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Ease of
Doing Business

Indonesia is the world's largest archipelago, with more than 17,500 (seventeen thousand and five hundred) islands. The said archipelago stretches between the Pacific and the Indian Oceans, and bridges 2 (two) continents, namely Asia and Australia/Oceania. This strategic position profoundly influences the country's culture, social and political life, and economy.

Moreover, Indonesia has a population of 267,663,435 (two hundred sixty-seven million, six hundred sixty-three thousand, four hundred and thirty-five) people. Today, Indonesia is the world's 4th (fourth) most populous nation, the world's 10th (tenth) largest economy in terms of purchasing power parity, and a member of the G-20.

In terms of poverty reduction, Indonesia has reduced the poverty rate by more than half since 1999 to 9,78% (nine point seventy-eight percent) in 2020. According to BPS, Indonesia had a total workforce of 138,22 (one hundred thirty-eight point twenty-two) million people in August 2020, an increase of 2,36 (two point thirty-six) million people from August 2019.

As for the investment opportunities, it is publicly known that both domestic and foreign investors have developed their businesses in numerous sectors through investments in Indonesia. According to research conducted by BKPM, the 10 (ten) highest origin countries of foreign investors in Indonesia from January to March 2021 are as follows:

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Highest foreign investors in Indonesia from January to March 2021

Source: Indonesian Investment Coordinating Board

Subsequently, referring to the data from World Bank's Doing Business 2020 index, which was collected based on research in Jakarta and Surabaya, Indonesia has conducted the following business reforms:

 

  • to start a business, Indonesia (specifically Jakarta) has made improvements by introducing an online platform for business licensing and replacing hardcopy certificates with electronic certificates;

  • to get electricity, Indonesia (specifically Surabaya) improved the reliability of the power supply by conducting renovations to and enhancing the maintenance of its electrical grids;

  • to pay major taxes, Indonesia has introduced an online filing and payment system; and

  • to trade across borders, Indonesia has made it easier by improving the online processing of export customs declarations.

However, it is important to note that on 15 September 2021, the World Bank issued a statement  regarding its Doing Business report, which announced that it has conducted an investigation due to data irregularities on the reports. It has since decided to discontinue the publication. This development casts doubt on the reliability of the data provided in its Doing Business reports. Therefore, we encourage the readers to take the data referenced from the World Bank Doing Business report hereinafter cautiously and lightly.

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Business Reforms in Indonesia in order to Facilitate Doing Business

Source: World Bank’s Doing Business 2020 Index.

Indonesia is ranked 73rd (seventy-third) among 190 (one hundred and ninety) countries in terms of EoDB. The main obstacle in relation to licensing in Indonesia is that many parties are authorized to issue permits. This has resulted in a lengthy licensing bureaucracy, increased time required to apply for permits, and high licensing fees in Indonesia.

 

Through the enactment of Law No. 11/2020, the government seeks to accelerate licensing services in Indonesia to overcome various barriers to investment in Indonesia, especially in relation to complicated regulations and bureaucracy.

 

The enactment of Law No. 11/2020 is also an effort to amend the regulations relating to the convenience, protection, and empowerment of cooperatives and UMKM, enhancement of investment ecosystem, and the acceleration of national strategic projects, including the improvement of protection and welfare of workers.

The implementation of licensing in the regions comply with the following conditions:

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Implementation of Business Licensing in the Regions

Source: Indonesian Investment Coordinating Board.

An overview of Law No. 11/2020 is as follows:

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The Gist of the Job Creation Law

Source: Indonesian Investment Coordinating Board

Furthermore, there is RPJMN 2020-2024 which elaborates the President's vision, mission, and programs as a result of the 2019 General Election. By virtue of RPJMN 2020-2024, Indonesia aims to elevate its EoDB ranking to 40th (fortieth) in 2024 from its current position at 73rd (seventy-third).

 

Therefore, it is important for Indonesia to develop its economy in 2020-2024 by increasing investments in Indonesia (from the formation of gross fixed capital) by 6,6% (six point six percent) to 7,0% (seven percent) every year. In order to achieve this target, foreign and domestic private investments are encouraged through the deregulation of investment procedures, synchronization, and harmonization of licensing regulations.

