New investment law is not pro-poor

Down to Earth No. 73, May 2007

The Indonesian parliament passed a new investment law in March, despite strong civil society opposition and despite much concern over its implications.

Several years in the making, Indonesia's new investment law, UU Penanaman Modal 2007, is aimed at reinvigorating investment in the Indonesian economy, creating jobs and reducing poverty. Those at least were the goals highlighted by President Susilo Bambang Yudhoyono (SBY) when committing his administration to promoting a new law. In a 2005 keynote speech to the Indonesia Global Investment Forum in New York, the president argued that the country needed to attract investors in order to create jobs and halve the poverty rate by 2009. He said Indonesia needed US$426 billion worth of investment to make the 6.6% growth target possible each year until 2009¹.

"Because of its impact on job-creation, we see private investment, especially foreign direct investment, as necessary for the conquest of poverty. It is the key factor to human development. Every job created by an investment lifts an individual from extreme poverty and redeems her dignity. That is why we are determined to make foreign investments the engine of our economic growth." (Investment Forum speech, 19/Sep/05)

President SBY's push to increase foreign investment has been a constant feature of his term so far. Since the economic collapse of 1997-8, investment confidence has been low in Indonesia and the business community has complained of the lack of legal certainty, red tape, slow approval procedures and corruption. Whether the international business community has got all it wanted in the new law is doubtful but, if the associated government regulations follow along as planned, it will have made a lot of gains. These include tax breaks, a simpler procedure for starting up businesses, greater flexibility to move funds around, the employment of foreign staff and longer land use, building and other permits.

What does all this mean for ordinary people? More government revenues to spend on health and education? More jobs? A more highly-skilled workforce? Better infrastructure in remote areas? Maybe some of these things in some places for some people. But the new law also has the potential to do a great amount of damage to communities and their environments. Civil society organisations argue that the incentives offered to attract investments are not balanced by equal responsibilities for the investors or businesses, thus creating the potential for a 'race-to-the-bottom' as far as accountability standards are concerned. Where investors gain, especially in terms of access to land, facilities and finance, communities may well lose out - leading to an increase, rather than a reduction, in poverty. In rural areas, it is feared, the law will continue an already entrenched pattern of natural resources theft, human rights violations, environmental degradation and loss of livelihoods for communities whose resource rights are not adequately recognised under Indonesian law.

Main concerns

The new law replaces laws on foreign and domestic investment (No. 1, 1967 and No. 6, 1968). To be made fully operational, several other laws - including the Companies Bill and the Agrarian Law - need to be passed or revised. The following features of the law have prompted particular concern among civil society organisations, including peasants groups and labour and women's organisations:

Land: there is serious concern that the law will perpetuate conflicts over land, by making it easier for investors to acquire land and by creating a huge jump in the length of time that companies can control large areas of land. Protestors point out that the leases, now up to 95 years, are longer even than during Dutch colonial times. The Indonesian Peasants' Union says this shows the President's promises of pro-poor agrarian reform and revitalisation of agriculture are empty words. Oil palm is one sector which has seen massive expansion in recent years, accompanied by land conflicts, evictions and loss of land for local communities, including indigenous groups, as well large-scale forest destruction. Much more expansion is planned, partly driven by the increasing demand for biofuels. The new law will assist this expansion and make it more difficult for local people to defend their resources, livelihoods and economic independence (see DTE 72 for more background on oil palm and biofuels). The following lease rights used by investors are extended under the new law:

• Right of cultivation/exploitation (HGU): this is the right acquired by companies investing in the agricultural and fisheries sector, such as plantation developers. Under the previous arrangements, the lease was up to 35 years and could be extended for maximum of a further 25 years. Under the new law, the HGU lease is for an initial 60 years, extendable for a further 35 years.
• Right to use (and construct) buildings (HGB): needed by investors for building agricultural processing plants, pulp mills, ore processing facilities etc. Previously, these leases were for a maximum of 50 years, but under the new law the initial period is 50 years, with the option to extend for another 30 years.
• Right of use (Hak Pakai): another form of land lease which can be acquired by investors. Previously the length of the lease was determined by local administrations, but it is now available for a maximum period of 70 years².

Failure to protect economic & social rights or deal with poverty: the new law conflicts with the Indonesian Constitution, argues an NGO coalition of 29 organisations set up to reject the bill. The constitution obliges the state to control and use Indonesia's land, waters and the natural riches they contain for the greatest benefit of the people. Since the new law permits 100%-owned foreign companies to exploit Indonesia's resources³, to pay reduced levels of taxes, to use foreign staff and to transfer profits and capital overseas, the greatest benefit of the people is not being served.

The new law also runs counter to the constitution's commitment to 'economic democracy' and self-sufficiency. NGOs say the new law instead reinforces economic imperialism by rich countries, by laying out a red carpet for investors and selling the country's assets to corporations. Among the items on offer to investing companies are tax incentives for those with projects in rural or border areas (the highly controversial extractive and plantation sectors spring to mind) and projects that have the capacity to create a lot of jobs, along with reduced import duties on capital machinery and raw materials and reduced building and land taxes. Companies will have greater flexibility in bringing in foreign staff if skills are not available locally, and a guarantee that the government will not nationalise their industries. All sectors, except the defence industries, are open for foreign investors: foreign and local companies now have equal status.

