Indonesia’s population of 270 million, Gross Domestic Product (GDP) over USD 1 trillion, growing middle class, abundant natural resources, and stable economy all serve as very attractive features to U.S. investors; however, a range of stakeholders note that investing in Indonesia remains challenging. Since 2014, the Indonesian government under President Joko (“Jokowi”) Widodo, now in his second and final five-year term, has prioritized boosting infrastructure investment and human capital development to support Indonesia’s economic growth goals. The COVID-19 pandemic has accelerated the Indonesian government’s efforts to pursue major economic reforms through the issuance of the 2020 Omnibus Law on Job Creation (Omnibus Law). The law and its implementing regulations aim to improve Indonesia’s economic competitiveness and accelerate economic recovery by lowering corporate taxes, reforming rigid labor laws, simplifying business licenses, and reducing bureaucratic and regulatory barriers to investment. The regulations also provide a basis to liberalize hundreds of sectors, including healthcare services, insurance, power generation, and oil and gas. Sectoral or technical regulations may still present obstacles. Regardless of the outcome of these positive reforms and their implementation, factors such as a decentralized decision-making process, legal and regulatory uncertainty, economic nationalism, trade protectionism, and powerful domestic vested interests in both the private and public sectors can contribute to a complex investment climate. Other factors relevant to investors include: government requirements, both formal and informal, to partner with Indonesian companies, and to manufacture or purchase goods and services locally; restrictions on some imports and exports; and pressure to make substantial, long-term investment commitments. Despite recent limits placed on its authority, the Indonesian Corruption Eradication Commission (KPK) continues to investigate and prosecute corruption cases. However, investors still cite corruption as an obstacle to pursuing opportunities in Indonesia.
Other barriers to foreign investment that have been reported include difficulties in government coordination, the slow rate of land acquisition for infrastructure projects, weak enforcement of contracts, bureaucratic inefficiency, and delays in receiving refunds for advance corporate tax overpayments from tax authorities. Businesses also face difficulty from changes to rules at government discretion with little or no notice and opportunity for comment, and lack of stakeholder consultation in the development of laws and regulations at various levels. Investors have noted that many new regulations are difficult to understand and often not properly communicated, including internally. The Indonesian government is seeking to streamline the business license and import permit process, which has been plagued by complex inter-ministerial coordination in the past, through the establishment of a “one stop shop” for risk-based licenses and permits via an online single submission (OSS) system at the Indonesia Investment Coordinating Board (BKPM).
In February 2021, Indonesia introduced a priority list consisting of sectors that are open for foreign investment and eligible for investment incentives to replace the 2016 Negative Investment List. All sectors are at least partially open to foreign investment, with the exception of seven closed sectors and sectors that are reserved for the central government. Companies have reported that energy and mining still face significant foreign investment barriers.
Indonesia established the Indonesian Investment Authority (INA), also known as the sovereign wealth fund, upon the enactment of the Omnibus Law, aiming to attract foreign equity and long-term investment to finance infrastructure projects in sectors such as transportation, oil and gas, health, tourism, and digital technologies.
Indonesia began to abrogate its more than 60 existing Bilateral Investment Treaties (BITs) in 2014, allowing some of the agreements to expire in order to be renegotiated, including through ongoing negotiations of bilateral trade agreements. In March 2021, Indonesia and Singapore ratified a new BIT, the first since 2014. The United States does not have a BIT with Indonesia.