Incentives for Investors

According to Article 21 Law No. 25/2007, the facilities or conveniences provided to the investors are as follows:

 

  • land titles facilities;

  • immigration service facilities; and

  • import licensing facilities.

 

In particular, such facilities are given to investors who are expanding their businesses or making new investments. However, to obtain these facilities, investments made by the investors shall meet 1 (one) and/or more of the criteria stipulated in Article 18 (3) Law No. 25/2007, namely:

 

  • absorbing considerable amount of labors;

  • being categorized as a high priority scale;

  • the relevant investment shall be included in infrastructure development;

  • transferring technology;

  • implementing pioneer industries;

  • the relevant investments are located in remote areas, underdeveloped areas, border areas, or other areas deemed necessary;

  • preserving the environment;

  • implementing the research, development, and innovation activities;

  • partnering with micro, small, medium enterprises or cooperatives;

  • industries which utilize capital goods or manufactured machinery or equipment produced domestically; and/or

  • being included in the development of tourism businesses.

 

Decision of the Constitutional Court No. 91 of 2020 on the Formal Review of Law No. 11 of 2020 on Job Creation

The Constitutional Court of the Republic of Indonesia (“Constitutional Court”) recently rendered the widely anticipated Decision of the Constitutional Court Number 91/PUU-XVIII/2020 on the Formal Review of Law Number 11 of 2020 on Job Creation (“Decision No. 91/2020”). Law Number 11 of 2020 on Job Creation (“Law No. 11/2020”), or commonly referred to as the Omnibus Law, had only been issued and implemented for just over a year, containing revocation and amendments on 78 (seventy-eight) laws divided into 11 (eleven) clusters. Law No. 11/2020 received significant criticism and objections from various parties and individuals during the legislating phase, culminating in the Judicial Review filing to the Constitutional Court even before Law No. 11/2020 had officially been legislated. After a year of implementation of Law No. 11/2020, the Constitutional Court has finally rendered a decision.

General Overview of Decision No. 91/2020

The Petitioners in Decision No. 91/2020 (“The Petitioners”) is a coalition of individuals with various backgrounds who essentially petitioned that Law No. 11/2020 as formally defective for not fulfilling the procedural requirements under the provisions of law-making. Their arguments can be summarized into 4 (four) main points, which are as follows:

  • Law No. 11/2020 creation method caused uncertainty and vagueness in the objective of the law.

  • Law No. 11/2020 creation method is unknown under Indonesian law.

  • There was a substantive alteration to the draft following the legislative and executive approval of the draft.

  • Law No. 11/2020 is contrary to the principles of law-making, such as principles of clear purpose, efficiency and effectiveness, precise formulation, and transparency.

Based on the preceding grounds, the Petitioners requested the Constitutional Court declare Law No. 11/2020 as unconstitutional and does not have binding legal force, and declare the amended and revoked laws under Law No. 11/2020 to re-enter into force.

Then, after a little over a year of deliberation, the Constitutional Court finally rendered 5 (five) points in the verdict on the constitutionality of Law No. 11/2020, which in essence are as follows:

  • declared that the creation of Law No. 11/2020 is contrary to the 1945 Constitution and conditionally does not have binding force unless it is procedurally corrected within 2 (two) years (“Conditionally Unconstitutional”);

  • declared that Law No. 11/2020 remains in force until the procedural correction is fulfilled within 2 (two) years;

  • instructed the legislators to complete the correction within 2 (two) years after the rendering of this verdict, whereby if the correction was not completed after the time limit had passed, then Law No. 11/2020 shall be declared permanently unconstitutional;

  • declared that if within the 2 (two) years period, the legislators failed to complete the procedural correction, the laws or provisions revoked or amended by Law No. 11/2020 shall re-enter into force;

  • suspended all actions or decisions which are of strategic and extensive nature, and all issuance of implementing regulations relating to Law No. 11/2020.

