Indonesia’s economy is the largest in Southeast Asia and the 16th largest in the world. The country’s championing of democracy, advancement of tolerance, and stable economic growth has made the country crucial to regional security and the global economy. Indonesia has become a key partner of the U.S. Agency for International Development (USAID), which has sought to support the archipelago as it seeks to strengthen is democratic resilience and government, improve its environmental practices, and grow its economy. USAID’s Economic Growth Support Activity (EGSA), implemented by DevTech, has been working with the Government of Indonesia since 2019 to help boost Indonesia’s economy, which has slowed in the last decade owing to a number of factors, including insufficient investment, sluggish manufacturing growth, and the recent economic impact of COVID-19. In addition to providing research, demand-driven training, policy-level advisory services, and supporting business forums to help the Government of Indonesia improve the country’s business enabling environment, USAID EGSA also undertakes research and analysis to support USAID’s Indonesia Mission to get a clear picture of changes in Indonesia’s economic landscape. Most recently, the project published a report summarizing key aspects of Indonesia’s Perppu on Job Creation.
On December 30, 2022, the Government of Indonesia issued the Government Regulation in Lieu of Law (also known as a Perppu, or a government-issued emergency law that temporarily has the force of a statute) Number 2 on Job Creation. This Perppu has been described as an attempt to resuscitate the Job Creation Law Number 11 of 2020, also known as the Omnibus Law on Job Creation, which was declared unconstitutional due to a lack of meaningful public consultation.[1] The Perppu and the Omnibus Law on Job Creation are materially similar, though the Perppu was created following a more robust consultation process. In March, the House of Representatives formally passed the Perppu, setting the stage for it to become permanent legislation.[2]
The Job Creation Perppu aims to attract investment, generate employment opportunities, and boost economic growth through various measures such as streamlining licensing procedures, harmonizing laws and regulations, and expediting policy decision-making by the central government.
The Perppu has been generally well received by the private sector. According to a survey by the Indonesian Chamber of Commerce and Industry (Kadin), 62 percent of businesses believed that the Perppu would create jobs. The World Bank stated that foreign investors had responded positively to the Omnibus Job Creation Law of 2020; we can infer that foreign investors will also consider the Perppu favorably given the similarity of both regulations. In 2021, foreign direct investment (FDI) in Indonesia was the second highest in Southeast Asia, increasing by 29.4 percent over the five quarters following the ratification of the law. FDI to Indonesia’s manufacturing sector grew by 34.6 percent post-regulation.[3] Similarly, the Organization for Economic Co-operation and Development (OECD) reported that structural reformation in Indonesia through the implementation of the Job Creation Law could reduce barriers for FDI by more than a third and reduce trade and investment barriers by almost 10 percent in 2021.[4]
One of the main features of this Perppu is the regulation and improvement of investment ecosystems across 15 sectors. In general, business permits previously required approval from the Ministry of Investment and/or regional leaders, such as Governors or Regents/Mayors, in accordance with their respective authorities. The Perppu has simplified this process. While local government provide clearance or recommendations related to the permits, it is up to the central government to approve or reject permit applications. In the area of employment, the Perppu introduces various provisions that include differences in the calculation of minimum wage and a minimum wage formula that can be adjusted under certain conditions; the absence of contracts in a Fixed-Term Employment Agreement (PKWT); the implementation of bipartite negotiations for settlements related to layoffs; changes in leave regulations, and job loss guarantees. Other employment-related provisions that were previously regulated by the Ministry of Manpower now refer to provisions of the central government.
In the area of cooperatives and micro, small and medium enterprises (MSMEs), the Perppu simplifies administration for cooperative and MSME formation, the application for financing, and the process of applying for incentives. In addition, there is an emphasis on empowerment through training and assistance, especially related to financial records for MSMEs. Moreover, the Perppu streamlines provisions and regulations related to the formation of businesses to provide a more conducive environment for business activities, including immigration processes such as making visit visas available to prospective foreign investors. The establishment of a Regional Research and Innovation Agency has also broadened the scope of support for research and innovation, which was previously limited to the central level.
In terms of land acquisition, the Perppu expands the types of areas considered to be of public interest, which include industrial areas, special economic zones (SEZ), tourism areas, food security areas, and technology development areas. In doing so, the regulation provides legal standing for zoning and land use planning, allowing for greater certainty among private sector entities who wish to invest in these areas. The central government also established a land bank to strengthen land management. Regarding SEZs, the scope of business activities that can be conducted within an SEZ has been expanded to include distribution, education, and health sector businesses. Additionally, the mechanism for proposing SEZs has been modified to allow direct proposals to the government’s National SEZ Council. This previously required approval from the local government. Regarding central government investment, the Perppu established an investment management institution to manage investments more effectively.
