In brief
On 5 October, the Parliament approved the job creation law (RUU Cipta Kerja) – commonly known as the “Omnibus Law“. The Omnibus Law amends a number of existing laws, including Law No. 25 of 2007 on Capital Investment (“Investment Law“). This alert will focus on the impacts of the Omnibus Law on the Investment Law.
Key Provisions
Changes to the Capital Investment Framework
The Omnibus Law introduces high-level changes to the capital investment framework in Indonesia. One of the most notable changes is that the central government will introduce a priority list through a presidential decree to replace the existing negative list. This priority list has been referred to as a “positive list” by government officials.
The Omnibus Law provides that all business sectors are either open or closed for capital investment (including foreign investment), or can only be conducted by the central government. Certain business sectors that can only be conducted by the central government are those that are services in nature and those activities intended for defense and security such as: (a) main weaponry equipment system, (b) government museums, (c) historical artifacts, and (d) provision of telecommunication navigation/shipping or vessel navigation support facilities.
Essentially, the priority list will be issued under the following parameters:
- Six business sectors will be fully closed for private domestic or foreign investment.
- Certain business sectors will be prioritized, and certain business sectors will be subject to certain requirements.
The Omnibus Law also revokes the obligation of the central government to set out activities that are reserved for micro and small enterprises, or activities by large scale businesses that have to partner with micro and small enterprises. It remains to be seen whether this will be included in the priority list. The provision of incentives, support and protection to micro and small enterprises will be done by the central and regional governments by taking into account the guidelines that will be issued by the central government through a government regulation.
Parameters of the Priority List
As noted above, the Omnibus Law states that the priority list will further govern certain business sectors that are prioritized and business sectors that are subject to certain requirements, as follows:
- prioritized business sectors to be granted with fiscal incentives
- business sectors to be granted with non-fiscal relief (i.e., ease of licensing, easier access to investment locations/sites and provision by the government of certain infrastructure for investment locations/sites)
- business sectors that are specifically designated for micro, small and medium enterprises and the requirement for cooperation between large businesses and micro, small and medium enterprises, other than equity participation
- business sectors that are open for investment that is subject to certain requirements
The following six business sectors are fully closed for private domestic or foreign investment:
- cultivation and manufacturing of class 1 narcotics
- casinos and other forms of gambling activities
- fishery activities of fish species listed in Appendix I to the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES)
- activities involving the use or collection of coral, including natural coral, for building materials/lime/calcium, aquariums or souvenirs/jewelry and any natural living coral or recently dead coral
- chemical weapons manufacturing
- industrial chemicals and ozone-depleting substances manufacturing
Pending the issuance of the priority list, it remains to be seen:
- What the criteria of the sectors that will be included in the priority list will be, but we suspect the list will include large-size investment, investment in labor intensive business sectors, investment in high-tech business sectors, and investment in digital-based business sectors.
- What investment requirements will be imposed by the central government on the sectors set out in the priority list.
- How the list will deal with the foreign ownership restrictions (including local player requirements) currently imposed on many sectors, e.g., herbal pharmaceutical, hospital, and transportation sectors.
Changes to the Business Licensing Framework
To improve the ease of doing business, the Omnibus Law (i) introduces a new concept of risk-based business licensing, and (ii) simplifies business licensing processes, sectoral business licensing processes, and investment requirements.
Risk-based business licensing
Risk-based business licensing is applied by determining the risk level of business activities, generally counted based on the hazard level (perhitungan nilai tingkat bahaya) and the potential hazard value (nilai potensi terjadinya bahaya). The business activities are divided into three categories, which will be further regulated in implementing regulations. The three categories of business activities are as follows:
- low-risk business activities
Low-risk business activities would only be required to have a business identity number (“NIB“) to operate.
- medium-risk business activities
Medium-risk business activities would be required to have an NIB and standard certification to operate. For medium-risk business activities, the standard certification is a statement by the business actor that it has fulfilled the requirements to conduct the business activities. For medium-high-risk business activities, the standard certification will be issued by the central government or the regional government based on the results of its verification of the fulfillment of the requirements to operate the business activities.
- high-risk business activities,
High-risk business activities would be required to have an NIB and a business license to operate. For a high-risk business, a business standard certification and a product standard certification from the central government are also required if the government considers standardization is needed for that business.
The standard certification concept is a welcome change since it removes the need to have a license if a requested activity meets the standards set by the government (the concept being applied to medium-risk businesses). Further implementation of this new licensing regime and the supervision of the business activities will be addressed in the implementing regulations.
This is one of the major changes introduced by the Omnibus Law and it remains to be seen how the government will anticipate the needs of business actors, in particular foreign investors, to have legal certainty during the licensing process as well as during the commercial stage due to this change.
Simplified business licensing processes
Business licensing processes are simplified through the central government, although some sectors are still not clear on the procedures, e.g.:
- ensuring suitability between the business activities and spatial use, which would be done by ensuring conformity between the location plan of the activities and/or business and the spatial plan
The Omnibus Law requires the spatial plan prepared by local governments to be integrated with the Online Single Submission (OSS) system. This will grant business actors easier access to the plan and enable business actors to apply for suitability of space utilization approval through the OSS system. This requirement may also lead to a standardization of the spatial plan prepared by each local government.
You may refer to our client alert on the impacts of the Omnibus Law on the real estate sector for further elaboration on this part.
- simplifying procedures to obtain environmental approvals, with the amendment or deletion of some existing provisions, and introduction of new provisions.
One of the changes brought under the Omnibus Law is the removal of the requirement to obtain an environmental permit as this will be integrated into the business license.
You may refer to our client alert on the impacts of the Omnibus Law on the environment sector for further elaboration on this part.
- simplifying procedures to obtain building approvals and function worthiness certificates (sertifikat layak fungsi), with the amendment or deletion of some existing provisions, and introduction of new provisions
You may refer to our client alert on the impacts of the Omnibus Law on the real estate sector for further elaboration on this part.
Simplified sectoral regulatory requirements
Some sectoral laws are amended. Stay alert for our separate client alerts covering specific key changes in several sectors.
