Transparency of the Regulatory System
Indonesia continues to bring its legal, regulatory, and accounting systems into compliance with international norms, but progress is slow. Notable successes include passage of a comprehensive anti-money laundering law in late 2010 and a land acquisition law in January 2012, with revised implementing regulations issued in 2015. Although Indonesia continues to move forward with regulatory system reforms, these efforts have not yet created a level playing field for foreign investors, nor does the current regulatory system establish clear and transparent rules for all actors. Certain laws and policies, including the Negative List, establish sectors that are either fully off-limits to foreign investors or are subject to substantive conditions.
Decentralization has introduced another layer of bureaucracy for firms to navigate, resulting in costly red tape. Ineffective management, resistance from vested interests, and corruption are among the challenges faced by the GOI in launching bureaucratic reform. U.S. businesses cite regulatory uncertainty and a lack of transparency as two ongoing factors hindering operations. Government ministries and agencies, including the Indonesian Parliament, continue to publish many proposed laws and regulations in draft form for public comment; however, not all draft laws and regulations are made available in public fora. Laws and regulations are often vague and require substantial interpretation by the implementers, leading to business uncertainty and rent-seeking opportunities.
Regulatory consultation in Indonesia is inconsistent, at best, despite the existence of Law 10/2004 on the Formulation of Regulations, article 53 of which states that the community is entitled to provide oral or written input into draft laws and regulations, and Law 12/2010 which further expands this right.
International Regulatory Considerations
Ministries and agencies are required to provide draft regulations to the National Standards Body of Indonesia (BSN) to be included in the National Program for Technical Regulation. BSN has primary responsibility to notify draft regulations to the WTO; however, in practice, notification is inconsistent.
Legal System and Judicial Independence
Indonesia’s legal system is based on civil law. The court system consists of District Courts (primary courts of original jurisdiction), High Courts (courts of appeal), and the Supreme Court (the court of last resort). Indonesia also has a Constitutional Court. The Constitutional Court has the same legal standing as the Supreme Court, and its role is to review the constitutionality of legislation. Both the Supreme and Constitutional Courts have authority to conduct judicial reviews.
The court system often does not provide effective recourse for resolving property and contractual disputes. Cases that would be adjudicated in civil courts in other jurisdictions sometimes result in criminal charges in Indonesia. Judges are not bound by precedent and many laws are open to various interpretations.
A lack of clear land titles has plagued Indonesia for decades, although the land acquisition law enacted in December 2011 included legal mechanisms designed to resolve some past land ownership issues. Indonesia also has a poor track record on the legal enforcement of contracts and civil disputes are sometimes criminalized. Government Regulation 79 of 2010 opened the door for the GOI to remove recoverable costs from production sharing contracts. The GOI is also requiring mining companies to renegotiate their contracts of work to require higher royalties, more divestment, more local content, and domestic processing of mineral ore.
Indonesia’s commercial code, grounded in colonial Dutch law, has been updated to include provisions on bankruptcy, intellectual property rights, incorporation and dissolution of businesses, banking, and capital markets. Application of the commercial code, including the bankruptcy provisions, remains uneven, in large part due to corruption and training deficits for judges, prosecutors, and defense lawyers.
Laws and Regulations on Foreign Direct Investment
FDI in Indonesia is regulated by Law 25/2007 (the Investment Law). Under the law, any form of FDI in Indonesia must be in the form of a limited liability company, with the foreign investor holding shares in the company. In addition, the government outlines restrictions on FDI in presidential decree 44/2016, issued in May 2016, commonly referred to as the 2016 Negative Investment List. It aims to consolidate FDI restrictions in certain sectors from numerous decrees and regulations to create greater certainty for foreign and domestic investors. The 2016 Negative Investment List enables greater foreign investments in some sectors like film, tourism, logistics, health care, and e-commerce. A number of sectors remain closed to investment or are otherwise restricted. The 2016 Negative List contains a clause that clarifies that existing investments will not be affected by the 2016 revisions. The website of the Investment Coordination Board (BKPM) provides information on investment requirements and procedures: http://www2.bkpm.go.id/.
Competition and Anti-Trust Laws
The Indonesian Competition Authority (KPPU) implements and enforces the 1999 Indonesia Competition Law. The KPPU reviews agreements, business practices and mergers that may be deemed anti-competitive, advises the government on policies that may affect competition, and issues guidelines relating to the Competition Law.
