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G20 New Delhi: World Economy Issues and Evaluation of Investment Regulations in Indonesia

The G20 Meeting in India presents a significant topic for discussion among both developed and developing countries: “One Earth, One Family, One Future.

The meeting held in New Delhi at the Bharat Mandapam International Exhibition-Convention Centre is closely tied to current issues, particularly those concerning the global economy.

Indonesia is one of the countries affected by the global economic repercussions following Covid-19. According to data from the Coordinating Ministry for Economic Affairs of the Republic of Indonesia (9/9/2023), global growth rates have been on a declining trend, slowing down from 6% in 2021 to 3.2% in 2022. The growth for 2023 is also estimated at 2.7% (IMF, June 2023). Amid this global situation, Indonesia, as a member of the G20 India Presidency Troika, continues to work towards achieving a consensus among G20 members to produce a G20 Leaders’ Declaration.

During the two-day meeting, G20 countries committed to promoting economic growth, supporting investment, and sustainable development.

Indonesia often faces numerous challenges, one of which pertains to the national economy within the country. Therefore, there is a need for evaluation in Indonesia to enhance economic growth through macro-scale development.

The Weakness of Legal Certainty in Investment in Indonesia

In terms of data, Indonesia does indeed possess abundant natural resources but lacks the necessary capital and expertise for their management. It is essential to understand that attracting both domestic and foreign investors to enter and invest in Indonesia is not an easy task. This endeavor must be accompanied by a healthy and conducive investment climate to make investors feel comfortable and confident that their investments will yield profits. On the other hand, one of the yardsticks for a country to have a conducive investment climate is regulations. Regulations should provide legal certainty for investors.

Legal certainty (Rechtmatigheid) is an imperative factor in attracting foreign capital to a country, as expressed by Daniel S. Lev, who emphasized that legal certainty is a Conditio Sine Qua Non (an absolute prerequisite) in economic development. Therefore, without a clear and effective legal process, economic improvements become challenging.

Legal uncertainty can be attributed to several factors. Firstly, it stems from the substance of legislation, which often overlaps or lacks synchronization. For instance, the existence of regional autonomy has led to the emergence of local authorities who enact rules, causing headaches for entrepreneurs whenever there are changes in local regulations. The abundance of unclear regulations makes it challenging for entrepreneurs to calculate costs. For example, many local regulations impose fees on investors who invest in a region, even though these charges are already included in contracts signed by the central government and investors.

This leads to instances of double taxation, often found in contracts related to the oil and gas industry and mining contracts. On the other hand, most regional governments currently lack land-use regulations, causing delays in land acquisition processes for development projects. Secondly, it results from ineffective law enforcement in supporting increased investment. Despite both local and foreign investors adhering to existing regulations, viewing compliance as a way to respect national laws while investing in Indonesia, the lack of effective law enforcement hampers the investment climate.

Regarding the inconsistency between “Das sollen” (what should be) and “Das sein” (what actually is) in terms of legal certainty, it often prompts complaints from the business world. In reality, many investors in Indonesia face dilemmas, sometimes leading to the withdrawal of investments, which, in turn, affects other potential investors considering entering Indonesia. This becomes an obstacle to investment, alongside issues such as corruption, bureaucracy, and infrastructure, which are additional factors hindering investment in Indonesia. Both local and foreign investors primarily hope for a strong legal framework in this country to ensure business certainty. The extremely weak legal certainty in creating an investment-friendly environment discourages investors from putting their money into Indonesia.

Meanwhile, the results of the World Bank’s survey have also lowered Indonesia’s ranking in the Ease of Doing Business (EoDB) index from 73 to 72 out of a total of 190 countries. The examples of investment mentioned here also encompass legal certainty, macroeconomic stability, system, and infrastructure availability.

The lack of legal certainty and transparency has caused the pace of investment in Indonesia to be lower compared to other G20 countries, such as India, Mexico, South Africa, and Brazil. If this trend continues, it could lead to competitiveness issues, potentially burdening the investment climate in Indonesia. If this situation persists, it may become a disincentive for domestic entrepreneurs in their efforts to strengthen investments.

Regulations on Investment in Indonesia in Each Region

One of the efforts to achieve sustainable development undoubtedly requires capital, and to obtain substantial capital (not debt), it involves providing extensive opportunities for investors, both domestic and foreign. This is done to expedite the national development process, particularly in the economic sector.

Looking at the history of Foreign Direct Investment (FDI) in Indonesia, we can observe it through the intricate framework of the Investment Law. It commenced during the New Order era with the enactment of Law No. 1 of 1967. Post-Reformasi, this framework has been refined through Government Regulation No. 20 of 1994 and Investment Law No. 25 of 2007.

During President Soeharto’s leadership, for the first time on April 7, 1967, the government accepted Foreign Direct Investment (FDI) marked by the signing of the Contract of Work I for a duration of 30 years. Until today, Indonesia remains open to foreign investors, including individual foreign citizens, foreign business entities, and/or foreign governments that engage in investment activities within the territory of the Republic of Indonesia.

As a developing country, Indonesia cannot turn away from Foreign Investors, as the benefits gained from foreign investment can at least support the country’s economic growth and fulfill its needs, particularly in running the government.

Based on Law No. 25 of 2007 concerning Investment, Article 4 (2) further regulates the rights that investors, including foreign investors, should rightfully receive. Investors are entitled to legal certainty, protection, service rights, open information, and facilities to facilitate their investments in Indonesia. These facilitations are not meant to provide excessively wide access for investors to invest, but rather to offer assurance and trust to investors in conducting their business in Indonesia.

However, in reality, the responsibility for creating a healthy and conducive business environment is not solely that of the government but also the responsibility of the entire nation, including business actors and the general public.

Local governments, in collaboration with the central government, need to address these issues promptly if they wish to attract the expected investment that will be a pillar of development. Furthermore, local governments should not only focus on that aspect but also take serious steps to prevent the enactment of regional regulations that hinder investment. This should be aligned with transparency in the investment sector, which indirectly ensures fairness for investors who invest their capital in Indonesia. By realizing these measures, Indonesia will have the opportunity to compete with other countries globally.

Writer: Wahyu Hidayat (Master of Law Student at Ahmad Dahlan University, Indonesia)

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