Showing posts with label investment. Show all posts
Showing posts with label investment. Show all posts
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Indonesia - Investment Policy Review – OECD

Wednesday, December 22, 2010

The 2010 OECD Investment Policy Review contains a quite comprehensive assessment of Indonesia’s regulatory and investment policy. For those of you who areinvestment lawyers, Chapter 2 discusses in depth, Indonesia’s  implementation of international investment principles. Other aspects such as competition policy, infrastructure, and corporate governance were also addressed. A sneak peak of the book is available in Google Books . The book dedicate a sub chapter on water infrastructure (ch 5.6) and cited my newspaper Article (Indonesia Needs a Strong Water Services Law). The analysis on water related investment is not really in depth, but it agrees that vague laws and regulations could be a deterring factor for foreign investment in this sector. The book’s executive summary is available for a free download, but the complete hard and soft copy versions are not free.


Foreign Direct Investment in Indonesia [Guest Post]

Monday, November 8, 2010


Ed note: this is a guest post by Suria Nataadmadja (suria[at] and Selviyani from SURIA NATAADMADJA & ASSOCIATES. If you have further inquiry on this topic, please contact the authors directly.

As a matter of clarity, the term foreign direct investment is used here to distinguish it from the investment made by acquiring the shares of an Indonesian company from the stock market. Foreign direct investment can also be done by acquiring the shares of an established foreign investment company. The effect of foreign direct investment is to ascertain the share holding of foreign investors in a limited liability company as regulated by Law Number 40 of 2007 regarding Limited Liability Company, promulgated on August 16, 2007 in State Gazette 2007 Number 106 (“Law 40/2007”), and Supplement to State Gazette Number 4756.

Foreign direct investment in Indonesia has started as early as 1967 and the government has changed the law to Law Number 25 of 2007 regarding Investment, promulgated on April 26, 2007 in State Gazette 2007 Number 67, and Supplement to State Gazette Number 4724 (“Law 25/2007”). This Law supersedes Law No.1 of 1967 regarding Foreign Investment, and Law No.6 of 1968 regarding Domestic Investment. Compared to the 1967 Law, the new legislation is more accommodating to foreign investors, addressing important issues such as land rights. A presidential decree number 36 of 2010 regarding List of Business Open and Closed with Restriction for Investment (“Negative Investment List”) updated Indonesia’s Negative Investment List of December 2007 as regulated by presidential decree Number 76 of 2007. The main purpose of the new Negative Investment List are to implement the Indonesian government’s commitment to the Association of Southeast Asian Nations/ASEAN Economic Community but nevertheless it will encourage foreign direct investments from other countries as well. Only direct investments either foreign or domestic will be affected by the Negative Investment List. Indirect investment through the stock market will be exempted from complying with this Negative Investment List.

Certain investment that is meeting the requirement as stipulated in article 18 of Law 25/2007, entitled to be given tax incentives i.e. Income tax reduction; Custom exemption to machineries, capital goods and tools; Custom exemption on raw materials; VAT exemption; Accelerated amortization and depreciation; and Incentive on land and building tax. The government also recently issued Government Regulations No.1 of 2007 regarding the Facility of Income Tax for Investment on Certain Business Sectors or Regions (January 2, 2007). The certain business sectors amongst others are: food processing industries, packaging industries, plastic goods industries, cement industries, furniture industries, seafood processing industries, etc. Furthermore, the Government also issued the following regulations e.g. Ministry of Finance No.16/PML/03/2007 regarding Granting Income Tax Facilities for Investment on Certain Business Sectors or Certain Regions, Directorate General of Tax No. Per 67/PJ/07 of 2007 regarding Procedure of Granting Income Tax for Investment on Certain Business Sectors and/or Certain Regions.

Investments in Indonesia are coordinated by the Investment Coordination Board or Badan Koordinasi Penanaman Modal (“BKPM”); a nongovernmental department board leads by Head of BKPM, a position of ministerial level. BKPM’s policy has a very simple guidelines, forms, and requirements for filling applications of investment licenses as regulated by Decree of Head of BKPM Number 57/SK/2004 and Number 70/SK/2004. Latest regulation issued by BKPM is regulation No. 12 of 2009 regarding Guidelines and Procedures Application of December 23, 2009, that replaced the previous BKPM regulations on the guidelines and procedures for investment applications under domestic and foreign Investments. The latest regulation is sufficiently clear and self explanatory whereas it is attached with the necessary forms and guidance which are provided in Indonesian and English.

In practice, the process from the application to BKPM approval will take approximately between 3 weeks to 3 months. The most time consuming process is to translate foreign company documents to English, the language accepted by BKPM, and communicating Indonesian regulations to the foreign investors.

The approval from BKPM shall be followed by limited liability company establishment which for the foreign investment company shall be in form of a limited liability company under the foreign investment scheme (usually called “PT. PMA”). PT. PMA shall be formed by at least two share holders in form of a civil law notary’s deed (paragraph 1 article 7 Law 40/2007). Then, the deed shall obtain a statutory body status from the Minister of Law and Human Rights (paragraph 4 article 7 Law 40/2007) and published at the Supplement to State Gazette (article 30 Law 40/2007).

