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Editorial

Indonesia Under Review - July 2014

Negative Investment List  

The Government has issued a new Presidential Regulation revising the negative investment list that sets out the limit on the share percentage that can be owned by foreign shareholders. Consistent with the previous regulation, all current investment structures that have been approved will be similarly grandfathered in against increased restrictions.

Onshore oil and gas service is now regulated more tightly. Services pertaining to onshore oil and gas facilities construction, such as onshore production facilities and distribution pipes are no longer open to foreign investment. Equally, onshore drilling is now closed to foreign investment. Previously, foreign investors could own up to 95% interest in these sectors.

Pharmaceuticals (medicine and medicinal ingredients) are now more open to foreign investment, with maximum foreign shareholding increased to 85%, from 75%. 

The business of cultivation, seeding, as well as integrated production of staples and cash crops over lands larger than 25 hectares are open to foreign investment, but subject to recommendation from the Ministry of Agriculture. The permitted maximum foreign shareholding ranges between 49% and 95% depending on the crops.

To accelerate development in areas that have not seen development, the revised negative investment list introduces foreign shareholding caps that are based on the location of the investment activities. For example, cold storage in Java, Sumatera and Bali are now capped at 33%, whereas in Kalimantan, Sulawesi, the Nusa Tenggara, Maluku and Papua are capped at 67%. 

The cap on foreign shareholding in two sectors, power (generation, transmission and distribution) and seaport facilities, may be increased if the investment is made as part of a PPP project.

It is of note that the revised negative investment list was issued just months before the 9 July 2014 Presidential Election, with swearing in expected to take place in late 2014. The presidential candidates have voiced nationalistic tendencies over strategic resources, such as food production and natural resources. This raises questions of whether or not the 2014 Negative Investment List will remain under the next administration.

Financial Services Authority (OJK)

At the start of the year the Indonesian Financial Services Authority (OJK) took over the supervisory role over the banking sector from the central bank (Bank Indonesia). This, however, still leaves part of the regulatory authority with Bank Indonesia, making coordination between the two institutions a pertinent issue while the OJK works on scaling up its capacity.

OJK has issued implementing regulations and circular letters on the payment of levies to the OJK, and has otherwise been active in its role. Notably issuing a circular letter on Financial Literacy Education for Consumers and the Public, which sets out technical guidelines for financial service providers on how to organize their financial literacy education, as mandated by a regulation and expected to be further supported by a higher-ranking presidential regulation. A circular letter on customer complaints procedures, and a regulation on fines procedures, as well as a number of regulations on good corporate governance and financial stability have also been issued. Such as a regulation requiring key personnel and controlling individuals in insurance companies, pension funds, financing companies and credit insurance companies to pass OJK's fit and proper test before they are appointed to positions or if they currently hold certain positions and are not deemed to have passed the test.

The OJK is also expressing concern over certain practices, such as bankassurance and what it calls "banking conglomeration", in which exclusive deals are entered into and where lenders also operate other businesses either in banking or non-banking sectors.

It is also notable that the OJK has revoked a circular letter thereby ending the ability to automatically conduct share buybacks. Previously, when OJK announced such conditions, issuers and publicly listed companies could undertake share buybacks as provided for under the regulation. This indicates that OJK is of the view that Indonesian capital markets have stabilized compared to 2013.

Trade Law

The Trade Law has been issued, essentially codifying existing laws and regulations through reference to those regulations. It also repeals and replaces a number of historical pieces of legislation. Notably, the Law requires all businesses operating in Indonesia to secure proper licenses issued by the Minister of Trade, previously, in certain sectors, only a license from the relevant ministry was required. There are also provisions specifically targeted at e-commerce operations.

The Trade Law contains 13 types of violations that may result in criminal penalties including imprisonment and fines. These criminal sanctions contain prison terms ranging from 1 year to 12 years. Specifically, it provides for imprisonment of a maximum of 4 years or a fine of up to approximately $860 thousand for a businesses that perform trading activities without the required business licenses. And imprisonment of 12 years, the longest imprisonment sanction under the Trade Law, for businesses that sell goods or services through electronic systems that do not comply with the predetermined data or information requirements.

Notable Legislation

The Notary Law has been amended, tightening requirements for becoming a notary, creating a council of notaries, and affirming the notaries' professional organization. Notably the law sets out the format of a notarial deed, and specifies that any deed that does not match such format will be automatically considered a private deed (lessening its strength and admissibility). The Law also introduced a requirement that an Indonesian language version of the notarial deed exist, and be governing.

An Industry Law has been issued, replacing the 1984 law, and broadening its scope. The law covers the masterplan and the national industrial policy, industrial zones, developing resources/facilities/infrastructure, and the industrial licensing process (applicable to all industrial businesses) as well as public participation and government control/oversight.

A Space Law, largely implementing treaties that Indonesia is party to, and an Engineering Law have also been issued, while a 2012 Cooperatives Law has been overturned by the Constitutional Court, reverting the regulatory regime back to the 1992 Cooperatives Law.

The Indonesia Stock Exchange has issued new free float requirements: for IPO 10% to 20%, depending on company size, and at least 7.5% at all times.

National Energy Policy for 2013-2050 was adopted by the House of Representatives and the President instructed that more detailed plans be developed. Prior to the more detailed plans being developed one of the overall trends is to move to more gas rather than relying on diesel generators.

