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.

What do whistleblowers, transparency fighters, file sharing activists and defectors have in common? They may all possess the same personality trait: a rejection of authority. According to Esther Dyson in project syndicate:

But you probably need to be a bit weird and callous to devote your life to transparency for others. Mikhail Khodorkovsky, the imprisoned ex-CEO of what was Russia's largest oil company, is another example of a flawed, uncompromising person who challenged the flawed people in power and their unaccountability. Such people do not die for our sins; Rather, they sin on our behalf, so that we may live comfortably while they afflict the authorities at great personal risk and in disregard of (authorities' interpretation of) the law and sometimes even ethics.

Information is always used to impose and safeguard an established authority. Because knowledge is power, only the priest are allowed to read the scriptures. This is evident in the ancient Mayan civilization who restricts the ability of reading and writing into a small circle of elite class. The spread of the printing press in the European history allows the Bible to be studied by commoners and along with Luther’s writings, paves the way to protestanism, ending the Catholic church monopoly to human salvation in the Christian world. 
Within the psyche of these leakers – whistleblowers, journalists, spies-- whatever you wish to call them, is the hidden desire to achieve some sort of equilibrium and a resentment to authority. These people are anarchists.

The Jakarta Post reported several months ago, that the State Audit agency (BPK) cease the publication of companies financial audit report due to blackmailing concerns. According to the article:

The Supreme Audit Agency (BPK) has stopped publishing online reports, to the dismay of freedom of information proponents. The agency said the state institutions it audited had complained that it was “too open”. BPK provided reports through the Internet even before the 2008 Law on Freedom of Information was implemented this year.

….

But reports of blackmail prompted the agency to close the online access, requiring information seekers to submit official letters to obtain a hard copy of reports. A public relations staffer of BPK, who requested anonymity, said, “The state institutions have been complaining that we were too open.” “[The institutions] said the reports had been used to blackmail them,” the source said recently.

Why fear blackmail if you are right? One of the possible reason is the corruption witch-hunt. The eradication of corruption in Indonesia is somewhat turning into a witch-hunt (a colleague in the UK is researching this for his Ph.D in Anthropology). Dealing with KPK and the Prossecutor office is cumbersome. This provides a disincentive for being transparent.

How do we handle this? Well, we need to provide more incentive for being more transparent. Transparency should not be used only for displaying the rotten apples of an organization, but also in highlighting the hidden jewels. This is what expert called a ‘targetted transparency’, which are conducted through, among other, publication of performance target benchmarked against certain a set of indicators.

 
Img source:mediaindonesia.com

In the wake of wikileaks, the Australian government recently issued a booklet titled “The Insider’s Threat to Business: A Personnel Security Handbook”. The booklet elaborate precautionary approaches that a business organization may employ in order to prevent the leak of confidential business information.

One of the legal method to prevent leaks (this is not explained in the booklet) is through the signing of employee confidentiality agreement. My research however indicates that the power of confidentiality agreements differs across jurisdiction. In the common law jurisdiction, confidentiality carries more weight due to the operation of obligation of confidence under the English equity law. The obligation of confidence protect the imparting of information in a ‘trust’ environment, such as between a doctor and its patient, or between a employer and employee. As such, the obligation may be enforced irrespective of agreement.

This is not the situation in continental legal system. I have yet to find any obligation to keep secret, independently of an agreement. Hence, an employee signing confidentiality agreement in a continental jurisdiction will be bound only to the extent of the agreement. When he decide to disclose the information one day, it would amount simply to a breach of (an employment) contract.

Determination of access level and the use of Digital Rights Management are therefore the most appropriate precaution. You will find some details about this in the booklet.

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

Legislative Update 01/2010

Earlier this year, the House of Representative presented the academic draft on the Law on Public Accountants (download the academic draft here, in Bahasa). The current version of the draft law in its preamble does not seem to provide enough justification on why accounting services has to be regulated. It only states that at present, there is not enough regulation on the profession and that more rules are required to provide ‘legal certainty’ for clients and public accountants.

The academic draft does contain some justifications on why the accounting industry needs to be regulated, among other, that the profession attempts to reduce information asymmetry between principal and agents of an undertaking and provide them with financial information to back up their business decision. However, this is not adequately enshrined in the draft Law.

ILR’s sources at the House of Representative commented that the real aim of the draft law is to curtail the ever expanding growth of foreign accounting firms and provide opportunity for local firms to grow. Provisions regulating foreign accounting firms (Articles 17 and 13 of the current Draft) will become a contentious subject to be debated. On these articles, the number of foreign partners and foreign workers in an accounting firm is limited.

ILR will closely monitor the Draft Law on Public Accountant. If you require more information or tailor made service, please contact movanet@gmail.com