Based on this decision, it is observable that the Constitutional Court only partially granted the Petitioners' requests. Furthermore, this decision's practical consequences on implementing Law No. 11/2020 are arguably insignificant if Law No. 11/2020 succeeded in being procedurally corrected within the time limit. However, if that time limit passes and  Law No. 11/2020 was declared permanently unconstitutional, Indonesia’s regulatory network will undoubtedly suffer significant repercussions.

Aside from that, the decision itself has piqued the interest of lawyers and legal scholars alike due to the pronouncement of Law No. 11/2020 as Conditionally Unconstitutional. This is because it is unprecedented for the Constitutional Court to render such a verdict. Moreover, the suspension of all actions or decisions “of strategic and extensive nature” also raised questions on interpreting such a vague term.

These practical consequences and the controversies surrounding Decision No. 91/2020 will be addressed below. However, before elaborating further on Decision No. 91/2020, the following chapter is dedicated to establishing a clear understanding of a judicial review and the rules on the law-making process.

What is Judicial Review?

Before elaborating Decision No. 91/2020 further, it is necessary to understand that one of the objects of a judicial review is the law. Law is legislation made by the House of Representatives/Dewan Perwakilan Rakyat (“House of Representatives”) with the joint approval of the President.  The material content of law contains:

  • further regulation of the provisions of the 1945 Constitution of the Republic of Indonesia ("1945 Constitution”);

  • order of a specific law to be regulated by law;

  • ratification of certain treaties;

  • follow-up on Constitutional Court’s decision; and/or

  • fulfillment of public legal needs.

Further, according to Article 9 (1) Law Number 12 of 2011 on Legislation Making as amended by Law Number 15 of 2019 (“Law No. 12/2011”), if a law is considered contradictory to the 1945 Constitution, the Constitutional Court reviews the said law.  Such provision is in line with Article 24C (1) of the 1945 Constitution jo. Article 29 (1) (a) Law Number 48 of 2009 on Judicial Authority (“Law No. 48/2009”), stating that the Constitutional Court has the authority to prosecute in first and last level which its decision is final for judicial review of laws to the 1945 Constitution.

Moreover, according to Article 51 (3) Law Number 24 of 2003 on the Constitutional Court as lastly amended by Law Number 7 on 2020 (“Law No. 24/2003”), Constitutional Court has the authority to review laws through formal and material reviews. Hence, the petition of the judicial review must clearly describe that:

  • the law-making does not conform with the provisions following the 1945 Constitution; and/or

  • the material contents in paragraphs, articles, and/or parts of the law are deemed contradictory to the 1945 Constitution.

In the event of a formal review, Article 22A 1945 of the Constitution states that further provisions regarding the procedures to conform laws shall be regulated by law, which is Law No. 12/2011. Thus, the examination and decision of a formal judicial review performed by the Constitutional Court are based on Law No. 12/2011. Concerning Decision No. 91/2020, the Petitioners submitted a petition to Constitutional Court to formally review law No. 11/2020 as it is violated the law-making procedure as regulated in Law No. 12/2011.

Decision No. 91/2020: a Formal Judicial Review against Law No. 11/2020

Referring to the provisions in the 1945 Constitution, the making of law process is a series of activities carried out continuously consisting of 5 (five) stages, namely: (i) submission of a draft law; (ii) joint discussions between the House of Representatives and the President (and also the Regional Representative Council/Dewan Perwakilan Daerah insofar as it is compliant with Article 22D (1) and (2) of the 1945 Constitution); (iii) a joint approval between the House of Representatives and the President; (iv) ratification of the draft law into law; and (v) the enactment. In addition to fulfilling the formalities of all stages above, another point that must be considered and fulfilled in law-making is public participation.

Furthermore, in carrying out a formal review of the law, besides the 1945 Constitution, the Constitutional Court shall also examine such law according to Law No. 12/2011 as the law that regulates the procedures for law-making. Under Consideration (b) Law No. 12/2011, to fulfill the public need for good law, law-making must be regulated based on fixed and standard procedures and methods that bind all institutions authorized to make law. Provisions regarding the technique of drafting law are listed in Appendix II of Law No. 12/2011.

