As nationalism grips regional and world politics, is Indonesia running out of time to implement reforms for business and cast out corruption? John Church reports
Getting a clear picture of Indonesia’s business law environment very much depends on whom you talk to, and what questions you ask. As the nation rolls towards crucial elections next year, political opponents are upping the ante for the people’s vote, and business, particularly foreign, may have to pay a price for keeping the favoured incumbent in power.
Reforms are ongoing and regulatory changes are occurring, but not all for the better if you listen to those who represent foreign and domestic perspectives. Other reforms wait to be enacted and associated policy is at times intangible, but business must proceed regardless.
Welcome to Indonesia – where hunger for change faces an uphill battle against an unhealthy appetite for corruption and the status quo. The latter, it seems, has all the time in the world.
Peter Fanning is a foreign legal consultant at HHR Lawyers and also treasurer of the Indonesia Australia Business Council. Wearing both hats, he hears criticisms from clients and fellow international business chambers alike, and from these identifies six main concerns:
- Bureaucratic hurdles
- Regulations that are incomplete and unclear
- Regulations that make it harder to invest
- Punitive tax administration
- Preference given to state-owned enterprises
- Corrupt police
“[Corruption] is most certainly being addressed in a fearless manner,” says Fanning, “but at the highest levels it clearly remains rampant, and those involved clearly expect that their wealth and the sheer amount of corrupt activity will help them hide.” He adds he does not come up against corruption in his normal transactional legal work.
Luky Walalangi, founder and managing partner of Walalangi & Partners, notes several regulatory reforms by the Indonesian government in the past 12 months that are intended to improve investment in Indonesia by making doing business easier, including:
- In June, the government issued Regulation No. 24 of 2018, which reduces red tape and simplifies complex licensing procedures by introducing the online single submission (OSS) system;
- In April, Regulation No. 14 of 2018 on Foreign Ownership in Insurance Companies was enacted, which strictly limits foreign ownership (whether direct or indirect) in Indonesian insurance companies to a maximum of 80%;
- In March, the Indonesian president, Joko Widodo, issued Presidential Regulation No. 20 of 2018 on Foreign Worker Utilization, which simplifies bureaucratic procedures for obtaining a licence to recruit foreign workers;
- In February, the Ministry of Energy and Mineral Resources (MEMR) announced its plan to revoke 32 energy regulations. Subsequently, the MEMR announced a proposal to consolidate 51 energy regulations into 29 regulations; and
- The Indonesian Central Bank issued a new regulation limiting foreign ownership (direct and indirect) in a “non-bank” e-money issuer to 49%. In addition, a company is now prohibited from concurrently holding two licences from Bank Indonesia for two different categories of business.
According to Robert Reid, senior foreign counsel at S&T Advocates, most components of the corporate licensing system have been replaced and with the new centralized OSS business licensing system, many ministries have issued regulations permitting their sectors to integrate with OSS. The Investment Coordinating Board (BKPM) also issued new regulations this year to integrate itself with OSS and to confirm its remaining supervisory powers, scrapping the relatively new BKPM regulatory framework that had been introduced only last year.
Reid adds that, while these changes were intended to ease doing business and provide more certainty, many foreign investors have become more cautious about investing in a jurisdiction with so much legislative change.
“Indonesia is still quite far away from having a stable legislative environment with a proven track record,” he says. “Although the long-term objective of projects such as OSS may be admirable, there remain many adjustment and co-ordination issues. This means new and existing investors must rely heavily on lawyers to determine the relevant policies and interpret the complexities regarding, among other things, available business lines.”
Freddy Karyadi, a partner at ABNR Counsellors at Law, says consumer behaviour and business trends are changing fast as they are affected by the development of digital technology. “More fintech and other digital types of business will attract more new policies and regulations,” he says. “These developments will lead other areas of practice such as tax regulation, consumer protection, monetary and fiscal policy, and logistic sectors.”