Although BKPM has been designed to be a “one stop services” institution, as regulated by a presidential decree Number 27 of 2009, which has given BKPM the authority to issue investment licenses, however, major specific licenses e.g. For Mining and oil and gas, plantation and forestry sectors still have to obtain licenses from other government related authorities. Certain permits will also be applied through the local government authorities e.g. Tax and related land permits and recommendations, etc.

Suria Nataadmadja, Partner

Selviyani, Associate



Still on Investment’s Negative List 2010

Wednesday, June 16, 2010

Provinces of Indonesia

Image via Wikipedia


The World Bank once says that Indonesia’s negative list is by no means a simple system. Here’s a list of news and analysis discussing the 2010 negative list:


There’s a good article about this in HPLaw’s website:

PR No.36/2010 regulates 17 business fields that are conditionally open to capital investment, namely agriculture, banking, communications & information technology, culture & tourism, defense, education, energy & mineral resources, finance, forestry, health, industry, manpower & transmigration, marine & fisheries, public works, trading, transportation, and security.

Ebeling Heffernan (probably sourced from the Jakarta Post) tries to explain the ‘hierarchy of law’, operating with the DNI:

The regulation also recognizes a grandfather clause, meaning the new regulation will not affect investors that have complied with the previous regulation issued in 2007, he added. "This regulation also recognizes law hierarchy, so other regulations whose hierarchies are below this regulation are not effective," said Gita, adding that Indonesia wanted to eliminate investment uncertainties.

The Jakarta Globe details the ‘ownership percentage’ :

It permits, for example, foreign companies to own 67 percent of construction businesses, up from 55 percent. Meanwhile, foreign companies will be able to own 67 percent stakes in hospitals nationwide, up from 65 percent in specific health-related enterprises that were restricted to a few cities. Desperate to address a power shortage, however, the government has granted foreign investors the right to own up to 95 percent of joint ventures in power plants with a capacity above 10 megawatts.Meanwhile, in movie production, the government is allowing foreigners to own 49 percent of such companies, up from zero.

I found that this article from the Singaporean Law Firm O’Melveny to be particularly helpful and quite detail. It also addresses the BTS antenna controversy. As you might be aware, the current DNI resolves the overlap by siding with the Communication Ministry by forbidding foreign investment in Telecom Towers:

One significant area of difficulty in determining the Indonesian foreign ownership regime has been the existence of conflicting regulations issued by various different regulatory bodies. The most well known example is the telecommunications tower industry, which was opened to 100% foreign investment by BKPM under the 2007 Negative List, but which was declared closed to foreign investment by regulation of the Communications Ministry. The revised Negative List resolves this particular debate in favor of the Communications Ministry by closing the telecommunications tower industry to foreign investment. It was hoped that the New Regulations would address these conflicts by reconciling all foreign ownership issues to a single regime.


Meanwhile, Bisnis daily focuses on the overlap between the current DNI and the Shipping Law:

Johnson reminded the relaxed requirement for international route sea transportation was overlapping with Law 17/2008 on Shipping. "In implementing the presidential regulation, please don't violate Article 29 clause 2 of the Shipping Law." The article reads Indonesian citizens or business agencies can establish joint ventures with foreigners in forms of sea transportation companies. "To get business permit in Indonesia based on the law, foreign investors should at least have one Indonesia-flagged ship weighed 5,000 gross tonnage (GT) and the ship has to be registered to the government," he said.

Overlaps are quite normal for DNIs. But it can be a problem too if the industry sector is tightly regulated by a department or a ministry or especially, if it is correlated with license conditions. This is where potential investors normally requires an advice.


To read the Presidential Regulation 36 Year 2010 on Investment’s Negative List, click on my previous post here. Contact me at movanet(at) for queries.

Related Posts:
The New Negative List for Foreign Direct Investment 2010 (Confirmed)
The new investment negative list (2010)
The New Negative List of Investment (2007)
How to set up a company in Indonesia
Geothermal projects in Indonesia
Water investment in Indonesia
Some note on Indonesian Investment Law
Living with the Other Fishes
Guide to doing business in Indonesia

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The New Negative List for Foreign Direct Investment 2010 (Confirmed)

Tuesday, June 15, 2010


On my previous post, I blogged about the new rule on negative list of investment (Daftar Negatif Investasi or “DNI”). The BKPM recently issued a press release about this. Here’s a snippet:


8)  Several sectors give opportunities for foreign capital to more help strengthening the financing capacity for domestics:
a.  Industrial sectors in siklamat and saccharine were previously closed for investment and now they are opened with certain license.
b.  Public works industries in construction have an upgrade of foreign capital ownership from 55% to 67%.
c.  Culture and tourism sectors in filming service (studio of filming, laboratory of film processing, dubbing facilities, printing and film reduplication) is now opened for foreign capital of 49%.
d.  Health sector in hospital services, clinics of specialist doctors clinic laboratories and medical check-up clinic has also an upgrade in foreign capital ownership from 65% to 67% and the location of the activities can now be done all over Indonesia.
e.  Electricity sectors in electricity generators (1-10MW) can be carried out in partnerships, whereas the generators higher than 10 MW, the ownership of foreign capital is maximum 95%.

