INVESTORS BEWARE

                                                                         The croc in the therapy pool

Indonesian President Joko Widodo wants to snare foreign investors. They’re a wary lot.  Though excited by big markets and the chance of bigger returns, they’re fearful of losing fortunes, and with good reason: Risk.

Indonesia's ranking in the World Bank's Ease of Doing Business Index has stuck in the low 70s – far from Widodo’s aim at position 40. (Singapore =2, Malaysia and Australia = 14.)

So his government has rammed through more than 1,000 pages of reforms called the Job Creation Law, better known as the Omnibus law.  The goals (set before the pandemic hit) are for an annual per-capita income of AUD 32,000 (currently AUD 4,000) and GDP of AUD 10 trillion in the next quarter-century.

The idea is to clean up the thousands of often contradictory Jakarta and provincial regulations impeding development and ensure controls are centralised, as they were before the democratic reforms of this century.  Almost 80 laws will be amended and thousands of regulations erased.

That sounds meritorious but the Omnibus is finding it hard to get ignition with four different drafts, varying from 812 pages through to 1,035.

Among the clauses shredding red tape are some problematics.  Green tape protections of the environment are also being cut; proponents claim the laws remain strong, but are just being simplified and condensed.

Cynics say it doesn’t matter because any new rules will be snubbed by developers paying off corrupt officials just as past legislation was ignored. 

The illegal felling of protected forests for palm-oil plantations in Kalimantan has been underway for years, the smoke from burning trash sometimes blanketing Singapore. In Sumatra endangered species like the orang-utan are losing their habitat to the fellers and their freedom to wildlife traders.

But the sometimes violent protests against the new laws (600 arrests in the first three days), mainly featuring uni students and labour unions, aren’t focussing so much on saving species but protecting jobs. As in Australia, the shift is to the gig economy, welcomed by the big end of town because it gives more room to hire and fire.

It also fractures the unions’ abilities to represent workers who are spread across different jobs in separate locales.

A regular whinge by investors is that the old laws made downsizing costly as workers had to get 32 months salary if dismissed.  That’s now down to 19 months.

The minimum wage has vanished, though local governments can bring it back provided it’s based on economic growth

Wage rates will be set according to business productivity, not the employees’ education, skills and years of service. Holidays are being cut from two days a week to one.  Long-service paid leave is also being farewelled.

These changes are being cheered by employers’ groups such as the Indonesian Chamber of Commerce and Industry.  The government predicts three million jobs for school-leavers and graduates, plus six million for those who have lost work through the pandemic. No sources for these calculations have not been revealed, but a cuff seems likely.

Missing from the chorus line is the International Trade Union Confederation:

 ‘It’s staggering that while Indonesia is, like other countries, facing the devastation of the Covid-19 pandemic the government would seek to further destabilise people’s lives and ruin their livelihoods so that foreign companies can extract wealth from the country.’

Once the protests subside there’s unlikely to be a rush of capital into Indonesia because the reforms ignore the croc in the therapy pool – the rule of law.

In an interview with the WA think tank Future Directions International, Jakarta-based lawyer and business consultant Bill Sullivan said:

“... many companies – including Australian companies – if they are properly advised, would be reluctant to make large capital investments in Indonesia

‘... the legal and court systems ... are almost as opaque and non-transparent today as they were during the presidency of Indonesia’s first president, Soekarno.

‘It is an extraordinary weakness in the development of Indonesia and it’s something that even many Indonesian businesspeople rail about and find very discomforting.’

Indonesia Investments managing director Richard van der Schaar likes the new law but cautions business to wait and see.  In a newsletter to members he wrote:

‘ ... over the past decade or so we have seen the Indonesian government coming up with various ambitious and 'game-changing' programs or plans. However, while they look good on paper, actual implementation in the field has always been the main problem.’

‘Indonesia also has to develop a good track record in terms of policy-making, policy-implementation, policy-monitoring, dispute resolving, and legal and regulatory certainty. Building this good track-record can certainly not be done overnight. On the contrary, it requires years of consistent and quality management.’

In the meantime, the protests continue, though now with pro-Omnibus law supporters collecting lunch boxes and water bottles for their time spent waving professionally printed placards. 

Who’s organising?  The standard reply in Indonesia is the never-defined ‘dark forces’.  A synonym is ‘the oligarchy’ of which Widodo, once champion of the wee folk, is now a full member,

 

 

 

First published in Pearls and Irritations 23 October 2020: https://johnmenadue.com/protests-against-indonesian-economic-reform-stability-and-a-minimum-wage-have-gone/

CAN THIS BUS STAY ON THE ROAD?

Sprint urged, but long haul likely                       

It’s the first major political challenge of 2020. Can overriding laws deemed essential for the economy be passed by the new Dewan Perwakilan Rakyat (DPR Indonesian Parliament) within one hundred days?

As you read this the deadline has already dashed closer; novice legislators should be buying eye drops and caffeine pills to cope with the reading needed to understand a job few expected when they stood for election last April.