Law No. 11/2020 was drafted with the omnibus law method, which deals with numerous objects or items at once or having various purposes. Nevertheless, such a method is not regulated in law No. 12/2011 cannot be applied as long as it has not been adopted in Law No. 12/2011.

Subsequently, law-making must be carried out according to the principles of good law-making as follows: (i) clear purpose; (ii) competent state institution or official; (iii) conformity between type, hierarchy, and material content; (iv) enforceability; (v) efficiency and effectiveness; (vi) precise formulation; and (vii) transparency. However, it is known that in Law No. 11/2020:

  • there has been a quoting error in referring to the article in Law No. 11/2020. Thus the making of Law No. 11/2020 is not following the principle of “clarity of formulation”, in which every law must meet the technical requirements for the law forming, systematics, choice of words or terms, as well as clear and easy legal language, so it is not to cause multi interpretation in its implementation; and

  • the examination revealed that the legislators did not provide maximum space for public participation concerning the transparency principle.

Moreover, discrepancies were found between the draft Law No. 11/2020, which had been jointly approved by the House of Representatives and the President before it was ratified and enacted into law and the draft that has been ratified into law.

Based on all legal considerations above, as the procedures for the formation of Law 11/2020: (i) is not based on definite, standard, and standard methods and methods, as well as the systematic formation of laws; (ii) there was a change in the writing of several substances after the joint approval of the House of Representatives and the President; and (iii) contrary to the principles of the law forming, the Constitutional Court opines that the process of forming Law No. 11/2020 did not meet the provisions under the 1945 Constitution. Thus Law No. 12/2020 is declared procedurally defective.

Referring to the Constitutional Court’s consideration in Section 3 Paragraph 3.20.1 Decision No. 91/2020, the Constitutional Judges opine that it is known that the reasons the government used the omnibus law method are to accelerate investment and expand employment opportunities in Indonesia. However, referring to Section 3 Paragraph 3.20 Decision No. 91/2020, the judges opine that it is still not allowed to use the omnibus law method to override the applicable procedures for the law-making according to Law No. 11/2020.

As it has been legally proven that Law No. 11/2020 is procedurally defective, while there are also big goals to be achieved with the enactment of Law No. 11/2020 and its implementing regulations, thus to avoid legal uncertainty and the more significant impact in the future, the Constitutional Court opines that Law No. 11/2020 must be declared Conditionally Unconstitutional. Further explanation regarding Conditionally Unconstitutional will be elaborated in Section D below.

The Constitutional Court’s Authority in the Context of Conditionally Unconstitutional Decisions

Conditionally Unconstitutional means that the articles requested by the petitioners for review are unconstitutional if the conditions set by the Constitutional Court are not fulfilled. There are 4 (four) characteristics of Conditionally Unconstitutional, as follows:

  • Conditionally Unconstitutional decision in its decision must have a clause Conditionally Unconstitutional;

  • Conditionally Unconstitutional decisions can be in the form of meaning or interpretation of a norm or providing unconstitutional conditions for the norm;

  • Conditionally Unconstitutional decisions are based on the decision granting either partially or entirely because, in principle, the norms being tested are unconstitutional, but with certain conditions;

  • The Conditionally Unconstitutional clause is not substantially different from the conditionally constitutional clause since the norm would be unconstitutional eventually if the revision is not made.

Thus, when the decision is pronounced, the petitions submitted for review become unconstitutional. It will only become constitutional if the requirements set by the Constitutional Court are satisfied by the adjunct at the time of the Constitutional Court's decision. The Constitutional Court considered this decision to adhere to structural functionalism that seeks to balance various interests. Moreover, 4 (four) of the 9 (nine) judges had dissenting opinions, which had divided the nine judges, and this conclusion appears to be a central point.​

Decision No. 91/2020 affirmed the non-compliance with the process of developing Law No. 11/2020. If no decision is made to amend, this unqualified behavior will obtain credibility and will repeat continuously.