9)  There will be several adjustments on foreign capital ownership for several sectors and it may be due to the existing of some new decrees or to give wider opportunities for local investors:
a.  Agricultural sectors in the cultivation of principal food crops (corns, soybeans, peanuts, green beans, rice, cassava, sweet potato) with the width of no more than 25 hectares, the ownership of foreign capital is maximum 49% based on the Decree No. 41 Year 2009 regarding the Protection of Sustainable Agricultural Land.
b.  Sectors of Communication and Information in the fields of:

i.  Mailing administration, is conditioned to have special permission and the foreign capital is maximum 49% based on the Decree No. 38 Year 2009 regarding mailing.
ii.  Providing, managing, (operating and renting) and providing construction service for telecommunication towers are 100% local investor ownership.

10) In order to implement Indonesian commitment in investment related to ASEAN Economic Community, this current DNI adds one new attachment (Attachment II.j) which rules out the conditions of foreign capital ownership and/or location for investors from ASEAN countries. These investors are given dispensation in owning capital more than the other foreign investors, for example in the transportation sectors in maritime cargo handling services of which the ASEAN investors are allowed to own foreign capital with the maximum of 60% while the other foreign investors are only allowed for 49%.

You can download the Presidential Regulation 36 Year 2010 on Negative List of Investment here (in Bahasa Indonesia). Alternatively, you can have a look at Google’s translation of the DNI regulation in this page (Google’s translate has been improving quite a lot although it can get lousy for technical terms sometimes). You may find some tips on filling out BKPM Forms on my previous posts below.


If you have any specific question, you can email me at movanet(at)


Related Posts:


The new investment negative list (2010)
The New Negative List of Investment (2007) 
How to set up a company in Indonesia
Geothermal projects in Indonesia
Water investment in Indonesia
Some note on Indonesian Investment Law
Living with the Other Fishes
Guide to doing business in Indonesia

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The new investment negative list (2010)

Wednesday, June 9, 2010


As of today, still no news in BKPM’s website about the new Presidential Regulation 36/2010 on investment’s negative list. But below is the new list according to some news source. Note: as I don’t have the Perpres 36 with me yet, please treat this as an unconfirmed.


  1. Industrial sector: In the industry of cyclamate and saccharin previously closed to investments, now opened with special permission.
  2. Public works: In the field of construction services foreign capital ownership increased from 55 percent to 67 percent.
    Culture and tourism: in the business of filming techniques 49 percent is opened to foreign capital.
  3. The health sector: in specialist medical clinics and medical support services, foreign equity ownership is increased from 65 percent to 67 percent and its activities can be conducted at locations throughout Indonesia.
  4. Electricity sector in the business of power plant (10-10 MW) can be done in the form of partnerships, while for above 10 MW, the maximum foreign equity ownership of 95 percent.


Meanwhile, in some other business sectors foreign capital ownership is adjusted:


  1. The agricultural sector: in the cultivation of staple food crops (corn, soybeans, peanuts, green beans, rice, cassava, sweet potato) with an area of more than 25 hectares, the maximum foreign equity ownership of 49 percent (in compliance with Law No. 41 Year 2009 on the Protection of Agricultural Land Sustainable Food).
  2. Communication and Information Sector: in the business of the postal administration, special permit is required and the maximum foreign capital is 49 percent (in accordance with Law Number 38 Year 2009 on Postal Service).  Meanwhile the provision, management (including operation and rental) and provider of construction services for telecommunication towers (BTS towers ) must have 100 percent domestic capital.

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Legal loopholes in Nano Liability

Tuesday, June 30, 2009

Chris Phoenix at CRN referred us to a new report from Investor Environmental Health Network. The Report highlighted 8 loopholes under current regulations which, if go unrepaired, will trigger litigation bomb in the future.

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HP 3 Rights, What Strategy for NGOs?

Tuesday, May 19, 2009

Following my Articles on HP-3 in Jakarta Post ("The need for Clarification on HP-3 Rights" and previously "Coastal Management Law Review?") it is relevant to ask question on which course of (legal) action would our Civil Societies colleagues take, in response to the enactment of Coastal Law.