Sadly there’s no indication yet that the politicians have grasped the enormity of the task given them by President Joko Widodo.  Maybe there’ll be a sudden awakening and we’ll all become familiar with the new Jakarta bizterm – Omnibus Bill.

It sounds like a matey name for a tour coach driver, but if this vehicle can steer around the obstacles left by lawmakers long gone, then foreign investors might start to look for space to park their money.

The President and his advisors have said there are 1,244 articles in 79 statutes (though other figures are being canvassed) ready for consolidation to make life less confusing.  Three bills have been drafted – one on taxation reform in the hope of garnering more cash for the national exchequer. 

The others are designed to help State Owned Enterprises (SOEs) focus on making profits, and let businesses concentrate on job creation to bump the budget up into second gear.

Currently it’s cruising.  The World Bank says the GDP annual growth bounces around five per cent in Southeast Asia’s largest economy.  That looks spectacular when measured against neighbors like Australia with less than two per cent. 

However the Indonesian figure is largely underpinned by domestic consumption among its 270 million citizens, so the government wants to lift exports.  This means creating a benign investment climate.

Indonesia ranks 73^rd on the Ease of Doing Business list developed by World Bank economists.  New Zealand is number one, a position it also holds on Transparency International’s Corruption Perception Index, suggesting the two factors are linked.

While the Indonesian government sees over-regulation and duplication as bars to progress, graft remains endemic and is not being tackled in the draft ordinances.  The TI rank is 85^th and hardly moves.

‘Omnibus’ is probably not the smartest term to sell a novel notion as the word is foreign and has many meanings.

The Latin original meant ‘for all’.  Two centuries ago it described a horse-drawn carriage in Paris.  The term then migrated across the Channel and the Atlantic when buses became motorized.

Now it’s left public transport and nestled in publishing and politics to mean a collection of stories or laws.  However there’s little indication that the public is so familiar with the word that they feel comfortable.

Indonesian labor unions are certainly ill at ease, fearing the crushing of workplace hiring, firing and safety protections in any compression of legislation.  Some workers have been shouting in Jakarta protests, though not in numbers that would make the Presidential Palace quake.

Other concerns have been expressed by urban planners and environmentalists.  They’re alarmed that procedures to preserve open space and restrict commercial development in residential areas will be sacrificed if the Omnibus Bills take short cuts.

Their worries have been aggravated by statements attributed to Coordinating Economic Minister Airlangga Hartarto who reportedly said permits will be scrapped for ‘simple structures’.  

He defined these to be like two-storey buildings.  Off-hand comments suggest policy-on-the-run rather that well considered analysis, propping up claims that many stakeholders weren’t consulted when the bills were being drafted.

Rushed debates don’t always lead to jurisprudence that’s just.

Businesses have so far welcomed the proposal as a move towards consistency. ‘Omnibus laws come to the rescue’ headlined one investment magazine, as though they’ll be like lifeboats in the flooded capital.

An exception has been the mining lobby which wants the government to first stabilize its guidelines on the export of raw minerals.  Nationalists claim ores should be processed in the archipelago, adding value before shipping by refining minerals like copper, nickel and bauxite.

The latter is the raw material for alumina which is decomposed to make aluminum.  The costs of building and running power-hungry smelters are exorbitant.

The planned Omnibus dicta are supposed to simplify a clutch of messy bits and bobs that bother entrepreneurs, like rules about hiring overseas workers, and buying, owning and developing land.

Then there’s knowing who to contact in government offices for correct advice and how to get licenses which won’t be challenged by officers from other departments when work is underway and equipment on site. 

As the livelihoods of numerous public servants depends on them maintaining old labor-intensive tasks, the problem of implementing unwelcome measures is ever present.

Decentralization followed the 1998 collapse of President Soeharto’s 32-year New Order government.  This led to regional administrations passing their own regulations which often challenged or duplicated Jakarta’s rules.

The English word ‘socialization’, which means getting on well with others, has been hijacked by Indonesia and given a twist.  Sosialisasi is now a public education program, usually run by governments and companies to justify and clarify changes in direction.

So far the proposed Omnibus drafts have not been well explained, leading to confusion and suspicion of the government’s real intent. 

In late January the House of Representatives approved 50 bills to be included in this year’s National Legislation Priority Program.  Among them are the Omnibus drafts. 

That doesn’t mean they’ll automatically get right up to the traffic lights; much will depend on how other legislation moves and who’ll give way.  The drivers will be the 575 DPR members, and who knows how they’ll behave?

If the President’s 100-day ambition is achieved the Indonesian Parliament will be setting new records in lawmaking. 

 


First published in Strategic Review, 13 February 2020:  http://sr.sgpp.ac.id/post/All%20aboard%20the%20omnibus

CLEARING HURDLES, KEEPING ROADBLOCKS

                               This bus isn’t moving fast

It’s not too difficult for outsiders to get the gist of Indonesian economics.  That’s because terms, like ‘administrasi, deficit, bangkrut, fiskal’ and others have been pinched from English and tweaked.