On the political front, Karyadi says upcoming elections for president and parliament will bring more tension to Indonesia’s business environment. He adds the incumbent is expected to adopt popular policies and deregulate certain unpopular policies and regulations.
Makarim & Taira S. Counsellors at Law partner, Rahayu Ningsih Hoed, notes that uncertainties such as severe fluctuations in foreign exchange rates and force majeure events like the recent tsunami disaster mean litigation work will pick up as parties to contracts face difficulties meeting their obligations, or disagreements arise over the nature and extent of force majeure cover. “We believe the trend will continue if the situation does not improve,” says Rahayu. “We believe, however, that the government has been able to manage the impact of exchange rate fluctuation. However, litigation over insurance claims and construction disputes may continue to occur.”
The single-biggest event to influence the legal landscape in the next 12 months are the presidential and parliamentary elections. Most lawyers agree activity will slow to a holding pattern until results are known.
“The campaign season for the Indonesian 2019 presidential elections has been officially underway since September 2018, and the election will commence on 17 April 2019,” says Yozua Makes, managing partner at Makes & Partners. “As part of their campaign platforms both [presidential nominee] Prabowo Subianto and [incumbent president] Joko Widodo have highlighted the need for reform in the Indonesian justice system.
“However, as most policymakers and the parliament will focus on the upcoming election, it is predicted that the actual implementation of regulatory reform agendas will become a lesser priority than grand political promises.”
Walalangi says there are unlikely to be any significant changes until elections are over. “If the incumbent remains in office, we expect more stability, and it seems that the government will continue to prioritize infrastructure development and the energy sector,” he says.
Reid agrees fresh foreign investment in major projects is not anticipated in the coming months, since potential investors will probably wait until after the elections, and then closely monitor the winner’s policy implementation.
“Of course, this will not stop the fairly continuous stream of M&A and restructuring work,” he says. “It is anticipated that, in the coming months, dealing with senior regulators to determine their policies will become more difficult, as regulators may be even more reluctant to share policy positions.
“For instance, the BKPM has recently been very reluctant to issue any policy decisions in writing in response to our written requests on behalf of clients. This could be due to the impending elections, but also a lack of co-ordination between BKPM and the Co-ordinating Ministry for Economic Affairs, the relationship of which will hopefully improve before the elections.”
M&T’s Rahayu says new strategic investors may be hesitant to proceed with their plans pending the presidential election. “With the government postponing the remaining electric power projects in the 35,000MW plan, existing investors are looking for small, renewable, electric power projects,” she says.
“If the incumbent wins, we assume that the government will speed up their projects. However, if there is a new president, we believe that new investors will adopt a wait and see policy, as it is still not clear what government policy will be.”
Pramudya Oktavinanda, the managing partner at Umbra Strategic Legal Solutions, notes that the government and Indonesian state-owned enterprises signed several memoranda of understanding (MoUs) relating to major investments for various projects in Indonesia during a recent IMF-World Bank event.
“We expect this to contribute enormously to the list of deals next year and we are optimistic that the momentum can be maintained, despite the fact that we will be having the general elections,” says Oktavinanda. “At the end of the day, business must go on, regardless of who wins the presidency. The idea that an election always correlates with a weak demand for legal services might be an unsubstantiated claim.”
Fanning counters that, “presidential candidates and parties are hell-bent on popular appeal, and policies, or even statements, which appear to favour (or even recognize) foreign investors are out.”
Reid agrees. “We are seeing campaigns by the two leading candidates focusing on economic nationalism and protectionism,” he says. “Even though President Joko Widodo, or Jokowi as he is known, has to date passed 16 economic reform packages, many aimed at facilitating foreign investment, many of the all-important implementing regulations are lacking. In the current climate, any promises to open the economy to foreign investment may be political suicide.”
Reid notes that when, in March, Jokowi issued Presidential Regulation No. 20 of 2018 on the Engagement of Expatriates, partly with the intention of simplifying permit processes, he was strongly criticized by labour unions and political opponents, who attacked the government as unpatriotic and pro-foreign workers.