Despite the challenges that industry has reported, Indonesia continues to attract significant foreign investment. Singapore, the Netherlands, the United States, Japan, and Malaysia were among the top sources of foreign investment in the country in 2019 (latest available full-year data). Private consumption is the backbone of Indonesia’s economy, the largest in ASEAN, making it a promising destination for a wide range of companies, ranging from consumer products and financial services, to digital start-ups and franchisors. Indonesia has ambitious plans to continue to improve its infrastructure with a focus on expanding access to energy, strengthening its maritime transport corridors, which includes building roads, ports, railways and airports, as well as improving agricultural production, telecommunications, and broadband networks throughout the country. Indonesia continues to attract U.S. franchises and consumer product manufacturers. UN agencies and the World Bank have recommended that Indonesia do more to grow financial and investor support for women-owned businesses, noting obstacles that women-owned business sometimes face in early-stage financing.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Indonesia is an attractive destination for foreign direct investment (FDI) due to its young population, strong domestic demand, stable political situation, abundant natural resources, and well-regarded macroeconomic policy. Indonesian government officials often state that they welcome increased FDI, aiming to create jobs, spur economic growth, and court foreign investors, notably focusing on infrastructure development and export-oriented manufacturing. During the first term of President Jokowi’s administration, the government launched sixteen economic policy packages providing tax incentives in certain sectors, cutting red tape, reducing logistics costs, and creating a single submission system for business licensing applications. Foreign investors, however, have complained about vague and conflicting regulations, bureaucratic inefficiencies, ambiguous legislation in regards to tax enforcement, poor existing infrastructure, rigid labor laws, sanctity of contract issues, and corruption. To further improve the investment climate, the government drafted and parliament approved the Omnibus Law on Job Creation (Law No. 1/2020) in October 2020 to amend dozens of prevailing laws deemed to hamper investment. It introduced a risk-based approach for business licensing, simplified environmental requirements and building certificates, tax reforms to ease doing business, more flexible labor regulations, and the establishment of the priority investment list. It also streamlined the business licensing process at the regional level
The Indonesia Investment Coordinating Board, or BKPM, serves as an investment promotion agency, a regulatory body, and the agency in charge of approving planned investments in Indonesia. As such, it is the first point of contact for foreign investors, particularly in manufacturing, industrial, and non-financial services sectors. BKPM’s OSS system streamlines almost all business licensing and permitting processes, based on the issuance of Government Regulation No. 24/2018 on Electronic Integrated Business Licensing Services. While the OSS system is operational, overlapping authority for permit issuance across ministries and government institutions, both at the national and subnational level, remains challenging. The Omnibus Law on Job Creation requires local governments to integrate their license systems into the OSS. The law allows the central government to take over local governments’ authority if local governments are not performing. The government has provided investment incentives particularly for “pioneer” sectors (please see the section on Industrial Policies).
Limits on Foreign Control and Right to Private Ownership and Establishment
As part of the implementation of the Omnibus Law on Job Creation, the Indonesian government enacted Presidential Regulation No. 10/2021 to introduce a significant liberalization of foreign investment in Indonesia, repealing the 2016 Negative List of Investment (DNI). In contrast to the previous regulation, the new investment list sets a default principle that all business sectors are open for investment unless stipulated otherwise. It details the seven sectors that are closed to investment, explains that public services and defense are reserved for the central government, and outlines four categories of sectors that are open to investment: priority investment sectors that are eligible for incentives; sectors that are reserved for micro, small, and medium enterprises (MSMEs) and cooperatives or open to foreign investors who cooperate with them; sectors that are open with certain requirements (i.e., with caps on foreign ownership or special permit requirements); and sectors that are fully open for foreign investment. Although hundreds of sectors that were previously closed or subject to foreign ownership caps are in theory open to 100 percent foreign investment, in practice technical and sectoral regulations may stipulate different or conflicting requirements that still need to be resolved.