Expropriation and Compensation
The GOI generally recognizes and upholds the property rights of foreign and domestic investors, and the 2007 Investment Law opened major sectors of the economy to foreign investment, while assuring investors’ protection from nationalization, except where corporate crime is involved. However, Indonesia’s economic nationalism continues to manifest itself through negotiations, policies, regulations, and laws that erode investor value. These include local content requirements, requirements to divest equity shares to Indonesia stakeholders, and requirements to establish manufacturing or processing facilities in Indonesia.
In 2012, the GOI issued a regulation requiring foreign-owned mining operations to divest majority equity to Indonesian shareholders within 10 years of operational startup using cost of investment incurred, rather than market value, for purposes of divestment valuation. In October 2014, with Regulation 77/2014, the government eased the foreign ownership restrictions to 60 percent for companies that smelt domestically (40 percent divestment) and 70 percent for companies that operate underground mines (30 percent divestment). However, regulations enacted in January 2017 again require foreign-owned miners to gradually divest over ten years 51 percent of shares to Indonesian interests, with the price of divested shares determined based on fair market value and not taking into account existing reserves. Implementation of the new regulations has just begun, but the government has indicated it intends the majority-share divestment requirement to supersede Regulation 77/2014 and apply to all foreign investors in the sector. Based on the 2009 Mining Law, the GOI required that mining contracts of work be renegotiated to alter terms in favor of the GOI, including royalty and tax rates, local content levels, domestic processing of minerals, and reduced mine areas. Some mining companies had to reduce the size of their original mining work area without compensation.
In general, Indonesia’s rising resource nationalism supports the idea that domestic interests should not have to pay prevailing market prices for domestic resources. In the oil and gas sector, the GOI is increasingly explicit in its policy that expiring production sharing contracts operated by foreign companies be transferred to domestic interests rather than extended. While there is no obligation of compensation under the production sharing contract, this policy has begun to affect the Indonesian business interests of foreign companies.
The Law on Land Acquisition Procedures for Public Interest Development passed in December 2011 sought to streamline GOI acquisition of land for much-needed infrastructure projects. The law seeks to clarify roles, reduce the time frame for each phase of the land acquisition process, deter land speculation, and curtail obstructionist litigation, while still ensuring safeguards for land-right holders. The implementing regulations, first approved in 2012, went into effect on January 1, 2015; further revisions in 2015 expanded the scope of the new provisions. Some reports indicate that the law has reduced land acquisition timelines; with no accusations of illegal GOI expropriation of land.
ICSID Convention and New York Convention
Indonesia is a member of the International Center for Settlement of Investment Disputes (ICSID) and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Thus, foreign arbitral awards are legally recognized and enforceable in the Indonesian courts, but, in practice, are not always enforced.
Investor-State Dispute Settlement
Since 2004, Indonesia has faced seven Investor-State Dispute Settlement (ISDS) arbitration cases including those that have been settled and ongoing cases. In December 2016, an International Centre for Settlement of Investment Disputes (ICSID) tribunal ruled in favor of Indonesia in the 2012 arbitration case of British firm Churchill Mining vs Indonesia. Currently, there are two on-going arbitration cases involving Indonesia, with Indian firm Indian Metals & Ferro Alloys, and Singaporean firm Oleovest.
Indonesia recognizes binding international arbitration of investment disputes in its bilateral investment treaty agreements (BITs). However, in response to a perceived increase in the number of arbitration cases submitted to ICSID, in February 2014 Indonesia began to allow its existing BITs, numbering more than 60, to expire as soon as the agreement allowed. BKPM formed an expert team to review the current generation of BITs and formulate a new modern model BIT that would more effectively protect national interests. The Indonesian model BIT is currently under legal review for finalization.
International Commercial Arbitration and Foreign Courts
Judicial handling of investment disputes remains mixed. Indonesia’s legal code recognizes the right of parties to apply agreed upon rules of arbitration. Some arbitration but not all is handled by Indonesia’s domestic arbitration agency, the Indonesian National Arbitration Body.
Companies have resorted to ad hoc arbitrations in Indonesia using the UN Commission on International Trade Laws (UNCITRAL model law) arbitration rules. Though doing business in Indonesia remains challenging, there is not a clear pattern or significant record of investment disputes involving U.S. or other foreign investors. The court system in Indonesia works slowly. International arbitration awards, when enforced, may take years from original judgment to payment.
Indonesian Law No. 37/2004 on Bankruptcy and Suspension of Obligation for Payment of Debts is decidedly pro-creditor and the law makes no distinction between domestic and foreign creditors. As a result, foreign creditors have the same rights as all potential creditors in a bankruptcy case, as long as foreign claims are submitted in compliance with underlying regulations and procedures. Monetary judgments in Indonesia are made in local currency.