Responses from the Government on Decision No. 91/2020

Reported in the Official Website of the President of Republic of Indonesia, President Joko Widodo stated that the Government respects Decision No. 91/2021 and will immediately carry out the instructions thereof by ordering Coordinating Minister of Economic Affairs and other related ministers to immediately follow up and make improvements regarding the said decision. The Coordinating Minister of Economic Affairs and Minister of Law and Human Rights, had also issued a formal response respecting and acknowledging the Decision on behalf of the Government soon after the pronouncement of Decision 91/2021.

It can be inferred from both press releases that the Government committed to observe Decision No. 91/2020 and to arrange the necessary steps to revise Law No. 11/2020 as instructed by the Constitutional Court. The Government also added that Law No. 11/2020 and all its existing implementing regulations are still in effect. An additional guarantee is also provided by the President to businesses on the security and certainty of investment in Indonesia.

In addition, the Vice Chairman of the House of Representatives, Sufmi Dasco Ahmad, emphasized that the House of Representatives also acknowledges Decision No. 91/2020 which is final and binding. In this regard, the House of Representatives informed that it will conduct further study on the Decision to devise a plan of action in response to the instructions within the Decision. Furthermore, that plan of action will be discussed further by the House of Representatives jointly with the Government in the near future.

The Impacts of Decision No. 91/2020

Decision No. 91/2020 tries to accommodate various interests. Nevertheless, the Constitutional Court has given a conditionally unconstitutional status by granting a maximum tolerance period of 2 (two) years. Failure within those 2 (two) years to revise Law No. 11/2020, then Law No. 11/2020 becomes permanently unconstitutional. This status gives ambiguity because Law No. 11/2020 that has been expressly stated to be contrary to the 1945 Constitution, still has the chance to be applicable for 2 (two) years; under the pretext of use, many derivative regulations have been issued and have also been implemented.

The compromise made by the Constitutional Court is also apparent in its decision to suspend governmental actions or decisions which are “strategic and extensive” in nature. Unfortunately, the Constitutional Court neither define nor delinate the policies that are included within that “strategic and extensive” clause. However, one can argue that “strategic and extensive” clause is explicable by virtue of the purview of Law No. 11/2020, as declared in Article 4, which states:

“To achieve the objectives referred to in Article 3, the scope of Law No. 11/2020 regulates the strategic job creation policy, which includes:

  • improvement of the investment ecosystem and business activities;

  • employment;

  • convenience, protection, and empowerment of cooperatives and SMEs;

  • ease of doing business;

  • support for research and innovation;

  • land acquisition;

  • economic area;

  • Central Government investment and acceleration of national stratification."

Through this enumeration, one could interpret the “strategic and extensive” as consisting of the policy areas included in Article 4 of Law No. 11/2020.  As a result, all derivative regulations concerning these policy areas will be uniformly suspended. Moreover, aside from regulations (regeling), government legal action might take the shape of a decision (beschikking) resulting from state administration or activities. This would mean that administrative decisions concerning the previously mentioned policy areas are also barred from being issued.

Nonetheless, this interpretation should not be considered as authoritative, since different institutions with different interests will seek to interpret the clause according to their own objectives. For instance, some might seek to refuse to observe this clause, since ruling the suspension of all actions which are “strategic and extensive” in nature is not within the Constitutional Court's power. Instead, the State Administrative Court and District Court have this authority. The authoritative interpretation of the clause still remains to be seen.

One point of certainty explicitly mentioned in Decision No. 91/2020 is that all derivative regulations of Law No. 11/2020 issued before this revision order will still be applicable. Derivative regulations have a delegative role in the law as they serve to strengthen law enforcement. However, further derivative regulations shall not be enacted under Decision No. 91/2020. Meaning that this vacuum in the new derivative regulations may cause uncertainty in the practical perspective of Law No. 11/2020. Thus, the effectiveness of specific provisions lies in the strength of the existing regulatory framework of Law No. 11/2020.

We will continue to follow up on the aftermath of Decision No. 91/2020, specifically on further implementation of Law No. 11/2020 that may affect practical level, i.e., industrial relation, licensing submission, and taxation.