In total, 245 business fields listed in the new Investment Priorities List, or DPI, are eligible for fiscal and non-fiscal incentives, notably pioneer industries, export-oriented manufacturing, capital intensive industries, national infrastructure projects, digital economy, labor-intensive industries, as well as research and development activities. Restrictions on foreign ownership in telecommunications and information technology (e.g., internet providers, fixed telecommunication providers, mobile network providers), construction services, oil and gas support services, electricity, distribution, plantations, and transportation were removed. Healthcare services including hospitals/clinics, wholesale of pharmaceutical raw materials, and finished drug manufacturing are fully open for foreign investment, which was previously capped in certain percentages. The regulation also reduced the number of business fields that are subject to certain requirements to only 46 sectors. Domestic sea transportation and postal services are open up to 49 percent of foreign ownership, while press, including magazines and newspapers, and broadcasting sectors are open up to 49 percent and 20 percent, respectively, but only for business expansion or capital increases. Small plantations, industry related to special cultural heritage, and low technology industries or industries with capital less than IDR10 billion (USD 700,000) are reserved for MSMEs and cooperatives. Foreign investors in partnership with MSMEs and cooperatives can invest in certain designated areas. The new investment list shortened the number of restricted sectors from 20 to 7 categories including cannabis, gambling, fishing of endangered species, coral extraction, alcohol, industries using ozone-depleting materials, and chemical weapons. In addition, while education investment is still subject to the Education Law, Government Regulation No. 40/2021 permits education and health investment as business activities in special economic zones.
In 2016, Bank Indonesia (BI) issued Regulation No. 18/2016 on the implementation of payment transaction processing. The regulation governs all companies providing the following services: principal, issuer, acquirer, clearing, final settlement operator, and operator of funds transfer. The BI regulation capped foreign ownership of payments companies at 20 percent, though it contained a grandfathering provision. BI’s Regulation No. 19/2017 on the National Payment Gateway (NPG) subsequently imposed a 20 percent foreign equity cap on all companies engaging in domestic debit switching transactions. Firms wishing to continue executing domestic debit transactions are obligated to sign partnership agreements with one of Indonesia’s four NPG switching companies. In December 2020, BI issued umbrella Regulation No. 22/23/2020 on the Payment System, which implements BI’s 2025 Payment System Blueprint and introduces a risk-based categorization and licensing system. The regulation will enter into force on July 1, 2021. It allows 85 percent foreign ownership of non-bank payment services providers, although at least 51 percent of shares with voting rights must be owned by Indonesians. The 20 percent foreign equity cap remains in place for payment system infrastructure operators who handle clearing and settlement services, and a grandfathering provision remains in effect for existing licensed payment companies.
Foreigners may purchase equity in state-owned firms through initial public offerings and the secondary market. Capital investments in publicly listed companies through the stock exchange are generally not subject to the limitation of foreign ownership as stipulated in Presidential Regulation No. 10/2021.
Indonesia’s vast natural resources have attracted significant foreign investment and continue to offer significant prospects. However, some companies report that a variety of government regulations have made doing business in the resources sector increasingly difficult, and Indonesia now ranks 64th of 76 jurisdictions in the Fraser Institute’s 2019 Mining Policy Perception Index. In 2012, Indonesia banned the export of raw minerals, dramatically increased the divestment requirements for foreign mining companies, and required major mining companies to renegotiate their contracts of work with the government. The full export ban did not come into effect until January 2017, when the government also issued new regulations allowing exports of copper concentrate and other specified minerals, while imposing onerous requirements. Of note for foreign investors, provisions of the regulations require that in order to export mineral ores, companies with contracts of work must convert to mining business licenses – and thus be subject to prevailing regulations – and must commit to build smelters within the next five years. Also, foreign-owned mining companies must gradually divest 51 percent of shares to Indonesian interests over ten years, with the price of divested shares determined based on a “fair market value” determination that does not take into account existing reserves. In January 2020, the government banned the export of nickel ore for all mining companies, foreign and domestic, in the hopes of encouraging construction of domestic nickel smelters. In March 2021, the Ministry of Energy and Natural Resources issued a Ministerial Decision to allow mining business licenses holders who have not reached smelter development targets to continue exporting raw mineral ores under certain conditions. The 2020 Mining Law returned the authority to issue mining licenses to the central government. Local governments retain only authority to issue small scale mining permits
In order to conduct business in Indonesia, foreign investors must be incorporated as a foreign-owned limited liability company (PMA) through the Ministry of Law and Human Rights. Once incorporated, a PMA must fulfill business licensing requirements through the OSS system. In February 2021, the Indonesian government issued Government Regulation No. 5/2021 introducing a risk-based approach and streamlined business licensing process for almost all sectors. The regulation classifies business activities into categories of low, medium, and high risk which will further determine business licensing requirements for each investment. Low-risk business activities only require a business identity number (NIB) to start commercial and production activities. An NIB will also serve as import identification number, customs access identifier, halal guarantee statement (for low risk), and environmental management and monitoring capability statement letter (for low risk). Medium-risk sectors must obtain an NIB and a standard certification. Under the regulation, a standard certificate for medium-low risk is a self-declared statement of the fulfillment of certain business standards, while a standard certificate for medium-high risk must be verified by the relevant government agency. High-risk sectors must apply for a full business license, including an environmental impact assessment (AMDAL). A business license remains valid as long as the business operates in compliance with Indonesian laws and regulations. A grandfather clause applies for existing businesses that have obtained a business license.
