Omnibus law could curb Chinese energy investment in Indonesia

As the Indonesian government races against time to revise the controversial Jobs Creation Act – popularly known as the Omnibus Act – questions remain as to the impact these revisions, and the nature of the law itself, might have on the delivery of energy investments and mining companies, one of the country’s largest foreign investors and trading partners.

President Joko “Jokowi” Widodo promulgated the Omnibus Law in November 2020 despite weeks of protests in many parts of the country, which is the largest economy and most populous democracy in Southeast Asia. The Indonesian parliament had approved the bill a month earlier. While officials say the law would improve the nation’s investment climate and provide more job opportunities, critics remained skeptical. They believe it would be more damage the environment and give employers more space to exploit the country’s workforce.

The Indonesian Constitutional Court declared the law “conditionally unconstitutional” in November 2021, deeming it contrary to the country’s 1945 state constitution and having “no conditional binding legal force”. As a result, authorities have been urged to present revisions within two years – by the end of 2023 – or risk the law being permanently overturned.

Whether the law revision is passed will depend on the political setup in 2024, the year of Indonesia’s next general election, and whether the government “still has strong enough political capital in parliament” to make it happen. adopt, says Giri Ahmad Taufik, a legal scholar. at the Indonesian Center for Legal and Policy Studies (PSHK) and a lecturer at the Indonesian Law School, Jentera.

Chinese investors aren’t scared off by social or environmental protections

Rebecca Ray, senior academic researcher at Boston University‘s Global Development Policy Center

“The political situation is dynamic, especially when it comes to crucial environmental and employment issues, so parliament could be cautious [in weighing those] given that 2024 is approaching,” says Giri.

Still, experts say the country should not view the Jobs Creation Act as legislation that could support and secure China’s future mining and energy investments. According to the Indonesian Ministry of Investment (BKPM), so far in 2022, Mainland China has been the third foreign investor in the country after Singapore and Hong Kong, accounting for $1.4 billion or 13.2% of total foreign investment in the first quarter of the year, figures consistent with pre-pandemic (and pre-Omnibus) levels, when China accounted for $1.2 billion or 16.1% of foreign investment in the first quarter of 2019.

Attract Chinese investment

Rebecca Ray, a senior research fellow at Boston University’s Global Development Policy Center, says her research on Chinese overseas investment shows that “cutting environmental and social protections don’t bring more Chinese investment.” – conditions and a result that the Job Creation Act sought to stimulate. One of the critical elements of the law would be the implementation of deregulation policieswhich could benefit the country’s oligarchs.

“Chinese investors aren’t scared off by social or environmental protections,” says Ray, who has studied cases in Indonesia and countries in the Amazon Basin facing similar governance challenges. She believes that “these short-term costs are not as important in their decision-making process” as the longer-term considerations.

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In December 2021, Ray posted a paper on mitigating socio-ecological risks in Indonesia in the context of increasing foreign investment from China, alongside 13 other authors. She says reducing those protections would likely do a “long-term disservice” to Chinese investors.

“Investors are there for other reasons,” says Ray. “And if they’re just not as well-regulated, they’re more likely to face labor disputes, suspensions, even cancellations, due to environmental and social risks that haven’t been properly addressed. during the planning stages.”

“Our work shows that a more constructive policy response is to work in depth with Chinese counterparts, find out what their motivations are, and find a way to jointly regulate these investments, which are often in very sensitive sectors from an economic point of view. environmental and social.

Southeast Asia’s largest population has seen some public opposition to Chinese-funded projects in the country. For example, in March 2019, activists from WALHI, a national environmental NGO, protested in Jakarta to demand that the Bank of China not finance a hydroelectric dam in the province of North Sumatra. In a open letter, they said the project would “probably doom the recently discovered species of Tapanuli orangutan to extinction”. Meanwhile, in June 2020, hundreds of Indonesians in Southeast Sulawesi opposite the arrival of hundreds of Chinese workers in the province because they feared depriving the inhabitants of jobs.

A low carbon pivot?

How might Chinese investments in Indonesia change given both the legal environment and the need to control greenhouse gas emissions?

Bill Sullivan, senior foreign attorney at Jakarta-based law firm Christian Teo & Partners, said “there is still a high level of uncertainty” in Indonesia, particularly around its policies and regulations. But he says that compared to Western investors, Chinese companies are “rather less concerned” about such uncertainties. “I suspect it’s because they have to deal with the somewhat opaque regulatory environment in China,” he says.

There are other factors, beyond the legal environment, that influence China’s energy and mining investments in Indonesia.

Last year, China and Japan, two of the biggest investors in Indonesian coal-fired power, have announced the end of their funding for new coal-fired power plants overseas. Indonesia has also published its balance sheet strategy until 2050. “Combined, these developments reflect a turning point for the country’s clean energy transition,” the GEM report says.

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Beijing’s new guidelines on Belt and Road projects, which call for them to align with the Paris Agreement, are also expected to influence overseas investment decisions. The Working Group on Climate, Development and the International Monetary Fund recently to analyse some of the negative impacts that lower coal demand from China could have on Indonesia, such as the loss of jobs in the mining sector. However, low-carbon projects such as renewable energy generation are a promising alternative investment destination, given China’s willingness to support environmentally sustainable projects.

With more than a year to go before the deadline for amendments to the Job Creation Law, Giri does not foresee an easy path, especially with the 2024 election campaigns looming. “The discussion on the revision of the law risks causing political upheaval and the possibility for political parties to recalculate,” he says. It doesn’t look like the controversy surrounding the law is going away anytime soon.

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