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Indonesia Under Review April 2012
A Strong Start to a Year of Business Growth
A significant macroeconomic development in recent months has been that Indonesia has regained an investment grade rating, from Fitch and Moody’s, for the first time since the Asian financial crisis over a decade ago. Combined with a record low rate of 5.75% that has been set by Bank Indonesia in February this should serve to encourage further investor confidence.
Also of note is that the ASEAN – Australia – New Zealand Free Trade Agreement has entered into force on 10 January 2012 for Indonesia, which had been the last of the signatories to ratify. The agreement addresses trade in goods and select services, facilitation of the movement of businesspersons, protection of a range of investments, competition, and intellectual property. Its primary effect will be to progressively reduce and eliminate tariffs and export subsidies, and simplify customs procedures.
A notable upcoming development is the planned subsidized fuel price increase, this time in six months’ time and if oil prices exceed the budgeted $105 by 15%. Despite the government earlier appearing to have finally decided to curtail the costly fuel subsidy programme, but failing to reach consensus for an immediate increase in the House of Representatives (DPR) at the last moment, it remains to be seen if the implementation takes place, considering the substantial public opposition, political ambitions of the ruling coalition’s members, and concerns over the impacts.
Also of note is the on-going commissioner selection process for the Financial Services Supervisory Authority (OJK) that is currently at the presidential selection stage, with 21, out of 290 applicants, remaining. The President will select 14 names and submit them to the House of Representatives, who will then decide on the 7 appointments.
Corruption and Related Political Developments
Corruption has once again taken centre stage on the Indonesian political arena as the Corruption Eradication Commission (KPK) continues its work on the Nazaruddin case involving the South East Asian Games scandal. The fallout has not been kind to Partai Demokrat, and President Susilo Bambang Yudhoyono has called for a complete shake-up of the 149 lawmakers, including the party leadership. Although unverified at this time, it is expected that House Chairman Jafar Hafsah will be replaced; with speculation that Edhie Baskoro Yudhoyono, the President’s youngest son, will be his replacement.
With the background of the expected shake-up at Partai Democrat, President Yudhoyono has reiterated that fighting corruption remains a focus for his administration. In January the President fortified the Indonesian anti-corruption mechanism with Presidential Regulation No. 9 of 2012 (“Perpres”) on Tasking the Minister of Law and Human Rights, the Minister of State Secretariat, the Minister of Finance and the Attorney General with Handling Asset Recovery of Criminal Proceeds of the Bank Century Case Located Abroad. One of the main functions of this Perpres is to allow the aforementioned authorities to directly appoint legal consultants to assist in the handling of the Bank Century asset recovery effort. As the Bank Century asset recovery effort has languished unresolved for the last few years, this mandate allows for a long overdue jump-start to the process by potentially enlarging the strategic repertoire of the Indonesian side at home and in cooperating with authorities in the jurisdictions where the Bank Century assets are located, including Switzerland and Hong Kong. Notably, the Bank Century corruption, banking fraud and embezzlement charges came out of the same culture of corruption within certain parts of the Indonesian banking system that previously gave rise to the Bank Indonesia Liquidity Assistance (BLBI) scandal. To date, the asset recovery efforts for BLBI have not met with any significant success. It is arguably a major an indicator for improved governance that certain aspects of at least the Bank Century case continue to be the top priority for high ranking officials.
It goes without saying that should Indonesia succeed in recovering assets in these jurisdictions and others, this would go a long way to set a precedent that Indonesia is indeed serious in its law enforcement efforts, and more specifically to eradicate systemic corruption. Indonesia’s dismal rate of success in asset recovery efforts from abroad thus far is yet another face of deep-rooted corruption – perhaps most importantly, it is a branch of the system of corruption that is connected with the global network of organized crime. If the Bank Century case actually succeeds (which is only possible after a series of gruelling and necessarily swift changes in the whole of the Indonesian legal system), there will be significant cross-border benefits to crime-fighting efforts.
