Indonesia: Policy Package To Improve Indonesian Investment Climate

First published in SSEK Legal News Jan-Mar 2006

On February 26, 2006 the President of the Republic of Indonesia issued Presidential Instruction No. 3 of 2006 Regarding Policy Package for Improvement of the Investment Climate (PI 3). The issuance of PI 3 is intended to revive and improve investment in Indonesia so that it will become increasingly clear and transparent to both local and foreign investors.

PI 3 sets out a policy package for investment sectors containing a series of programs, activities to be done, timelines to be achieved, output of laws, government regulations or other regulations that must be introduced, and the person responsible for each task. These programs are to be monitored by the Coordinating Minister for the Economy through the establishment of a Monitoring Team.

The policy package consists of 19 policies spread over these five areas: (i) the general investment sector, (ii) customs and excise, (iii) taxes, (iv) labor and (v) small and medium enterprises and cooperatives. A bullet-point summary of the policy package follows.

A. Strengthening investment service institutions, consisting of the following programs:

B. Synchronizing central regulations and regional regulations (Perda) through a program to review those regional regulations that impede investment.

C. Clarify the regulations requiring an Environmental Impact Assessment (AMDAL) by revising State Minister for the Environment Decree No. 17 of 2001 Regarding Business Plans and/or Activities for which an AMDAL is Mandatory.

A. Accelerating the flow of goods through the following programs:

B. Expanding the role of Bonded Zones, consisting of the following programs:

C. Eradication of smuggling through a program to improve smuggling eradication activities through better coordination with related institutions and intensifying supervision through auditing of customs and excise affairs.

D. De-bureaucratization in the customs and excise sector through a program to accelerate the registration and application process for customs and excise facilities.

A. Tax incentives for investment, through the following programs:

B. Implement the "self-assessment" system consistently through the following programs:

C. Revise VAT to promote exports through the following programs:

D. Protect the rights of taxpayers through the following programs:

E. Promote transparency and disclosure through programs to disclose tax audits and investigations and increase public awareness of taxes.

A. Create an industrial relations climate that supports the expansion of employment through the amendment of Law No. 13 of 2003 Regarding Manpower and its implementing regulations.

B. Protection and placement of Indonesian manpower (TKI) overseas through a program to amend Law No. 39 of 2004 Regarding Placement and Protection of Indonesian Manpower Overseas.

C. Ensuring prompt, inexpensive and fair industrial relations dispute settlement through programs to implement Law No. 2 of 2004 Regarding Settlement of Industrial Relations Disputes.

D. Accelerating the process of issuing manpower licenses through a program to amend laws, regulations, decrees and circular letters.

E. Creating a flexible and productive manpower market through a program to develop employment exchange and employment market information.

F. Reform of transmigration policies in the framework of expanding employment through a program to amend Law No. 15 of 1997 Regarding Transmigration.

Empowerment of Small and Medium Enterprises and Cooperatives (UKMK) through the following programs:

Four Government Regulations (GRs) on broadcasting that were enacted in November 2005 are to be revised. This decision was reached at a meeting arranged by Constitutional Court Chairman Jimly Asshidiqie and attended by representatives from the Indonesian Broadcasting Committee (Komite Penyiaran Indonesia or KPI), the House of Representatives (Dewan Perwakilan Rakyat or DPR), and the Department of Communication and Information (DOCI). However, no timeframe has yet been issued for such revisions.

The four regulations in question are GR No. 49 of 2005 Regarding Coverage Activity Guidelines for Foreign Broadcasting Agencies (GR No. 49), GR Regulation No. 51 of 2005 Regarding the Operation of Private Broadcasting Agencies (GR No. 50), GR No. 50 of 2005 Regarding the Operation of Community Broadcasting

Agencies (GR No. 51) and GR No. 52 of 2005 Regarding the Operation of Subscription Broadcasting (GR No. 52) (together, the Broadcasting Regulations).

The Broadcasting Regulations comprehensively regulate (i) establishment and licensing procedures, (ii) restrictions on ownership and control, (iii) cross-ownership schemes and (iv) administrative sanctions for broadcasting agencies in Indonesia, as required by Law No. 32 of 2002 Regarding Broadcasting (the Broadcasting Law).

Controversy arose immediately after the issuance of the Broadcasting Regulations, which constituted the implementing regulations required under the Broadcasting Law. In preparing and drafting the Broadcasting Regulations, the DOCI had not involved the KPI, which is the independent government institution mandated under the Broadcasting Law to handle broadcasting affairs in Indonesia. This led to several provisions of the Broadcasting Regulations being deemed by many to be controversial since they may go against the spirit of the Broadcasting Law.