I can think of three possible actions by Civil Societies:
  1. Judicial Review. Most activist would blame the Law for its interest in privatizing coastal areas. As such, they would be inclined to invalidate Law 27/2007. But what reasons can be used to submit the JR? Roughly speaking, I would say that any attempt to invalidate Law 27/2007 will have a very minimal chance of success. I do not see any provision under the Law which diametrically contradicts the Constitution. True, that the implementation of the Law may deprive certain members of the societies (such as the Adat Community) from their Constitutional rights, but in general, the black letters of Law 27 guarantees the preservation of existing traditional rights. Thus, if JR is to be opted, the most convincing hole would be to contradict the ill-defined HP-3 rights against "legal certainty" provision of the Constitution. I am not suggesting that this measure would be effective as property rights needs not to to be fully defined (a 'complete' property rights is impossible anyway), but there is a chance of success since "legal certainty" is weighed considerably by the Court. In any case, a move in reviewing Law 27 must not be aimed at winning the case completely (which result in the complete invalidation of the law) but simply in getting partial invalidation of harmful articles or, if not possible at all, in gaining the Court's recommendation for safeguarding its implementing regulations.
  2. Legislative Review. If one thinks that the Law is insufficient or defective invalidation may not be the option. The Court's function is in ensuring that provisions of Laws are Consistent with the Constitution. So, if there are provisions of laws which is consistent with the Constitution but is nevertheless defective, the Court may choose to reject the petition to invalidate and recommends it for a legislative review. However, when a Law is recommended for a legislative review by the Court, it does not necessarily follows that the parliament will take the Court's suggestion. There are so many Bills that the Parliament needs to enact in any given year and there are political (as well as administrative) costs for rediscussing an already-enacted bill.
  3. Implementing Regulation and Its Reviews. Law 27 will require plenty of government regulations and regional regulations to be implemented. In terms of technicalities, this measure is the most technically feasible. It is easier to change implementing regulation than annuling a provision of a Law or modifying it through legislative measures. Option #1 involves proceedings at the Constitutional Court and option #2 involves deliberation by parliament members. Option #3 however, only involves the government. It is easier for the government to enact regulations which are friendly to the cause promoted to Civil Societies. But because Option #3 rests on the discretion of the government alone, there is always a chance of capture by business interests. A way of rejecting an enacted government regulation is by conducting an appeal to the Supreme Court. Note however that the appeal for Government Regulation (against a Law) in the Supreme Court would take a very long time, as the Supreme Court has a very high case-load.
From these options, I would suggest Civil Societies to first submit a JR to the Constitutional Court. This must be done with a caveat that it has a minimum chance of success, so the aim of the JR should not be in entirely invalidating the Law but in obtaining partial invalidation and recommendation from the Constitutional Court in safeguarding the Law's implementing regulation.

This move will benefit Civil Societies developing monitoring and stakeholder participation capacity during and after the property rights setting takes place, as institutional set-up for HP-3 (zoning, etc) and its implementation are prone to capture.

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The need for clarification on HP-3 rights

Thursday, May 14, 2009

I published an article in today's Jakarta Post:

Law 27/2007 enables private ownership of coastal zones through a system called HP-3 (which governs the right to commercialize coastal waters). The idea behind this system is to allow the exploitation of the currently neglected, but potentially profitable, 81,000 thousand kilometers of Indonesian coastline and its 12 mile wide territorial sea.

A HP-3 grants ownership to water columns (above the seabed to the water surface) in Indonesian territorial zones. In most cases, the Law stipulates that HP-3s will be granted by local governments. The Law says that the first period of ownership is granted for a period of 20 years but can be extended. As the law does not impose any limitation for extension, it is presumable that HP-3s could be owned perpetually. It is also worth noting that a HP-3 certificate can be used as collateral to secure a loan.

We know from theory that in order to be functional, property rights must fulfill the "3Ds" rule: definability, defensibility and defeasibility. Property rights can only be efficient within these three aspects, and only if transaction costs are low.

With respect to definability, the Law stipulates that a HP-3 covers a three dimensional space from the seabed up to the surface. This would mean that the seabed falls under another system of regulation. There is however, some interface between the seabed and the water column, and this becomes an issue in sea mining operations. If there is an overlap of ownership between the two (the seabed is granted to an oil company and the HP-3 on the surface is granted to an aquaculture company, for example).

A way of preventing this problem is by coordinating the awarding of property rights between the two areas. That is to say, the awarding of any marine mineral resources exploitation license by the central government must be coordinated with local government.

In another scenario, if both a seabed exploitation licenses and a HP-3 for the adjacent surface are owned by the same entity, disputes could occur from one area to another, which could dilute the value of the property of the neighboring HP-3 owner. One way to anticipate this is for the local government to stipulate which area is used for what. Zoning mechanisms must be very solid in order to prevent property rights disputes.

The law also does not define exact rights within a water column. A water column may be an area passed-though by highly migratory species protected under international law, which therefore cannot be harvested, even by HP-3 owners. A way to address this issue is by clarifying the dos and don'ts for HP-3 owners when implementing regulations.

Another significant problem is that marine boundaries constantly change because of natural phenomenon. HP-3 limits could be confused if the baseline used to measure a sea boundary also changes because the sea level rises. I am not certain as to what mechanism could be used to adapt to this problem.

As for defensibility; defending a property rights in the ocean is relatively more difficult than on land. On land, one can install fences in order to defend and mark their property. This is not possible in the sea. Nets can be used, but if used too extensively they could capture protected species. The surface structure could be used, but that should not hinder navigation for vessels passing through the area. And in any case, it is difficult to exclude traditional fishermen from fishing in HP-3 zones, as they may not be equipped with GPS.