Foreign investors are generally prohibited from investing in MSMEs in Indonesia, although the Presidential Regulation No. 10/2021 opened some opportunities for partnerships in farming, two- and three-wheeled vehicles, automotive spare parts, medical devices, ship repair, health laboratories, and jewelry/precious metals.
According to Presidential Instruction 7/2019, BKPM is responsible for issuing “investment licenses” (the term used to encompass both NIB and other business licenses) that have been delegated from all relevant ministries and government institutions to foreign entities through the OSS system, an online portal which allows foreign investors to apply for and track the status of licenses and other services online. BKPM has also been tasked to review policies deemed unfavorable for investors. While the OSS’s goal is to help streamline investment approvals, investments in the mining, oil and gas, and financial sectors still require licenses from related ministries and authorities. Certain tax and land permits, among others, typically must be obtained from local government authorities. Though Indonesian companies are only required to obtain one approval at the local level, businesses report that foreign companies often must seek additional approvals in order to establish a business. Government Regulation No. 6/2021 requires local governments to integrate their business licenses system into the OSS system and standardizes services through a service-level agreement between the central and local governments.
Indonesia’s outward investment is limited, as domestic investors tend to focus on the large domestic market. BKPM has responsibility for promoting and facilitating outward investment, to include providing information about investment opportunities in other countries. BKPM also uses its investment and trade promotion centers abroad to match Indonesian companies with potential investment opportunities. The government neither restricts nor provides incentives for outward private sector investment. The Ministry of State-Owned Enterprises (SOEs) encourages Indonesian SOEs through the SOE Go Global Program to increase their investment abroad, aiming to improve Indonesia’s supply chain and establish demand for Indonesian exports in strategic markets. Indonesian SOEs reportedly accounted for around USD17.5 billion in outward investment in 2019.
2. Bilateral Investment Agreements and Taxation Treaties
Indonesia has investment agreements with 38 countries, including Australia, Bangladesh, Chile, Cuba, Denmark, Finland, Iran, Jordan, Mauritius, the Philippines, Qatar, Russia, Saudi Arabia, South Korea, Thailand, and the United Kingdom. In 2014, Indonesia began to abrogate its existing BITs by allowing the agreements to expire. However, Indonesia ratified a new BIT with Singapore in March 2021, marking the first investment treaty signed and entered into force after years of review. Indonesia reportedly developed a new model BIT which is currently reflected in the investment chapter of newly signed trade agreements.
The ASEAN Economic Community (AEC) arrangement came into effect in 2016 and was expected to reduce barriers for goods, services and the movement of some skilled employees across ASEAN. Under the ASEAN Free Trade Agreement, duties on imports from ASEAN countries generally range from zero to five percent, except for products specified on exclusion lists. Indonesia also provides preferential market access to Australia, China, Japan, Korea, Hong Kong, India, Pakistan, and New Zealand under regional and bilateral agreements. In November 2020, 10 ASEAN Member States and five additional countries (Australia, China, Japan, Korea and New Zealand) signed the Regional Comprehensive Economic Partnership (RCEP), representing around 30 percent of the world’s gross domestic product and population. RCEP encompasses trade in goods, trade in services, investment, economic and technical cooperation, intellectual property rights, competition, dispute settlement, e-commerce, SMEs and government procurement.
