has a thriving startup ecosystem characterized by the presence of several unicorns, a young, Internet-dependent population, and a burgeoning digital economy.

Morgan Stanley’s analysis suggests that by making conditions within the country favorable for foreign investments and hiring, the omnibus law will not only increase funding opportunities for startups in Indonesia, but also facilitate a knowledge and technology transfer.

The omnibus law reforms (to an extent) how startups in Indonesia do business, and how they receive funding. The omnibus law also makes it easier for startups to source talent from outside Indonesia, not necessarily as permanent employees.

This is significant because tech startups in Indonesia face a significant shortage of skills, something that the law aims to remedy.

Foreign workers at Indonesian startups were earlier required to be cleared for work through a permit. With the amendments, the central government does not have to approve any such foreign hires.

Moreover, the law also relaxes the rules for outsourcing the management of business departments to third-parties. These are inevitably going to have a marked effect on employment patterns within the country, as well as the hiring policies of startups in Indonesia.

These developments come at a timely juncture for Indonesia, with the U.S.-China trade war pushing tech and manufacturing companies out of China and into Southeast Asia. However, while the omnibus law promises many benefits for startups wanting to do business in Indonesia, it also posits a question about the nature and cost of commercial activity.

The omnibus law drastically affects several of the earlier benefits accorded to workers, including severance pay, minimum wages and layoffs, and also severely relaxes the environmental obligations of doing business in Indonesia.

Subsequently, what startups in Indonesia will need to deliberate on, is not only the ease of doing business in Indonesia with the omnibus law, but also the ethical and environmental considerations they may perhaps be stepping over by following it.

Header image by Bill Oxford on Unsplash

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