Omnibus law could slow rather than drive Chinese investment in Indonesian energy

Controversy around the ‘unconstitutional’ law adds to an uncertain legal environment, while global shifts in fossil fuel finance may force an investment rethink.

Silas Matoke and his wife, Yordana Yawate, pose for photographs as they harvest sago known as 'pangkur' on the banks of the Tuba river in Honitetu village, West Seram regency, Maluku province, Indonesia. Image: CIFOR, CC BY-SA 3.0, via Flickr.

As Indonesia’s government races against time to revise the controversial Job Creation Law – popularly known as the Omnibus Law – questions remain about the impact these revisions, and the nature of the law itself, may have on the realisation of energy and mining investments from China, one of the country’s largest foreign investors and trading partners.

President Joko “Jokowi” Widodo enacted the Omnibus Law in November 2020 despite weeks of protests across many parts of the country, which is Southeast Asia’s largest economy and most populous democracy. 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, its critics have remained unconvinced. They believe it would further damage the environment and provide more room for employers to exploit the country’s labour force.

Indonesia’s Constitutional Court declared the law “conditionally unconstitutional” in November 2021, finding it to contradict the country’s 1945 State Constitution and have “no conditional binding legal force.” As a result, authorities were told to present revisions within two years – by late 2023 – or risk the law being permanently nullified.

Rolling back environmental and social protections does not bring more Chinese investment.

Rebecca Ray, senior academic researcher, Global Development Policy Centre

The passing of the law’s revision will depend on the political configuration in 2024, the year of Indonesia’s next general election, and whether the government “still has strong enough political capital in parliament” to push it through, says Giri Ahmad Taufik, a legal researcher at the Indonesian Center for Law and Policy Studies (PSHK) and lecturer at the Indonesia Jentera School of Law.

“The political situation is dynamic, especially when it comes to crucial matters concerning the environment and employment, so the parliament might be careful [in weighing those] considering that 2024 is approaching,” Giri says.

Yet, experts say the country should not see the Job Creation Law as legislation that could sustain and secure future mining and energy investments from China. According to Indonesia’s investment ministry (BKPM), so far in 2022 mainland China has been the third-largest foreign investor in the country after Singapore and Hong Kong, accounting for US$1.4 billion or 13.2 per cent of total foreign investments 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 per cent of foreign investment in the first quarter of 2019.

Attracting Chinese investment

Rebecca Ray, senior academic researcher at Boston University’s Global Development Policy Centre, says her research on Chinese overseas investment shows that “rolling back environmental and social protections does not bring more Chinese investment” – conditions and an outcome the Job Creation Law has looked to stimulate. One of the critical elements of the law would be the implementation of deregulation policies, which could benefit oligarchs in the country.

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

In December 2021, Ray published a paper on social-ecological risk mitigation in Indonesia amid an increase in China’s foreign investments, alongside 13 other authors. She says that reducing such protections would likely do a “disservice in the long term” on the part of Chinese investors.

“The investors are there for other reasons,” Ray says. “And if they’re just not as well regulated, they’re more likely to run into social conflict, suspensions, even cancellations, because of environmental and social risks that were not properly taken into account in the planning stages.”

“Our work shows that a more constructive policy response is to work deeply with Chinese counterparts, find out what their motivations are, and find a way to jointly regulate these investments, which are often in very environmentally and socially sensitive sectors.”

Southeast Asia’s largest population has seen some public opposition regarding Chinese-funded projects in the country. For instance, in March 2019, activists from WALHI, a domestic environmental NGO, protested in Jakarta to demand that the Bank of China not fund a hydropower dam in North Sumatra province. In an open letter, they said the project would “likely doom the newly discovered Tapanuli orangutan species to extinction.” Meanwhile, in June 2020, hundreds of Indonesians in Southeast Sulawesi opposed the arrival of hundreds of Chinese workers in the province over concerns they deprived local people of jobs.

A low-carbon pivot?

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

Bill Sullivan, senior foreign counsel at the Jakarta-based law firm Christian Teo & Partners, says “there’s always a high level of uncertainty” in Indonesia, particularly around its policies and regulations. But he says that, compared to Western investors, Chinese firms are “rather less concerned” about such uncertainties. “I suspect that‘s because they’re forced into dealing with the somewhat opaque regulatory environment in China,” he says.

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

Last year, both China and Japan, two of the biggest investors in Indonesian coal power, announced an end to their financing of new coal-fired power plants overseas. Indonesia also published its low-carbon strategy up to 2050. “Combined, these developments reflect a turning point for the country’s clean energy transition,” the GEM report states.

Beijing’s new guidance on Belt and Road projects, which asks that they align with the Paris Agreement, is also set to influence investment decisions overseas. The Task Force on Climate, Development and the International Monetary Fund recently analysed some of the negative impacts that China’s falling demand for coal could have on Indonesia, such as loss of employment in the mining sector. However, low-carbon projects such as renewable power generation are a promising alternative investment destination, given China’s keenness to support environmentally sustainable projects.

With over a year left until the deadline for amendments to the Job Creation law, Giri does not foresee a straightforward path, particularly with 2024 election campaigns looming. “The discussion on the revision of the law is likely to cause political upheaval and the potential for political parties to recalculate,” he says. It doesn’t look like the controversy surrounding the law will be going away any time soon.

This article was originally published on China Dialogue under a Creative Commons licence.

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