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.

Ed note: this is a guest post by Suria Nataadmadja (suria[at]surialaw.com) 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

SURIA NATAADMADJA & ASSOCIATES

www.surialaw.com

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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)gmail.com 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

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)gmail.com

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

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.

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.
   

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.

Abstract:

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.

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

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

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.