In related news, on Wednesday 22 February 2012, The House of Representatives Commission III endorsed a bill on mutual legal assistance (MLA) in criminal matters with the Hong Kong Special Administrative Region of the People’s Republic of China. Somewhat ironically the DPR has taken around four years to endorse this bill despite its keen interest in the resolution of the Bank Century case, nonetheless, the treaty with Hong Kong is indeed a step in the right direction. The DPR’s increased activity in anti-corruption efforts should not go unlauded – it has temporarily suspended PDI-P representatives Panda Nababan and Suwarno for alleged involvement in the election of Miranda Swaray Goeltom as central bank senior deputy governor in 2004. Along with the aforementioned shake-up at Partai Demokrat, these are signals indicating that a transformation needs to happen within the DPR.
A compromised, co-opted and therefore unaccountable banking system works against attracting investment and business into Indonesia. The same can be said about our parliamentary system. Although corruption in these areas does not make Indonesia unique, arguably it is the deep and blatant nature of such corruption that makes it a more significant problem for doing business in Indonesia. When lawyers do not argue their corporate and commercial cases on their merits but instead take their arguments to the relevant government offices, or when lawmakers entertain lobbying from corruptors, legal certainty is one of the first to suffer.
The above-described scandals appear to have taken their toll on Partai Demokrat’s chances in the 2014 presidential election, but have also contributed to a general apathy of the electorate. One of the other main contenders, Golkar, appears to have finally settled on Bakrie as the presidential candidate. And PDI-P’s Megawati remains a potentially strong contender in light of a recent poll by the Center for Strategic and International Studies (Indonesia).
New Laws – A Boost for Indonesian Infrastructure
The long-awaited Law No. 2 of 2012 on Land Acquisition for Public Interest Development has finally been passed, following multiyear delays caused by a wide range of conflicting interests. The law is a significant revision and an escalation of the legal basis of the prior regime that was based on a Presidential Regulation, which nonetheless continues to remain in force to the extent that it does not conflict. The law sets out a new framework for the acquisition of land for the purpose of developing a range of public interest infrastructure projects and is designed to address the uncertainty that has resulted from the numerous delays in the process of land acquisition. Nonetheless, the law does provide a number of opportunities to challenge, and subsequently delay, the proposed land procurement, and presents potential for a constitutional challenge due to an appeal path that leads from the District Court directly to the Supreme Court, bypassing the High Court.
Under the law, land is acquired by government institutions (including state owned enterprises) following a consultation with rights holders and those affected (the result of which is subject to an appeal process) with compensation being paid to a range of rights holders for the land and for other losses sustained as a result of giving up their rights (said compensation also being subject to an appeal process). The anticipated implementing regulations of the law will provide a more specific regulatory regime and hopefully further address how delays will be prevented, since a number of uncertainties regarding this contentious issue continue to remain.
Also of note is the issuance of Law No. 20 of 2011 on Apartments, which has replaced the previous 1985 law to provide an updated framework for the development, control, ownership, use, and management of multi-storey dwellings. Notable features include the requirement for commercial apartment developers to provide 20% of the floor space, which can be located offsite, as public apartments; and the requirement for rebuilding if the existing structure poses a hazard and/or cannot be repaired.
Natural Resource Industry Regulations and Decrees
There has been a significant increase in the political and administrative attention being paid to the natural resource industry in the recent months, which, combined with broader protectionist overtures such as calls for tougher anti-dumping action, may result in legislative changes that seek to garner populist support for the politicians advancing them. An example of this is the proposed mineral export tax, which could potentially replace the, ahead-of-schedule, raw material export ban.
The Minister of Energy and Mineral Resources has issued an implementing regulation on the mineral processing obligation. The regulation sets a May 2012 deadline for operating mining licence (IUP Operation Production and IPR) holders to meet the minimum upgrading levels in order to continue export sales (the terminology used implies a deadline for entering into contracts, however it may get interpreted as relating to actual shipments). The acceleration of the export ban, which was previously expected to come into effect in 2014, and the lack of any exemptions has resulted in the regulation attracting wide-ranging criticism. It remains to be seen whether these restrictions will come into force as currently envisioned, considering the significant impact this would have on the mining industry and the broader economy. The regulation also sets deadlines for the implementation of mineral processing (which includes entering into partnerships) for exploration (2015), construction (2016), and operations (2014) stage licence holders (IUP and CoW). The companion regulation on the processing requirements for coal has yet to be issued, as the process of setting the calorific limits and the associated framework has been met with a number of political and technical difficulties.