Implementation of universal health coverage has commenced, in January 2014 for all workers, then for informal workers, and eventually for the entire population. Monthly contributions are capped at around $16 at present.

There has been an increase of Article 22 import tax to 7.5% from 2.5% on certain goods for registered importers.

Bank Indonesia introduced a regulation regarding credit ratings agencies (LPIP), as separate entities apart from the banks.

Under a new Supreme Court circular letter State Prosecutors can now represent state owned companies.

Upcoming Legislation

There is talk of agrarian reform, under which the 1960 "Land" Law would be replaced. However, considering the sensitivity of this issue, and that is has been in discussion since 2010, this is unlikely to transpire in the immediate future.

With increasing concerns over the trade balance and budget deficits, tax legislation and enforcement are tightening. Although part of the added scrutiny could be attributed to an end of 2013 change to tax audit timelines (from the previous 10 years to the previous 5 years).

Indonesia is planning to review/let expire, its 67 bilateral investment treaties, starting with the Netherlands treaty that expires in 2015. This appears to be a result of concerns over unbalanced treaties and the central government not having control over, but being responsible for, the actions of regional governments (which has so far resulted in a multibillion dollar ICSID dispute). 

Reciprocity is a major political concern for Indonesian authorities, the consequences of which can already be seen in practice with the difficulties that certain acquisitions have faced recently.

 

Elections

Several ministers and other high-ranking officials have left their positions to focus on the election, and such shift of focus is apparent throughout the administrative levels. Consequently, until the new president and his team commence their term it should not be expected that Indonesian officials will make any significant decisions.

Notably neither of the Presidential candidates' own parties have sufficient support in the House of Representative, so the implementation of either candidate's platform would be dependent on their political partners - which will also be significant with respect to the appointment of ministers and directors of ministerial departments - who are the ones ultimately responsible for implementing the often generic laws into specific regulations.

In light of potential election-related disputes, which are adjudicated at the Constitutional Court, it is notable that Akil Mochtar, the former Chief Justice, has been sentenced to life for corruption related to cases involving election disputes. He plans to appeal.

Mineral Export 

Indonesia finally implemented the 2009 Mining Law's raw mineral export restriction in early 2014 through a government regulation and Minister of Energy and Mineral Resources (ESDM) Regulation. However, the restriction is not in full effect as ESDM exempts 5 minerals from a higher standard of refinement for a period of three years, on the condition that the exporter owns sufficient reserves for eventual smelting and has a credible plan to construct a smelter or jointly process the ores.

The Minister of Finance has also issued a regulation which imposes tax on the export of the 5 mineral concentrates: copper, zinc, manganese, iron and lead, initially set at 20-25% and incrementally increasing to 60%, before being completely banned.

The Indonesian government has sought to apply the export restriction to Contract of Work holders, which has so far resulted in Newmont initiating international arbitration (at ICSID). 

At the same time, there is an ongoing constitutional challenge to the processing requirement and the export restrictions. In February 2014, Indonesia's Mineral Entrepreneurs Association (Apemindo), PT Harapan Utama Andalan, PT Pelayaran Eka Ivanajasa and Koperasi TKBM Kendawangan Mandiri, submitted a challenge to the 2009 Mining Law's mineral ore export ban to the Constitutional Court. The case is ongoing, but it is worth noting that the previous implementation of the export restrictions was successfully challenged, and simultaneously amended to comply, so it remains to be seen whether the current ban will withstand constitutional scrutiny.

It is also of note that the Inalum smelter takeover has been resolved amicably, in spite of the initially problematic takeover that proceeded without the parties having come to an agreement on price.

 

International Exchange of Tax Information

A Minister of Finance Regulation on Exchange of Tax Information has been issued, stating that the exchange of information will be organized upon request or automatically, and must be reciprocal between Indonesia and the respective foreign country.

With respect to FATCA a Model 1 IGA with Indonesia is now treated as "in effect" by the US Treasury, after the US and Indonesian governments have reached an agreement in substance.

Merpati Corruption Conviction

The Supreme Court has convicted Hotasi Nababan, the former President Director of PT Merpati Nusantara Airlines, and the General Procurement Manager, Tony Sudjiarto, overturning the Jakarta Corruption Court's acquittal. The case stems from a security deposit paid by Merpati to a US-based lessor who failed to supply the contracted aircraft or return the deposit, and is notable for the President Director being prosecuted, and now convicted, as a result of a business transaction involving a state owned company that went bad rather than due to what is traditionally considered corruption.

 

Infrastructure

Infrastructure projects are generally seeing delays, and it is expected that any major developments in this sector will have to await the arrival of the next administration.

In late 2013 the National Development Planning Agency (Bappenas) published the 2013 Public Private Partnership (PPP) book, containing a list of 27 PPP projects currently being offered by the Indonesian government. The projects constitute a shorter, more focused, list compared with prior years, placing emphasis on high priority projects and focusing on ensuring successful implementation. However, the 27 projects do span a wide range in terms of size, location, and stage of completeness.

As of the date of the PPP Book there have been 21 tendered projects, and there are 0 projects that are ready to be offered, 14 prospective projects, and 13 potential projects. Prospective projects (previously called priority projects) are those that are further along to being tendered, while potential projects are at an earlier stage of completeness.

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