“Much of the criticism was misguided – the presidential regulation did not remove the stringent requirements for foreign workers, but instead only simplified them,” he says. “Given this climate, I doubt we will see the enactment of any regulations that could be interpreted as being favourable to foreign investors until after the elections. However, this will of course depend on who wins.”
At this stage both main contenders, Jokowi and Prabowo, appear to be moving in a similar direction, focusing on resource and economic nationalism. Reid says Jokowi can promote his proven track record of resource nationalism, which was most recently exemplified by the acquisition by a state-owned Indonesian holding company, Inalum, of a controlling interest in the important Grasberg copper and gold mine, and by the takeover by the state-owned oil & gas company, Pertamina, of the strategic Rokan oil and gas field from Chevron.
“In contrast, Prabowo appears only to be resorting to populist rhetoric critical of foreign interests profiting from Indonesia’s natural resources, which, as article 33 of the Constitution provides: ‘are to be controlled by the state to be exploited to the greatest benefit of the people’,” says Reid.
“Given the perceived strategies of Jokowi and Prabowo, it is unlikely that in the lead-up to the elections we will see any significant pro-foreign investment regulations, especially in the natural resources sector.
“However, investors both domestic and foreign would certainly welcome new regulations clarifying the operation of the very incomplete OSS, including regulations on the respective powers and authorities of the BKPM and the Co-ordinating Ministry for Economic Affairs, which created and currently administers OSS.”
The OSS system
Perhaps more than any other initiative from the Jokowi government to date, OSS was meant to showcase the determination of government to break the shackles of red tape dominating the business landscape in Indonesia.
“During the administration of President Widodo, the government’s top agenda has been about increasing the ease of doing business to attract more foreign investment,” says Makes.
Adds Karyadi: “The OSS system was built, developed and operated by the central government as a single reference in the implementation of business licensing. Business licensing is the registration provided to entrepreneurs [including foreign investment limited liability companies, known as Penanaman Modal Asing (PMA)] to start and run the business and activity. The OSS system is managed by BKPM, which is a non-ministerial government agency engaged in investment co-ordination. However, for the time being, OSS is still being administered by the Co-ordinating Ministry of Economic Affairs.”
So, how does it work? Umbra’s Oktavinanda explains that investors wishing to start business are required to provide data to obtain a Business Identification Number (NIB) in order to further apply for business and commercial licences. An NIB is also a requirement for a newly established company to get other licences, such as: a taxpayer registration number (NPWP); a business licence; Social Insurance Administration Organization (BPJS) employment and health certificates; an approval letter of foreign employee utilization plan (RPTKA); and an operation/commercial licence.
Under the new OSS system, business actors are not required to obtain any prior approval from the OSS agency, so creating the post-audit nature of the system. “[The regulation] also introduces the concept of ‘commitment’, a statement in the form of a checklist made by a business actor to fulfill certain requirements for a business licence and/or commercial licence for which the business actor applied,” says Oktavinanda. “For example, upon application of a business licence, the OSS system will be able to issue such licence automatically, based on the commitments that the business actor made. However, every commitment has its own deadline. Therefore, a business actor must ensure that it is able to meet such commitments on time and shall not apply for just any licence impulsively without considering its capability and readiness to complete such commitment.”
Evaluations or audits by the BKPM, or relevant ministries, in order to ensure compliance with regard to establishment of a company, change of company data, fulfilment of commitment and other monitoring and controlling requirements are conducted after such activity is conducted by the company. By having this post-audit model, business entities are expected to self-assess their compliance with law and regulations to avoid any challenge that the relevant ministry or the BKPM might have.
But all that glitters is not gold, and despite the best intentions, the OSS in its current form has had its detractors. “Cracks are appearing,” says Fanning. “It is experiencing problems due to incompatibility between the way different ministries handle information, and apparently simply mistakes in input, which seem not able to be rectified.”