The President has issued a decree to form an evaluation team for Contract of Work and Coal Contract of Work adjustments, so as to implement the Mining Law’s requirement that such contracts be amended to comply with the new legislative regime. The team has been tasked with evaluating the contracts to identify any amendments that need to be made, determine the government’s position on mining areas and government revenue for the purpose of amendment negotiations, and set out the steps to enforce the contract holders’ mineral and coal processing obligations. The team consists of a number of ministers and heads of government agencies, and can involve a range of other actors during its tenure that will end in December 2013. Additionally, the President has ordered the review of all mining licenses issued by local governments in an attempt to improve transparency and accountability, with the Ministry of Energy and Mineral Resources, along with other departments, having until December to complete the review.
An amendment to an implementing regulation of the Mining Law introduced a dramatic change in the divestment requirement - from the previous 20% after 5 years, to 51% after 10 years of operations. The divestment requirement is intended for companies operating under the foreign direct investment framework, which would appear not to include public companies that are listed in Indonesia, to ensure that certain levels of Indonesian ownership are met. The revised divestment requirement starts to apply from the start of the 6th year, in yearly increments. The increase has been in discussion for a number of months and is another example of populist policies, the implementation of which, however, appears to be largely left for the next administration to oversee after the 2014 election. The increase should only immediately affect producing Contracts of Work (CoWs) that are extended, and consequently converted, while the earliest it would have an effect on the bulk of current generation mining licenses (IUPs and IUPKs), which have commenced production after being converted from exploration, is in 2015.
The divestment requirement is worded so as to only apply to holders of IUPs and IUPKs that stem from the new licensing system that came into force in 2009 under the new Mining Law. However, the Law calls for the terms of the CoWs issued under the previous licensing system to be adjusted in line with the Law. As such, it remains unclear exactly how the divestment requirement will apply to the holders of CoWs. There have been comments from industry that the expectation is that divestment would only affect IUPs and IUPKs, and not CoWs, at least prior to renewal. However, the Minister of Energy and Mineral Resources, Jero Wacik, has stated that there would be renegotiation of CoWs.
A long-awaited development is the passage of a government regulation on the unified environmental licenses that were introduced by the Environmental Law in 2009. The unified environmental license replaces a myriad of separate environmental licenses under the previous system, and becomes a prerequisite for business licenses, which become subject to revocation if the environmental license is revoked. The prerequisite for the environmental license is the Environmental Impact Assessment (AMDAL) or UPL-UKL, for activities with lesser impacts. The regulation also lists businesses that are exempted from preparing an AMDAL, such as those falling under a regional AMDAL or detailed spatial plan. The actual issuance of such unified environmental licenses, however, will once again have to await further implementing regulations, this time from the Minister of the Environment.
The Constitutional Court has issued a decision that has revised the Labour Law to grant additional rights to outsourced workers by requiring outsourcing companies to hire them on permanent, rather than temporary, contracts and by recommending that a substitute outsourcing company hire the workers of the previous provider on the same terms if the same works are still ongoing. The recommendation has since been implemented by the Ministry of Labour and Transmigration by allowing temporary contracts between outsourcing companies and their employees only if they include a transfer of undertaking protection of employment clauses. This development is likely to increase outsourced labour costs and is part of a wider negative view of outsourcing that is being taken by Indonesian authorities. In related matters, the recent spate of labour disputes appears to have ebbed with Freeport reaching an agreement and resuming operations. Nonetheless, isolated disputes continue to flare up, and can be expected to persist for the foreseeable future.
Also, of some note is the recent debacle surrounding the Minister of Labour Decree that purported to ban non-Indonesian nationals from serving as CEOs (as generally understood to be equivalent to a President Director), but now appears to have been issued in error, and was in fact only intended to reiterate the Labour Law's ban on foreigners holding positions of authority in a human resources capacity.
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