Indonesia is actively engaged in bilateral FTA negotiations. Indonesia recently signed trade agreements with Australia, Chile, Mozambique, the European Free Trade Association (Iceland, Liechtenstein, Norway, and Switzerland), and South Korea. Indonesia is currently negotiating Bilateral Trade Agreements with the European Union, Bangladesh, Iran, Pakistan, Morocco, Mauritius, Tunisia, and Turkey.
The United States and Indonesia signed the Convention between the Government of the Republic of Indonesia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of the Fiscal Evasion with Respect to Taxes on Income in Jakarta on July 11, 1988. This was amended with a Protocol, signed on July 24, 1996. There is no double taxation of personal income.
3. Legal Regime
Transparency of the Regulatory System
Indonesia continues to bring its legal, regulatory, and accounting systems into compliance with international norms and agreements, but foreign investors have indicated they still encounter challenges in comparison to domestic investors and have criticized the current regulatory system for its failure to establish clear and transparent rules for all actors. Certain laws and policies establish sectors that are either fully off-limits to foreign investors or are subject to substantive conditions. In an effort to improve the investment climate and create jobs, Indonesia overhauled more than 70 laws and thousands of regulations through the enactment of the Omnibus Law on Job Creation. Presidential Regulation No. 10/2021, one of 51 implementing regulations for the Omnibus Law adopted in February 2021, replaced the 2016 DNI with a new investment scheme that significantly reduced the number of sectors that are closed to foreign investment.
U.S. businesses cite regulatory uncertainty and a lack of transparency as two significant factors hindering operations. U.S. companies note that regulatory consultation in Indonesia is inconsistent, despite the existence of Law No. 12/2011 on the Development of Laws and Regulations and its implementing Government Regulation No. 87/204, which states that the community is entitled to provide oral or written input into draft laws and regulations. The law also sets out procedures for revoking regulations and introduces requirements for academic studies as a basis for formulating laws and regulations. Nevertheless, the absence of a formal consultation mechanism has been reported to lead to different interpretations among policy makers of what is required. Laws and regulations are often vague and require substantial interpretation by the implementers, leading to business uncertainty and rent-seeking opportunities.
Decentralization has introduced another layer of bureaucracy and red tape for firms to navigate. In 2016, the Jokowi administration repealed 3,143 regional bylaws that overlapped with other regulations and impeded the ease of doing business. However, a 2017 Constitutional Court ruling limited the Ministry of Home Affairs’ authority to revoke local regulations and allowed local governments to appeal the central government’s decision. The Ministry continues to play a consultative function in the regulation drafting stage, providing input to standardize regional bylaws with national laws. The Omnibus Law on Job Creation provided a legal framework to streamline regulations. It establishes the norms, standards, procedures, criteria (NSPK) and performance requirements in administering government affairs for both the central and local governments. Law No. 11/2020 aims to harmonize licensing requirements at the central and regional levels. Under that law and its implementing regulations, the central government has the authority to take over regional business licensing if local governments do not meet performance requirements. Local governments must also obtain recommendations from the Ministries of Home Affairs and Finance prior to implementing local tax regulations.
In 2017, Presidential Instruction No. 7/2017 was enacted to improve coordination among ministries in the policy-making process. The regulation requires lead ministries to coordinate with their respective coordinating ministry before issuing a regulation. The regulation also requires ministries to conduct a regulatory impact analysis and provide an opportunity for public consultation. The presidential instruction did not address the frequent lack of coordination between the central and local governments. The Omnibus Law on Job Creation enhanced the predictability of trade policy by moving the authority to issue trade regulations from the ministry-level (Ministry of Trade regulation) to the cabinet-level (government regulation).