Adds Makes, from Makes & Partners: “A number of technical issues and problems have come to light during the implementation of the OSS licensing system including the lack of adequate information technology infrastructure.”
Reid says OSS is premised on an “investor beware” approach, in which, for instance, prior regulatory approval is no longer required. “Dangers abound for new and existing investors when identifying the correct business lines and capitalization requirements in the course of making applications to OSS,” he says. “Although new (or updated) business licences may be issued by OSS once all the required data have been uploaded, the penalty for providing incorrect data, whether intentionally or not, may be catastrophic, resulting, in the worst case, in the regulator freezing the company’s business licence and activities.”
Oktavinanda says his firm’s clients have had vastly different experiences with the OSS system as it develops and progresses. “We have a client who successfully obtained its NIB within two hours, showing that OSS can really speed up the licensing process for investors online,” he says. “However, we also have a client who is facing difficulties in obtaining its NIB due to some technical problems with the system.
“Just recently, due to the data integration between the OSS and MOLHR [Ministry of Law and Human Rights] systems, not only our client’s, but a lot of companies’ data were incorrectly recorded into the OSS system. The errors take the form of incorrect calculation of total investment value due to incorrect records of the company’s KBLI [standard classification].”
Oktavinanda says that, given that the OSS system is still developing, further changes are expected and Umbra will continue to regularly monitor and provide updates on the development of the system.
For in-house counsel, navigating Indonesia’s often poorly constructed legal landscape can be fraught with peril. The Indonesia Corporate Counsel Association notes that things are slowly improving.
“We would like to see an alignment of regulations amongst interdepartmental or intergovernmental bodies, from laws to its implementing regulations,” says ICCA President Yudhistira Setiawan. “This is because many regulations in Indonesia do not align with other regulations in other sectors.
“For example: spatial plan (or zoning) regulations issued by regional governments often do not match with mining regulations, whereby mining rights given to a company are located in a land that is allocated for, say, farming under a regional spatial plan regulation. This has been causing unnecessary hiccups for mining companies or investors when they apply for a mining business licence.
“We would also like to see Indonesian regulations that are up to date with fast changing technology by amending the current regulations or establishing new ones that are in line with recent developments in technology.”
Setiawan says overseas GCs and their legal teams need to be aware before their companies begin operations in Indonesia. “The challenges are that, despite its strong economic performance, Indonesia faces challenges that stiﬂe private-sector development,” he says. “There are so many procedures and days spent to set up a business in Indonesia. Engaging a local partner, or local law firm, will surely be a great help to solve matters. Another [challenge] is that a lack of transparency and corporate governance means there is widespread corruption and organized crime in Indonesia.
“The Commission of Corruption Eradication (KPK) is working very hard on this, but still has not yet solved the main causes of the corrupt action itself: mentality and mindset. Industrial disputes are also commonly stated by businesses as being a difficulty, and it is recommended to do extensive due diligence on all contracts.”
Wisaksono Soegandhi is senior legal counsel at Sampoerna Strategic (PTSS), which he describes as a taskforce, rather than a holding company, for all of Sampoerna Strategic Group (SSG) businesses in Indonesia including banking, telecoms, property fintech, forestry and agribusiness.
Soegandhi says much has improved in terms of legal reform in the past couple of years under President Widodo. “For us in the private sector, the ease of doing business in Indonesia is much improved in the licensing and approval stages. However, although on the regulatory level a lot has been improved, it still needs support from the relevant regulations issued by government officials.”
He says compliance is very much an issue, “especially as one of our business units in the group is in the financial sector, which is heavily regulated and in which we have to comply, as any violation will be subject to sanction”.
Having a startup in the fintech is a headache for the opposite reason. “Unlike in the banking sector, which already has a complete set of rules and keeps expanding, the fintech area still has a lot to improve on, and sometimes the regulation cannot keep up with development in this area,” he says. “What overseas GCs should be aware of before they open their operation in Indonesia is that there are no centralized agencies that they can rely on for the source of information, therefore they have to know about specific areas that they will operate in Indonesia and get expert opinions from this particular area.”