HP-3s are interestingly defeasible enough. Defeasible basically means that the property rights can be transferred. In theory, a property right must be defeasible in order to enable exchange, so that a market can develop. The Law does stipulate that HP-3s can be transferred or encumbered with a mortgage. It is not yet clear which government department would be responsible for the registration of the mortgage. As long as the government has not clarified any institution responsible for the mortgage registration, the idea of mortgaging the sea will not be enforceable. Mortgage is an important part of the whole scheme, as it allows banks and other investor to enter and finance the project.

As we can see from the above explanations that property rights in the sea could be very costly in terms of its definability, defensibility and defeasibility. A huge amount of information would be required to define the property rights. Sonar imaging, GIS interpretation or anthropological studies on the existence of traditional fishing rights would expend a huge of amount of cost.

But these things are essential because, without a clear definition of property rights, future disputes may occur. Defending property rights is also difficult and the costs will be borne by the owners. If the cost of defending the property rights is more than the benefit of exploiting it, then it will not be a worthy investment. As for defeasibility, there is a high cost for institutional set-up. An institution will need to be established in order to maintain marine cadastre and administer HP-3 titles and their encumbrances.

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Safeguarding Water Contracts (peer-reviewed version)

Saturday, December 8, 2007


The The provision of water and sewerage services has been in the public sector for thousands of years. However, the trend towards privatising these basic services has recently been growing. When dealing with Multinational Corporations (MNCs), governments face risks in the form of legal asymmetries.

This paper explains the theory and practice of water privatisation in Indonesia. It analyses the legal anatomy of privatisation, from the regulatory to the contractual levels. It attempts to highlight important issues and risks that governments and other stakeholders need to focus on when dealing with privatisation.

We've made some significant editing for this version. Download the full paper here.

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Longing for Corporate Social Responsibility's (CSR) implementing regulation

Wednesday, August 22, 2007

Now that corporate social responsibility (CSR) is obligated under the new company law (for companies which its core business is Natural Resources or in one way or another related to the environment), business community in Indonesia awaits its implementing regulation. There are still some confusion about the nature of CSR obligation. For example, how should "Natural Resources or in one way or another related to the environment"be defined?

Noke Kiroyan explained this complexities on his article:
Almost as an afterthought, in verbal explanations by lawmakers, those industries producing hazardous waste such as hospitals are also included. What about state-owned and other hospitals that are not incorporated as limited liability companies, as the law regulates this legal form only?

Everyone is entitled to make up his or her own definition, but why go to the trouble of doing comparative studies outside the country if we end up going our own merry way?

Article 74(2) of the Company law specifically stated that the CSR will be accounted as a "cost". This may not be a good news for public service companies which are related to the environment. The cost will be reflected in the price, and thus the price of universal services (such as water and energy) might raise.

I'd say that the government must exclude USO companies from CSR obligation in its implementing regulation. I don't think it's a good idea to raise water, electricity and health bills in a country where these services remained poor.

(For a comparison, check also the Investment law's CSR clause)

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"Your" water, "their" tribunal. BITs in water privatizations

Monday, August 20, 2007

You don't believe me? There is more than one case, really. I want to get back to that Tanzanian water privatization case, as reported by the Guardian:

Lawyers for Tanzania's government, whose participation in such a tribunal process is among the terms of a bilateral investment treaty signed with Britain in 1994, argue that Biwater failed in its contractual obligations, performing worse than its inefficient state-owned predecessor. If the government was to meet its citizens' need for safe water, it too had no choice, they claim, but to terminate the City Water arrangement just 22 months into what was meant to be a 10-year contract.

Now, you think the government can do anything once such dispute arises?
Despite the secrecy of proceedings - the tribunal is closed to the public, and Biwater sought and was granted a ruling that both parties refrain from speaking publicly to the media during the week-long hearing that finally began in The Hague in April - a host of interested parties will be closely monitoring the outcome in the wake of final arguments submitted as proceedings wrapped up in July.The World Bank, which pressed Tanzania to enter into the contract, now faces the possibility of seeing the country penalised in a tribunal of the bank's own creation.
Voila. "Your" water, "their" tribunal. A state is not that 'sovereign' when dealing with investors.

And check this info too:
According to a new report published by the Washington-based Institute for Policy Studies, and Food and Water Watch, there are more than 2,500 bilateral investment treaties today, compared to 385 in 1989. And of the 255 investor-state lawsuits filed under these treaties, more than two-thirds have been lodged in the past four years.
There is a way to get around BIT, withdraw! But of course, other investors might pull back too. So this could be a middle way: Can we create a non applicability clause in BITs for water privatisation?

Some note on Indonesian Investment Law

Saturday, August 18, 2007 hosted an article on the newly amended Investment Law which may be good as a kickstart. You can download it here.

Note: I have not throughly read the content myself. In any event, no guarantee on its accuracy.

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The Tanzania Water Privatization Problem

Guardian issued an interesting article elaborating the Dar-es-Salam Water Privatization problem:
At 11.30am on June 1 2005, three British expatriates were detained by the police in Tanzania. Cliff Stone, Michael Livermore and Roger Harrington were the senior managers at City Water, a consortium responsible for managing Dar es Salaam's water supply. After being held for several hours, the men were served with notices describing them as "undesirable immigrants" and told to leave the country.