International Regulatory Considerations
As an ASEAN member, Indonesia has successfully implemented regional initiatives, including the real-time movement of electronic import documents through the ASEAN Single Window, which reduces shipping costs, speeds customs clearance, and limits corruption opportunities. Indonesia has committed to ratifying the ASEAN Comprehensive Investment Agreement (ACIA), ASEAN Framework Agreement on Services (AFAS), and the ASEAN Mutual Recognition Arrangement. Notwithstanding the progress made in certain areas, the often-lengthy process of aligning national legislation has caused delays in implementation. The complexity of interagency coordination and/or a shortage of technical capacity are among the challenges being reported.
Indonesia joined the WTO in 1995. Indonesia’s National Standards Body (BSN) is the primary government agency to notify draft regulations to the WTO concerning technical barriers to trade (TBT) and sanitary and phytosanitary standards (SPS); however, in practice, notification is inconsistent. In December 2017, Indonesia ratified the WTO Trade Facilitation Agreement (TFA). Indonesia has met 88.7 percent of its commitments to the TFA provisions to date, including publication of information, consultations, advance rulings, detention and test procedures, , goods clearance, import/export formalities, and goods transit.
Indonesia is a Contracting Party to the Aircraft Protocol to the Convention of International Interests in Mobile Equipment (Cape Town Convention). However, foreign investors bringing aircraft to Indonesia to serve the general aviation sector have faced difficulty utilizing Cape Town Convention provisions to recover aircraft leased to Indonesian companies. Foreign owners of leased aircraft that have become the subject of contractual lease disputes with Indonesian lessees have been unable to recover their aircraft in certain circumstances.
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 review.
Corruption continues to plague Indonesia’s judiciary, with graft investigations involving senior judges and court staff. Many businesses note that the judiciary is susceptible to influence from outside parties. Certain companies have claimed that the court system often does not provide the necessary recourse for resolving property and contractual disputes and that 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 land acquisition law No. 2/2012 includes legal mechanisms designed to resolve some past land ownership issues. The Omnibus Law on Job Creation also created a land bank to facilitate land acquisition for priority investment projects. Government Regulation No. 27/2017 provided incentives for upstream energy development and also regulates recoverable costs from production sharing contracts. Indonesia has also required mining companies to renegotiate their contracts of work to include higher royalties, more divestment to local partners, 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 and lawyers.
Laws and Regulations on Foreign Direct Investment
FDI in Indonesia is regulated by Law No. 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 minimum capital of IDR 10 billion (USD 700,000) excluding land and building and with the foreign investor holding shares in the company. The Omnibus Law on Job Creation allows foreign investors to invest below IDR 10 billion in technology-based startups in special economic zones. The Law also introduces a number of provisions to simplify business licensing requirements, reforms rigid labor laws, introduces tax reforms to support ease of doing business, and establishes the Indonesian Investment Authority (INA) to facilitate direct investment. In addition, the government repealed the 2016 Negative Investment List through the issuance of Presidential Regulation No. 10/2021, introducing major reforms that removed restrictions on foreign ownership in hundreds of sectors that were previously closed or subject to foreign ownership caps. A number of sectors remain closed to investment or are otherwise restricted. Presidential Regulation No. 10/2021 contains a grandfather clause that clarifies that existing investments will not be affected unless treatment under the new regulation is more favorable or the investment has special rights under a bilateral agreement. The Indonesian government also expanded business activities in special economic zones to include education and health. (See section on limits on foreign control regarding the new list of investments.) The website of the Indonesia Investment Coordinating Board (BKPM) provides information on investment requirements and procedures: https://nswi.bkpm.go.id/guide. Indonesia mandates reporting obligations for all foreign investors through the OSS system as stipulated in BKPM Regulation No.6/2020. (See section two for Indonesia’s procedures for licensing foreign investment.)
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. Strategic sectors such as food, finance, banking, energy, infrastructure, health, and education are KPPU’s priorities. The Omnibus Law on Job Creation and its implementing regulation, Government Regulation No. 44/2021, removes criminal sanctions and the cap on administrative fines, which was set at a maximum of IDR 25 billion (USD 1.7 million) under the previous regulation. Appeals of KPPU decisions must be processed through the commercial court.