The law also fails to take into account the emphasis on the protection of the public's rights in several international instruments such as the International Covenant on Economic, Social and Cultural Rights; the Convention on the Elimination of All Forms of Discrimination against Women (CEDAW) and the UN Convention on the Rights of the Child, as well as the aims of the Millennium Development Goals to eradicate poverty, all of which Indonesia has signed up to. A statement issued by the coalition argues that previous laws, including those on foreign investment, have failed to address poverty, currently standing at 110 million people living on less than US$2 per day. The NGOs argue that more private investment in public services, such as water, will worsen poverty and have a disproportionate impact on women and children, as well as turning citizens, who have the right to protection, into consumers who can only buy services if they can afford to.

Transparency and participation: there was no real public debate about the contents of the bill and no public consultation during the drafting process. However, the World Bank had substantial influence (see below). Other bodies that were involved in consultations include the Indonesian Chamber of Commerce, The National Economic Recovery Committee, the Centre for Strategic and International Studies (CSIS) and the International Business Chamber (the umbrella organisation for business organisations for foreign nationals).

The NGO Business Watch Indonesia is calling for much greater civil society participation in and monitoring of the drafting of flanking laws upon which the investment law depends if it is to be fully operational. These include laws which cover agriculture, land use, environmental protection, companies and funds repatriation. Crucial decisions which may limit or - at worst - expand the scope of the new investment law are to be made before these laws are finalised by 2009.

Debt: Indonesia's mining advocacy network, JATAM, has highlighted the link between investment and debt: attracting investors means improving Indonesia's ageing infrastructure, which requires foreign loans, increasing the national debt. President SBY's attempt to attract private investment into public infrastructure projects has not proven successful to date (see DTE 69).

Demonstrations

The level of concern in Indonesia about the potential impacts of the law led to several protests in the weeks leading up to the bill's passage through parliament. The Civil Society Coalition to Reject the Bill said the new law would help foreign investors' efforts to drain Indonesia's natural resources and exploit the country's manpower for low wages.

In Jakarta, protesters filled the courtyard of the National Investment Agency (BKPM) on Jalan Gatot Subroto, one of the capital's main thoroughfares. Eleven groups were represented at the protest, including women's groups, anti-debt, youth and environmental groups, peasants and labour unions. The protesters said the new law would add to the list of violations of economic, social and cultural rights by the state and by corporations. In the Central Java city of Solo, student and NGO protesters declared their rejection of the law, highlighting dangers for national sovereignty, people's rights and conditions for workers and farmers.

On March 28th, activists from the national peasants' union, FSPI, interrupted a parliamentary committee meeting to discuss the bill by throwing leaflets opposing the bill from the public gallery.

World Bank involvement

The pro-investor flavour of the new law is not surprising, given President SBY's belief in the need to attract inward investment. What may not be so obvious is the key role that the World Bank Group played in preparing the law. The Bank's involvement started in late 2004, when senior Bank staff from the Jakarta office held meetings with the newly elected president's coordinating minister for the economy, Aburizal Bakrie (of Sidoardjo mudflow notoriety). According to the Bank, an advisory team was formed to assist Bakrie, who had been given the task of guiding the process of reforming national investment policy. A more formal project ran from July 2005 to March 2006, to assist with preparing the new investment law, with developing an investment promotion agency and with the provision of information on best practice for incentives for investors.

The team's activities were extensive, including commenting on drafts of the law and implementing regulations on incentives; providing working papers and policy notes, preparation and discussion of 'drafting guidelines' for the law's implementing regulations and participation in meetings. A report on the project hints at the sensitivities surrounding Bank involvement. It says that providing drafting guidelines "avoids the situation in which the WBG is seen to be drafting legislation directly". Yet the purpose of the project appears to be just that. The report claims the project was successful in having an impact on the form of the draft law submitted to parliament as well as "indications of significant influence on the form and content of a number of the implementing regulations (Presidential decrees)".

Such interventions, which inevitably promote the Bank's ideas on how international business should be done, can only deepen the sense among Indonesia's marginalised population that their government is conspiring with the interests of global capital, as represented by the international financial institutions, rather than working to protect the poor.

(Source: Keynote Address Susilo Bambang Yudhoyono at the Indonesia Global Investment Forum, New York, 15/Sep/05 at www.ekon.go.id/v3/content/view/226/62/accessed 27 Mar 2007; Tempo Interaktif 13/Mar/07; Tempo Magazine No.31/Vii/Apr 03-09, 2007; JATAM 12/Feb/07; Jakarta Post 27/Mar/07; Position Paper, Civil Society Coalition to Reject the Investment Bill, 11/Mar/07; The Preparation of a new Investment Law and related Implementing Regulations in Indonesia, A report on the World Bank Group's contributions, May 2006, from www.worldbank.org; Xinhua 15/Mar/07. Thanks for additional insights are due to Business Watch Indonesia.)

Notes:
¹ This level of growth is not likely to be achieved. Latest figures from the Indonesian Statistics Bureau show growth at 5.97% over the past year. 
² Soewito Suhardiman Eddymurthy Kardono, Indonesia: Indonesian Mining 2006, 21 July 2006, Mondaq, www.mondaq.com/article.asp?articleid=41340&lastestnews=1, accessed 8/May/07; Jakarta Post 23/Mar/07
³ Apart from protected sectors related to national defence. Pertamina, the state-owned oil company, has also had an obligatory interest in foreign-owned oil companies protected.
⁴ The BKPM figures are based on permanent licences issued to certain sectors (excluding oil and gas, banking, mining and some other sectors) and do not reflect actual inflows. UNCTAD puts the figure for actual FDI inflows for 2005 figure at US$5.260 billion - see www.unctad.org, a major increase on the 2004 figure of US$1,896. No figure is available for 2006 at time of writing.