Rahayu at M&T suggests that in-house counsel check court rulings before drafting any contract to understand how the courts interpret similar contracts or particular regulations. “There have been interesting court rulings on, for example, nominee arrangements in which the courts, at the request of the nominees, cancelled the nominee arrangements and declared the nominees as the true owners of the property, whether shares or land,” she says.
Tasdikiah Siregar, a partner at TNB & Partners, says businesses face increasingly complex challenges associated with the management of risk worldwide. “The rise in cross-border collaboration between regulators means that incidents occurring in one jurisdiction can have consequences for your business in other regions,” she says. “The speed with which legal and regulatory risks can materialize and spread requires companies to have a firm understanding of their risk exposure and ensure that robust governance, risk and compliance strategies are in place to manage and minimize risk.”
The rapid development of fintech business in Indonesia has been marked by the growth in number of business players and the entry of big corporate groups. “The money is coming from some big VCs [venture capitalists] in the region, and also local family offices and VCs,” notes Gunadarma, a partner at AYMP.
“Big names like Softbank and Sequoia are also involved. Some fintech players and family offices from China contribute quite significant numbers in Fintech. Mostly the money is being directed to peer to peer (P2P) lending companies, where the maximum foreign ownership in this industry is up to 85%. However, lately they have also tapped into the remittance and aggregator business as well.” Gunadarma says the fintech categories that lead the Indonesian market are: P2P lending; e-aggregator; payment systems (payment, clearing and settlement); and risk management and investment (e-trading and e-insurance platforms).
Oktavinanda acknowledges improvements in the fintech regulatory environment, but adds that in Indonesia it is unavoidable that technology will always be at least one step – “perhaps even many steps” – ahead of the law. “There is a need for a balancing act between having laws that accommodate progress, and consumer protection for the development of fintech in Indonesia,” he says. “As legal counsel, we should embrace the reality as an opportunity to be legally innovative.”
He says one development would be an acknowledgement as authentic evidence in the Indonesian judicial process of electronic contracts and electronic signatures, which would serve as a foundation for the fintech industry.
The big build
Infrastructure is a top priority for the Indonesian government, and there are several key developments to attract investors.
One of the government’s strategies with regard to infrastructure development is to engage the private sector through the PPP (public-private partnership) scheme, says Gunadarma. “The scheme itself is governed under Presidential Regulation No. 38 of 2015 concerning PPPs, Bappenas Regulation No. 4 of 2015 concerning The Implementation Procedures of PPPs, and several implementing regulations with regards to the return of private sector investment on the project, such as Ministry of Finance Regulation No. 260 of 2016 concerning the Procedures of Availability Payment in PPP with regards to the Provision of Infrastructure.”
Gunadarma says there is a misperception that foreign investors in PPPs are not welcome. “The foreign investor is actually not frozen out, and can still participate in PPP schemes as a ‘business entity’ with the same rights as an Indonesian entity to join the tender. If the foreign business entity is elected in the tender, they must establish an SPV [special purpose vehicle].”
Oktavinanda says the Ministry of Finance (MOF) provides infrastructure financing through the provision of various facilities and fiscal support for projects with PPP schemes.
Mining and energy
In the mining sector, concerns have been raised over concessions that have overlapping claims of authority, with both national and regional governments having authority to issue licences.
Oscar Damarjati, a partner at Hendra Soenardi, says it is common that mining concession areas overlap with forestry areas, oil and gas fields and plantation areas, which means that mining activities will be impacted by the rules applicable in those sectors. “This overlap may be caused by the lack of synchronization of maps from various sectors, including land-based concession maps such as mining, plantation, oil and gas and forestry,” he says. “We found out that sometimes the map maintained by different sectors of government (either local or national) has discrepancies. In practice, the overlap is settled by the relevant parties through a business-to-business arrangement.