I do not know the privatization scheme of Dar-es-Salam water service, but it appears to me that they are using a leasing scheme, where the authority retains ownership of the infrastructure (plus doing some administrative work) and the private operator runs the water treatment, extend network, and in this case, do the billing.

There is one contractual issue that I would like to highlight in this Dar-es-Salam case:

City Water repeatedly complained to the Tanzanian water ministry that its bid was based on flawed information supplied by Dawasa. According to a subsequent World Bank report, signed by the bank's then-president, Paul Wolfowitz, City Water stopped paying its monthly fee for leasing Dawasa's piping and other infrastructure in July 2004, less than a year into the contract. The company was also insisting that its operating fee be raised.

Asked by Dawasa to assess if this was justified, auditors PricewaterhouseCoopers and the British engineering consultants Howard Humphreys rejected City Water's arguments. (Biwater, for its part, directs blame at Dar es Salaam's water authority, saying that Dawasa had "barely started" big capital-works projects on which rehabilitation of the system depended.)

In infrastructure projects, it is common to assume that the local authority knows more about the condition of the installations, more than the investors. The investor then makes the bid (and calculate the prices) based on these estimates. And then, if they won the bid, the contract is concluded. What can make things worse is if the investor puts some clauses on the contract, making the authority liable for imperfect or inaccurate information they supplied to investors. In the Tanzania case above, the Govt was lucky because the PwC audit confirm that they were correct. But what if the result is otherwise?

Some lessons for government's lawyers:
  1. Make sure the client makes proper disclosures
  2. Find a way to get around with the clause that puts the burden of liability on the client's shoulder, for giving inaccurate information
  3. Put a clause that the counterpart is also responsible for their own judgement, in addition to information supplied by the client
  4. Find a win-win solution if a case on imperfect information arise, in any event, avoid the Court

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Safeguarding a water contract

Monday, July 23, 2007

If you are representing a municipality or a central government, and you have to deal with water MNCs in concluding an agreement, what will you do?

I wrote a paper on this issue for a conference held by the IELRC in Geneva, last April. Here's the abstract:

Due to financial and technological reasons, water undertakings are often being conducted by large scale Multi National Corporations (MNC). Governments often positioned Regional Authorities as a regulator to these MNCs, and at the same time engaged in water contracts with them through State Owned Enterprise (SOE).

However, the relationship between Water MNC and Governments is asymmetrical as MNCs can move their assets overnight, transfer their ownership to third parties, seek various means of redress through bilateral, regional or international investment treaties and avoid confiscation by reallocating their assets. These are often done by hiding behind multiple jurisdictions enjoyed either by their parent companies, subsidiaries or shareholders.

The positions of Governments are the opposite as they do not have the flexibilities enjoyed by MNCs. This paper attempts to prescribe issues that need to be highlighted in safeguarding water contracts in Indonesia.

The first part discusses the legal relationship between institutions involved in a water undertaking. The second part listed down regulatory mechanisms in Indonesian context, more specific towards the impact of Constitutional Court’s review of the Water Law (2004). The third part of the paper examines the provisions existing normally in water contracts between a local subsidiary of MNC and regional authorities and presents a point of view in drafting the clauses.

Note that all laws mentioned there are as of March, 2007. The investment law has been modified recently. See the paper here.


The New Negative List of Investment

Thursday, July 5, 2007

Jakarta Post issued an editorial discussing the new investment's negative list:
It's true these sectors -- telecommunications and insurance -- became more restrictive, with foreign ownership in telecommunication companies (telcos) now restricted to 65 percent for mobile services and 49 percent for fixed network, with the insurance industry at 80 percent. The good news is however the new regulation is not retroactive so those foreign investors should rest assured their controlling ownership in those companies would not be contested.

In total, there are 11 sectors becoming more restrictive

While it's true some sectors would become more restrictive for foreign investors, more and more sectors are widened further to foreign ownership, including oil and gas exploration, the pharmaceutical industry and construction services. Some sectors, previously partially or wholly closed, are now opened to foreign investment, including health and education -- two of the most important sectors for the well being of the people. And we welcome this.

Drinking water is opened for investment with a condition that the maximum capital ownership of the foreign investor is 95%. To me this gives an impression that the Govt would like boost foreign investment in the infrastructure sectors. From one point of view, this is good. From another point of view, privatizing a Universal Service Obligation (USO) must be conducted with a great care, for the reasons I have explained here.

See the negative list yourself here (only in Bahasa for now, sorry).

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Water Privatization in Indonesia

Saturday, May 19, 2007

I wrote an op ed-piece for the JP a few days ago:

Privatization that involves MNCs will cover generally three legal arenas, namely transnational, national and contractual. Each legal arena requires a different model of legal protection.

In the transnational arena, governments may face parent companies and shareholders of an Indonesian-incorporated subsidiary company in arbitrations. In typical water contracts between local water authorities and a locally incorporated company, there is always a clause that refers every dispute arising from the contract exclusively to a local jurisdiction.

