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Exclusive: IMF raises concern over environmental standards in Job Creation Law

Jakarta Post - October 22, 2020

Adrian Wail Akhlas, Jakarta – The International Monetary Fund (IMF) has raised concern over environmental protection – or the lack thereof – in the Job Creation Law, calling on the government to ensure sustainable growth.

While the new omnibus law would ease restrictions that had been identified as obstacles to job-creating investment and higher productivity, which could boost growth and reduce poverty, one concern related to environmental standards, said IMF mission chief for Indonesia Thomas Helbling.

"The implementing regulation that is now underway should be guided by the need to ensure sustainable and inclusive growth," he told The Jakarta Post through email on Wednesday. "It should be applied in a consistent and transparent fashion."

The omnibus bill, passed into law on Oct. 5, has sparked widespread public protests and labor strikes as it is considered as undermining labor rights and weakening environmental protection. Protests entered their third week as thousands of students and workers took to the street on Tuesday.

Businesses considered low-risk will only need to register before they begin operations, according to the new law. Meanwhile, businesses considered medium-risk need to follow a set of standards, and only high-risk investment required an environmental permit.

Environmental studies are only required for investments considered to be high-risk. Investment permit procedures by provincial and local governments will be standardized, with the central government able to take over in certain cases.

The law raises the fines for environmental damage, with those burning forests facing 15 years of imprisonment and fines of Rp 7.5 billion.

The IMF has joined a list of foreign institutions that voiced concerns over environmental protection in the omnibus law, namely credit rating agency Moody's Investor Service, investor Sumitomo Mitsui Trust Asset Management and 34 others foreign investors.

"There have been strong [environmental] concerns among long-term investors like ourselves over the reforms, which may weaken efforts the government has pursued over many years," Sumitomo Mitsui representative director Yoshio Hishida wrote in a letter to Deputy Foreign Minister Mahendra Siregar, a draft of which was seen by the Post.

Previously, 35 foreign investors managing US$4.1 trillion in assets, including Sumitomo Mitsui, warned that the omnibus law could pose new risks to the country's tropical forests.

"While we recognize the necessity for reform of business law in Indonesia, we have concerns about the negative impact of certain environmental protection measures affected by the omnibus bill on job creation," Netherlands-based asset manager Robeco senior engagement specialist Peter van der Werf said as reported by Reuters.

"While the proposed regulatory changes aim to increase foreign investment, they risk contravening international best practice standards intended to prevent unintended harmful consequences from business activities that could deter investors from Indonesian markets."

Meanwhile, Moody's said the relaxation of reporting standards for businesses that had acquired approval for their environmental impact analysis and the eased restrictions on clearing peatland for palm oil plantations could "deter foreign investment that was increasingly focused on environmental, social and governance-driven goals and responsible commodity production".

In a statement published on Oct. 16, the World Bank said the omnibus law was a "major reform effort to make Indonesia more competitive and support the country's long-term aspiration of becoming a prosperous society", adding that removing burdensome restrictions on investment would help attract investors, create jobs and fight poverty.

"Consistent implementation of the law will be critical and will require strong implementing regulations to ensure inclusive and sustainable economic growth as well as concerted efforts by the government of Indonesia and other stakeholders," the US-based lender added.

Meanwhile, Fitch Ratings sovereign analyst for Indonesia Thomas Rookmaker said the law marked a significant enhancement of the business climate and a step forward for labor market flexibility, which should improve the country's international competitiveness if implemented properly.

"The reforms will put Indonesia in a better position to capitalize on shifts in global manufacturing supply chains," he wrote in an op-ed article published by the Post titled "Omnibus law boosts Indonesian growth prospects". "Fitch Ratings believes that the law will bolster Indonesia's long-term economic growth prospects."

Source: https://www.thejakartapost.com/news/2020/10/21/exclusive-imf-raises-concern-over-environmental-standards-in-job-creation-law.html