The Job Creation Perppu has addressed issues regarding overlapping regulations to provide more efficiency in government bureaucracy. Recognizing the importance of long-term legal and business certainty for foreign investors, experts view the Job Creation Perppu as a breakthrough in resolving the issue of conflicting laws and regulations that hinder the investment climate. The Perppu simplifies environmental assessment requirements and licensing procedures by integrating environmental permits and business licenses. Additionally, the Perppu removes, in general, the specific conditions and restrictions for foreign investment that were present in various laws governing several business sectors.
While the aforementioned features of the Perppu do create a business enabling environment that should encourage growth, some parts of Indonesia’s civil society have raised concerns about the regulation. Labor unions in particular have been protesting the Perppu since the bill was passed. The protests have centered around the 10 issues listed below.[5]
- Minimum wage. Minimum wage is not negotiated with labor unions. Previously, provincial minimum wage was determined by the Governor based on recommendation from the Provincial Wage Council and/or the Regent/Mayor. The members of the Provincial Wage Council consisted of representatives from government, employers’ organizations, trade unions/unions workers, universities, and experts. The Perppu states that only the governor is responsible for setting the provincial minimum wage.
- Outsourcing. There are no specific provisions regarding which fields are allowed to utilize outsourcing, which means that all types of outsourcing jobs are permitted. Previously, outsourcing was limited to five job fields namely catering, security, drivers, cleaning services, and oil support services.
- Contract work. The Perppu allows for continuous contracting of workers without a fixed period. Previously, the duration of fixed-term employment contracts (PKWT) was explicitly stated. PKWT based on a specific period could be made for a maximum of two years and could only be extended once for a maximum of one year.
- Severance Pay. Severance pay for layoffs due to efficiency was greater in the previous law than what is allowed by the Perppu. Additionally, previously, the law specified the minimum amount of severance pay employers were required to give workers. Employers were not precluded from giving larger severance pay. Now, in the Perppu, the words minimum limit have been erased, which can deter employers from offering larger amounts.
- Ease of laying off workers. In the previous law, layoffs had to be processed by the industrial relations court. The Perppu stipulates that companies can terminate workers simply by giving notice. If the worker agrees, the working relationship ends immediately. If the worker does not agree, there is a negotiation process they can initiate. However, law experts have suggested that non-unionized works are very unlikely to reject the layoff given their lack of bargaining power.
- Removal of the two-month-long break for workers. In the previous regulation, there was a provision for a minimum of a two-month long break. The Perppu instead allows for companies to set their company breaks independently.
- No payment certainty for women workers on menstrual and maternity leave. The previous regulation explicitly mentioned that women were entitled to take leave for menstruation and childbirth. The Perppu specifies instead that this provision will be included in subsequent derivative regulations.
- Removal of the two days of rest for workers with a five-day workweek. The previous law mentioned explicitly that workers could have two rest days per week. The Perppu only requires one weekly rest day.
- Extended labor working hours of 12 hours per day. The Perppu has extended overtime allowances to four hours per day, meaning that citizens can now work up to 12 hours per day.
- Increased ease of hiring foreign workers. In the previous regulation, foreign workers were required to obtain written permits from the Ministry of Labor or relevant officials, while for the Perppu, foreign workers only need a Foreign Workers Utilization Plan (RPTKA).
The business sector also reacted to the wage and employment issues regulated in the Perppu. In particular, as highlighted by the Indonesian Employers Association (APINDO), the Perppu could undermine the true purpose of the minimum wage as a social safety net given that it allows the government to establish a different minimum wage formula under specific conditions.[6]. This may negatively affect employment in the future as Indonesia could become less competitive than its Southeast Asian neighbors. While strong and sustained economic growth is an important objective, a strong social safety net is equally essential for a just and prosperous society.
For more information about the Perppu on Job Creation, read the Summary of Perppu No. 2 Year 2022 on Job Creation report written by USAID/Indonesia’s Economic Growth Support Activity (EGSA), implemented by DevTech.
[1] https://www.thejakartapost.com/indonesia/2023/03/21/house-passes-perppu-on-job-creation-despite-public-opposition.html
[2] In order for a Perppu to become permanent legislation, it must secure a majority support during a House plenary session. (See: https://www.thejakartapost.com/indonesia/2023/03/21/house-passes-perppu-on-job-creation-despite-public-opposition.html)
[3] https://openknowledge.worldbank.org/server/api/core/bitstreams/1d262981-8d96-5695-96bc-64c9b24d609f/content
[4] https://www.oecd-ilibrary.org/docserver/016eea51-en.pdf?expires=1684493965&id=id&accname=guest&checksum=207AA303559FF7CE85A287ECA8EF5EB3
[5] https://katadata.co.id/happyfajrian/berita/6432772112330/buruh-gugat-uu-ciptaker-ke-mahkamah-konstitusi-untuk-diuji
[6] https://finance.detik.com/berita-ekonomi-bisnis/d-6496407/kritisi-perppu-ciptaker-pengusaha-soroti-soal-upah-minimum-hingga-outsourcing