The problem is, MNCs can always refer to Bilateral Investment Treaty (BIT) to which Indonesia is a party and use the "umbrella clause" in the BIT to transform a problem that was originally a contractual dispute into an international investment dispute. So, the central government can be dragged into a costly international arbitration.

One of the drawbacks of international arbitration is that the proceedings are often closed to the public. This transparency can no longer be ensured once a dispute is settled at an international arbitration venue.

Another disadvantage in dealing with an MNC is that there is currently no adequate accountability and responsibility standard in place. Thus, it is theoretically possible for an MNC to cause losses (to the environment or labor) in a host state and get away with it. This is because an MNC is a single economic unity, but is legally distinct.

The losses are not attributable to its parent company in United States or Europe, because those companies exist beyond Indonesia's jurisdictions and they possess a distinct legal personality from their Indonesian "avatar".

From the above explanations, there are some conclusions that can be drawn.

First, the legal protections granted at the national level will be obsolete at the transnational level if the government decides to conclude a contract with an MNC.

Second, the damages created by an MNC to the host state may be irrecoverable due their transboundary character. Put it simply, the control by the government towards water provision will considerably diminish when privatization is opted.

The second legal arena is the national fora. Protection towards the right to water in Indonesia is very weak. The first weakness is that our constitution does not explicitly recognize the right to water. The right to water in Indonesia develops only out of a judicial interpretation of the Constitutional Court when the water law was reviewed.

The second weakness is the water law itself, which does not specifically cite the right to water as a human right. This is a mistake because it should have cited Chapter XA of the Constitution, which regulates human rights. If it is only Article 33 that is cited, then water would be perceived nothing but as an economic good.

The third weakness is that the current regulations governing infrastructure projects do not distinguish water from other projects. Currently, a 2005 Presidential regulation is used as a "catch-all" regulation for infrastructure project, including water. This could be fatal if the government decides to privatize more water services in the future.

Water projects are among the most critical infrastructure projects for emerging economies. They have natural, cultural, political and legal characteristics that differentiate them from other infrastructure projects. Naturally, water is a limited resource, inseparable from the hydrological cycle, it is an indispensable element of life for human, animal and the ecosystem as a whole.

Regulations governing water infrastructure must contain provisions that obligate financial and legal due diligence toward the bidders. There has to be provisions that specifically regulate water service companies, especially its shareholding, lending structure and corporate executives. Its financial condition must also be declared to the public.

The last of the legal arena is the contract between MNC's subsidiary and the authority. Provision of this contract is very delicate as it must embody and guarantee constitutional, human rights, environmental and financial benefits of all stakeholders.

Ensuring the sustainability of the contract would be difficult because MNC tends to always have a more favorable position to ask for renegotiation once the contract is signed. On the other hand, the government's interest is in ensuring water service from being impeded, and the government will be compelled to do it at any cost.

I also wrote a conference paper on the issue of water privatization and a power point presentation available here. Still on the water topic, I also wrote a paper on the Judicial Review of Indonesian water law available here.

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Water law in Indonesia

Monday, February 12, 2007

I am doing some research on drinking water contracts between water companies and regulators/government, so my next updates will be dominated by water law issues.

Anyway, here's some info as a backgrounder. The Constitutional Court had declared Indonesia's new law on water resources "Conditionally Constitutional". This means that affected parties will have opportunity to submit another judicial review to the Court if they are able to prove that in practice, the law is implemented differently than what has been suggested by the Court.

I wrote an article on that issue which you can download here (pdf). And here's the abstract:

Enactment of the Water Law in Indonesia has arises public debate. The Judicial Review of the Law by the Constitutional added to this controversy as it puts the legality of the water regime in Indonesia in a “twilight zone”. This article explained the historical background of the water regime in Indonesia and its development, analyze the position of water rights and human rights to water under Indonesian Constitution, elaborates the key provisions of Indonesian water law, elaborate water law's judicial review by the Constitutional Court, analyzes the legal consequences of the review and recommend the government on the parts of the law that needs to be amended or modified. The author also discusses several important issues that needs to be weighed by governments when creating the water law's implementing regulation, including regulating several standard contract provisions between government and water investors.

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How to set up a company in Indonesia

Sunday, January 21, 2007

The process of establishing a limited liability company is actually too complicated to be explained in a blog post, so I'll just give you a summary:
  1. Minimum Two shareholders are required
  2. Minimum authorized capital is IDR 20 million
  3. You need to reserve the Company's name (trade ministry), obtain a domicile license (local authority), obtain the company tax number (tax office), and re register everything at the ministry of trade.
A notary can do all those task for you, for a fee. There is no specific time period for the whole process so it depends in each case.

But, if the company is a Foreign Direct Investment (FDI) Company, then there are some other procedure that must be followed such as acquiring foreign capital license from the Central Bank and BKPM licenses. For that, you might need to either hire a lawyer or use investment consultancy services.

There are so many licensing services in Indonesia, each has their own rate. Okusi associates charges 2,550 USD. Healy Consultants charge up to 9,000 USD for 1st year for FDI. But, I also know that there are also consulting firms who charges only 800-1000 USD.