“For foreign investors, it seems that they [at the beginning] feel uncomfortable with these issues, but realistically speaking, doing business in Indonesia, especially those requiring vast areas, will face this issue. The government can solve this problem by developing a single map which is publicly available so that the investors can make a commercial assessment.”
Reid says that in consolidation and replacement of existing laws and regulations, such as in the mining sector with respect to the BKPM, there are instances where certain provisions have been omitted in the consolidated or replaced regulation. Whether these omissions are intentional or an oversight is unclear.
“For example, BKPM Regulation 13 of 2017 provided that every subsidiary of a foreign investment (PMA) company, which subsidiary had not yet converted into a PMA company, must convert into one, but only when the susidiary carried out a ‘corporate action’ (conversion obligation),” says Reid. “The conversion obligation could have had significant impact on a PMA company’s subsidiary’s business, which impact potentially included an obligation to divest in order to comply with applicable foreign investment percentage restrictions.”
As BKPM Reg 13 did not define “corporate action”, Reid says speculation was rife as to what would trigger the conversion obligation and how this obligation would be enforced. “The recently issued BKPM Regulation 6 of 2018, which replaced and revoked BKPM Reg 13, did not provide for the conversion obligation,” he says. “Speculation is therefore now rife as to whether there remains a conversion obligation, whether implicitly, or as a matter of BKPM policy.
“As mentioned, many mining sector regulations were consolidated in 2018, resulting in many recently passed mining regulations being revoked. Unfortunately, and again, certain provisions of earlier regulations were omitted in the consolidated regulations, resulting in the same speculation regarding the regulator’s intentions.”
Reforming the bench
In a book just published, titled Indonesia Law, by Simon Butt and Tim Lindsey, which has taken several years of research to complete, the authors have this to say of meaningful judicial reform in the country: “Perhaps the most fundamental problem with Indonesia’s judiciary is … corruption. Suffice to say here that judicial corruption – that is, litigants being able to ‘buy’ decisions, sometimes through an auctioning process with other parties to a legal dispute – appears to be more prevalent than ever before. The result is that, even though Indonesian courts appear now largely to be independent of the state, overall, they still do not provide an effective forum for the impartial resolution of cases.”
Judicial reform remains one of Indonesia’s biggest challenges. As Yozua Makes recalls, when former president Soeharto’s New Order fell in 1998, Indonesia’s courts were widely considered little more than an extension of executive and military power.
In 2004, while the reform process was in its early stages, Daniel Lev, a scholar in Indonesian law, noted that the political leadership had little interest in political and legal reform, and consequently, “reform was bound to be gradual and uncertain, which required careful consideration of strategic possibilities for the short and long term, with little guarantee, however, that any given measure would take successful hold”.
“This gradual character still defines much of the processes of reform today, especially in the case of judicial reform,” says Makes. “There have been improvements in the judicial independence and capacity, with clear separation of authority from the executive government, and better schemes for recruitment, training, remuneration and career development. Efforts to improve the system through electronic means have started to deliver results.
“However, news stemming from inconsistencies in decisions by Indonesia’s justice system still attracts the attention of media. The independence of the courts in deciding cases and implementing decisions is also challenged when the cases are political or publicly sensitive, especially when it comes to religion. Businesses also have not yet put full faith in the speed and efficiency of the judicial system in dealing with dispute settlements.”
Fanning goes further: “There is no sign of fundamental reform in the judicial system. And police are fearless in their pursuit of payment for services.”
Rahayu at M&T says that for the past few years the Supreme Court has been publishing court rulings through its websites, following the steps the Constitutional Court has taken to publish its rulings since its establishment. “The Supreme Court circular of 2014 requiring court proceedings to be completed within a certain time, i.e. at first instance (regency/municipality level) within five months, and High Appeals Court (provincial level) within three months, as well as the electronic system, have created a quick, more transparent and better court system because judges can also learn from other cases now made available to them.”
Progress, it seems, can take time, while the nation’s legal maladies appear to have all the time in the world.