The latest is ‘omnibus law’, a favourite with President Joko Widodo in a bid to slash and compost the vines of red tape that strangle the business landscape.  The problem is few understand the meaning so use their default setting – suspicion.  

Labour unions are opposing government reforms designed to make investors feel easier about leaving their deposits in Southeast Asia’s biggest economy.  Consolidating legislation would certainly help, though only if the public servants agree to implement.

As changes could lead to a reduction of stamping and photocopying tasks among the Republic’s almost five million bureaucrats, Widodo’s enthusiasm isn’t widely shared.

He reportedly said it would take half a century to revise each law individually, so why not make a bundle, call it an omnibus and drive it through the Parliament? 

There are more than 1,200 articles in 80 laws the President thinks need to be bashed aside by the bullbar. “Start now,’ he said. ‘It could all be done in 100 working days.’

He’s about the only person who thinks that timetable practical.   Workers fearing lower wages and loss of entitlements have been protesting, disbelieving government claims of more jobs through foreign investments. 

 Around 70 per cent of the nation’s workforce is informal; insecurity is widespread along with its twin, distrust.

The big end of town is being offered cut price tickets to jump on the omnibus.  In exchange for a comfy seat business tax will drop from 25 per cent to 20 per cent within three years.

That sounds fair enough – though only till it’s remembered that many entrepreneurs have refined the art of keeping their duties, fiscal and moral, to a minimum by sending profits overseas.  A lower rate on next to nothing is not a big inducement. 

According to the OECD ‘tax revenues are low relative to other emerging economies … (and) compliance remains a major challenge.’  Indonesia’s tax-to-GDP ratio is 12 per cent, less than half that of Australia’s.

VAT is applied where a business keeps records.  For a meal in McDonald’s, or any chrome and plastic eatery with a till, expect a tax and service charge of 21 per cent.  Use a streetfood stall or local café and there are no additions.  Cash still reigns - many shops won’t accept credit cards.

The omnibus bill is the latest bid to boost the tax take while reducing costs.  An earlier attempt thumped the nationalism drum, appealing to the megarich to repatriate the earnings they’d parked abroad in return for dropping tax avoidance prosecutions.

As patriotism is not a relative of capitalism the results were unimpressive. At the time (2017) it was reported that only 32 million were registered taxpayers and less than nine million submitted returns.  The Republic’s population is 270 million.

The government reckoned it could collect about one thousand trillion rupiah (US$ 74 billion) from two million rich listers, but got run down by reality.  Less than 150 trillion rupiah was recovered from just one million citizens.

These measures, though fine in intent, don’t tackle the key issue that’s wounding the nation’s economy and international reputation.

Last year Phil Turtle, National President of the Australia-Indonesia Business Council, had the courage to be blunt.  He told the Australian Parliamentary Joint Standing Committee on Treaties:  

“When I'm talking to Australian businesses about contemplating Indonesia, it's a bit like the real estate saying —location, location, location — it's corruption, corruption, corruption.”

Indonesia ranks 89 in Transparency International’s corruption perception index.  Australia is in 13^th place.

Despite these flaws there’s no outward evidence of a looming financial crisis.   Widodo’s first five-year term (2014-2019) was marked by huge infrastructure projects largely funded by loans from China and Japan.

Toll roads, railways, ports and airports have been built at astonishing speed. A new US $31 billion capital in Kalimantan, the Indonesian province on Borneo Island, is being planned to replace polluted, overcrowded and sinking Jakarta.  Almost 70 people have died in city floods this wet season. 

Last year the nation owed US $383 billion in foreign debt, a rise of 7.2 percent on the previous year. Bank Indonesia appeared unworried, claiming the increase came from government borrowings.
This year the United Arab Emirates offered US $23 billion for more infrastructure and energy projects.  The money will go into a new sovereign wealth fund, also part of the proposed omnibus laws.

Inflation seems to be under control.  The government forecast three per cent last year but the figure was 2.72.  Sudden food and fuel price jumps have triggered mass protests in the past so keeping the economy stable is a political necessity.

While the Anglosphere has been obsessed with the trivial doings of the regal Brits, Indonesians have been gripped by tales of oligarchs steering luxury cars around taxation roadblocks.

They’ve allegedly been hiding their Mercedes and BMWs ownerships by registering them in the names of lowly employees.  Most couldn’t raise the down payment on a motor scooter yet on paper they’re proud owners of Ferraris.

Bemused foreigners might ask how these vehicles could get into the country without owners paying duty, and then escape detection when driven around Jakarta.  One who didn’t was Ari Askhara, president director of the government-owned airline Garuda Indonesia.

He was sacked after allegedly smuggling a disassembled Harley Davidson motorcycle and Brompton folding bicycles on a new Airbus A330-900 being delivered to the airline.  The manifest apparently listed the parts in the names of employees, but someone dobbed in the boss.  

Revenge or conscience?  If the latter then things are looking up.

First published in Pearls and Irritations, 27 January 2020:
https://johnmenadue.com/duncan-graham-this-bus-isnt-moving-fast/