To get a broader view on investment in Indonesia and the judicial protection granted to investors, I suggest you to read this article from the US Embassy. The types of foreign investment licenses is discussed here. Please pay attention that I do not guarantee that both sites I've mentioned earlier contained an up to date information. If you want the latest information, use the search box in the right panel and search for foreign investment licenses. It should bring you to BKPM's (Coordinating Agency for Foreign Investment) website which should contained the latest info.

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Water investment in Indonesia

Friday, January 19, 2007

A good article on water investment appears on today's Jakarta Post:

No significant improvements in services have been seen since the Jakarta water business was taken control of by the foreign investors, as evident from the thousands of complaints sent to the companies. There are now a number of unresolved problems that the new investors will have to tackle as a legacy.

First, the scarcity of raw water, particularly during the dry season, as the companies rely too much on water from the Jatiluhur reservoir in West Java. Meanwhile, the water from the 13 rivers in the capital is too dirty to be processed into potable water.

Second, many people are unhappy about a clause in the agreement that provides for automatic water-price increases every six months. There have been rumors circulating that the privatization of the tap-water business was made possible due to collusion involving the family of then president Soeharto. Both Palyja and TPJ have denied the accusation.

Third, water privatization remains a controversial issue in this country, despite the enactment of the 2004 Water Resources Law. Many insist that privatization will deny the poor access to water.

Fourth, and most problematic, many customers say they have not seen any significant improvement in services since the arrival of TPJ and Palyja, although the two companies say they have invested a lot on improving water-supply infrastructure, such as the construction of new mains and the repair of old ones

The Judicial Review of the Water Law by the Constitutional Court arises important legal consequences for water investment, as I have previously discussed in my article at the LEAD Journal downloadable here. The consequences of the judicial review are:
The Court (with 7 concurring and 2 dissenting) held the Law to be “Conditionally Constitutional”. It considers the Law to be sufficient in protecting the citizen’s right and is so far compatible with the Constitution. It however warned that if the implementation is different than what has been outlined by the Court in its Decision, the Law can be subjected to a re-judicial review.

The Court is silence with regards to the parameters of “implementation”. Implementation can mean Implementing Regulations of the Law or the Government’ s Practice in the form of decrees, circulars or unwritten decision of the bureaucracy. It is not known as to whether -- for example-- a single cooperation contract between a regional government and a foreign investor or a bureaucratic behaviour requiring traditional salt farmer to obtain license from his village chief can be used as a ground for re-judicial review.

The author is of the opinion that examination of ‘Conditionally Constitutional’ should refer to policies of the Central Government and validity of the Law’s Implementing Regulations. It is also important to note that the Court tends to reinterpret the Law at several occasions in its Judicial Review as seen when examining Customary Water Right

"Pricing" is going to be a problem and a possible source of conflict. Unfortunatelly the law is silent of this matter. It is to be regulated in implementing regulations.

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Geothermal projects in Indonesia

Wednesday, January 3, 2007

Update on renewable energy investment in Indonesia. There is an interesting article in the Jakarta Post on Geothermal investment. Indonesia has developed only less than a thousand MW of geothermal power although it is estimated to have nearly one-third of the world's geothermal resources. A research (in Bahasa) from the ministry of mineral resources mentioned that there are 252 geothermal locations which have been identified along a volcanic belt extending from Sumatera, Java, Nusa Tenggara, Sulawesi until Maluku. These heat resources has the total potential of 27 GWe, which puts Indonesia as the biggest geothermal potential country in the world!

The Jakarta Post op ed told that (i) tax uncertainties and (ii) legal uncertainties are among the frontlines of investment barriers. Geothermal investment is really a high risk-high return investment scheme which involves huge exploration and exploitation funds. It is never intended as a short term investment. Investors are afraid that their contracts are not being honoured.

I'll give a little comment on the legal barriers. Generally contract observance remained high. Business partners will think twice before deciding to bailout from a contract since litigation costs are too high. The problem stems not from observance of the contract but mainly due to regional autonomy. How much share will the regions receive are the hot issue. There has been a case where Garut regional government requests Chevron and the Central Government to disburse concession money for their region. They even threatened to invalidate Article 41 of the Geothermal Law to the Constitutional Court. Article 41 governs a transitory provision which stipulates that all contracts prior to the entry into force of the Geothermal Law will remain valid. Under this transitory provision, regions don't receive any money. Of course, their attempts to invalidate the article are futile.

It must also be noted that the 2003 Geothermal Law gave many power to regions in particular with respect to licensing. This is a good opportunity for investors as they can now deal directly with the regions. During the old days, people will have to deal with state owned enterprise such as PLN or Pertamina. However, it is necessary to make sure that both central and regional government approves or condone the projects. It wouldn't be good if after a few years of investing the license given by regional government is revoked by the central, or a license given by central government is revoked by the central. In any event, although the regions are granted more power, it is always important to asks some sort of condonation from the central government.

Click here to read the Jakarta Post article and here to get some general views on geothermal potentials in Indonesia.