The main issue concerns the authority of the DOCI, which overlaps that of the KPI under the Broadcasting Law. The DPR believes that the Broadcasting Regulations should not have usurped the powers that the Broadcasting Law had constitutionally embedded in the KPI. It is feared that the Broadcasting Regulations may be used by the Government (through the DOCI) to interfere in the broadcast sector by abusing the dominant role of the DOCI in granting, rejecting and extending broadcasting licenses.

Another controversial provision is the ban preventing local media from directly relaying news programs provided by foreign networks. Members of the public have criticized the Broadcasting Regulations as being repressive and open to abuse, which might restrict freedom of the press in Indonesia. Despite the controversy, the Broadcasting Regulations are still in effect.

On November 9, 2005 the Government of Indonesia issued Presidential Regulation No. 67 of 2005 Regarding Cooperation Between the Government and Business Entities in Infrastructure Procurement (PR 67). PR 67 revoked Presidential Decree No. 7 of 1983 regarding the same.

PR 67 stipulates that cooperation can be implemented through (i) a Cooperation Agreement or (ii) a Business Concession. The Cooperation Agreement is a written agreement on infrastructure procurement entered into by the Technical Ministry/Head of Government Institution/Head of Regional Government (together referred to as the Government of Indonesia or GOI) and a business entity through a public tender. In case of procurement for business entities based on a Business Concession, this shall be implemented through a concession auction.

The types of infrastructure for which a cooperation may be entered into with a business entity both through a Cooperation Agreement and a Business Concession include: (i) transportation, (ii) roads, (iii) water, (iv) drinking water, (v) waste water, (vi) telecommunications, (vii) electric power and (viii) oil and natural gas.

Project identification shall be initiated by the GOI and business entity. The GOI will stipulate the priority projects for cooperation in a list to be made available to the public.

Business entities may also submit a proposal to the GOI on infrastructure procurement projects that are not included in the list of priority projects. Such a proposal will be evaluated by the GOI and, if it satisfies the worthiness requirement, the proposal may then proceed to a public tender. The proposing business entity will receive compensation in an amount of up to 10% of the value of the tender being proposed.

PR 67 also stipulates provisions on the initial tariff and tariff adjustments to determine the guaranteed rate of investment return based on return of investment, operational costs and margin over a specified period. Risk management shall be arranged through allocation of risk between the parties and shall be covered by the Cooperation Agreement. The details of the procurement procedures for business entities in a public tender are further stipulated in the attachment to PR 67.

Soewito Suhardiman Eddymurthy Kardono has been named the Who’s Who Legal Law Firm of the Year for Indonesia by Who’s Who Legal: The International Who’s Who of Business Lawyers 2006. This award was made following independent research and nominations from clients and private practice professionals.

Announcing the award, Who’s Who Legal Managing Editor Callum Campbell said: "Soewito Suhardiman Eddymurthy Kardono has four listings in four different practice areas and can boast more featured lawyers than any other firm in the country. As such, Soewito Suhardiman Eddymurthy Kardono is a worthy winner of the Who’s Who Legal Law Firm of the Year for Indonesia with outstanding individual talent and breadth of expertise. This is the first time we have singled out an individual firm nationally for such an honor, and Soewito Suhardiman Eddymurthy Kardono can truly be said to be Indonesia’s leading firm."

The SSEK lawyers featured in The International Who’s Who of Business Lawyers 2006 are Ira A Eddymurthy for both Banking and Capital Markets, Darrell R Johnson for Insolvency and Restructuring, and Michael D Twomey for Project Finance. Who’s Who Legal is the official research partner of the International Bar Association.

At the IFLR Asia Awards in Hongkong on March 15, 2006, the Asia Pulp & Paper restructuring in which SSEK was involved was named 2005 Asian Deal of the Year in the restructuring category.

Retty A Suhardiman has been endorsed as a leading insurance and reinsurance and mergers and acquisitions lawyer.

Darrell R Johnson has been endorsed as a leading insurance and reinsurance and project finance lawyer.

Michael D Twomey has been endorsed as a leading project finance lawyer.

Ira A Eddymurthy has been selected as a leading general corporate practice lawyer.

Darrell R Johnson has been selected as a leading general corporate practice and mergers and acquisitions lawyer.

Gaylord Watkins has been recognized as a leading mining lawyer.

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