Expropriation and Compensation
Indonesia’s political leadership has long championed economic nationalism, particularly concerning mineral and oil and gas reserves. According to Law No. 25/2007 (the Investment Law), the Indonesian government is barred from nationalizing or expropriating an investor’s property rights, unless provided by law. If the Indonesian government nationalizes or expropriates an investors’ property rights, it must provide market value compensation.
Presidential Regulation No. 77/2020 on Government Use of Patent and the Ministry of Law and Human Rights (MLHR) Regulation No. 30/2019 on Compulsory Licenses (CL) enables patent right expropriation in cases deemed in the interest of national security or due to a national emergency. Presidential Regulation No.77/2020 allows a GOI agency or Ministry to request expropriation, while MLHR Regulation No. 30/2019 allows an individual or private party to request a CL.
ICSID Convention and New York Convention
Indonesia is a member of the International Center for Settlement of Investment Disputes (ICSID) and the United Nations Commission on International Trade Law (UNCITRAL) through the ratification of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). Thus, foreign arbitral awards are in theory legally recognized and enforceable in Indonesian courts; however, some investors note that these awards are not always enforced in practice.
Investor-State Dispute Settlement
Since 2004, Indonesia has faced seven known Investor-State Dispute Settlement (ISDS) arbitration cases, including those that have been settled, and discontinued cases. In 2016, an ICSID tribunal ruled in favor of Indonesia in the arbitration case of British firm Churchill Mining. In March 2019, the tribunal rejected an annulment request from the claimants. In 2019, a Dutch arbitration court ruled in favor of the Indonesian government in a USD 469 million arbitration case against Indian firm Indian Metals & Ferro Alloys. Two cases involving Newmont Nusa Tenggara under the BIT with the Netherlands and Oleovest under the BIT with Singapore were discontinued.
Indonesia recognizes binding international arbitration of investment disputes in its bilateral investment treaties (BITs). All of Indonesia’s BITs include the arbitration under ICSID or UNCITRAL rules, except the BIT with Denmark. However, in response to an increase in the number of arbitration cases submitted to ICSID, BKPM formed an expert team to review the current generation of BITs and formulate a new model BIT that would seek to better protect perceived national interests. The Indonesian model BIT is reportedly reflected in newly signed investment agreements.
In spite of the cancellation of many BITs, the 2007 Investment Law still provides protection to investors through a grandfather clause. In addition, Indonesia also has committed to ISDS provisions in regional or multilateral agreements signed by Indonesia (i.e. ASEAN Comprehensive Investment Agreement).
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 UNCITRAL model law and ICSID arbitration rules. Though U.S. firms have reported that 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. Companies complain that the court system in Indonesia works slowly as 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 viewed as 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.
4. Industrial Policies
Indonesia seeks to facilitate investment through fiscal incentives, non-fiscal incentives, and other benefits. Fiscal incentives are in the form of tax holidays, tax allowances, and exemptions of import duties for capital goods and raw materials for investment. Presidential Regulation No. 10/2021 on investment establishes 245 priority fields that are eligible for tax and other incentives, such as facilitated licensing and land use, to encourage investment in those sectors. The Omnibus Law on Job Creation offers a variety of tax incentives, including eliminating income tax on dividends earned in Indonesia and on certain income, including dividends earned abroad, as long as they are invested in Indonesia. The Law also exempts dozens of goods and services from value added tax (VAT). The provisions in the Omnibus Law on Job Creation complement several regulations in Law No. 2/2020, which was issued earlier in 2020. Law No. 2 cut the corporate income tax rate, lowering it to 22 percent for 2020 and 2021, and to 20 percent for 2022. In addition, a company can claim a further 3 percent reduction if it is publicly listed, with a total number of shares traded on an Indonesian stock exchange of at least 40 percent. Investment incentives are outlined at https://www.investindonesia.go.id/cn/invest-with-us/faq.
To cope with soaring demand and to improve domestic production of medical devices and supplies amid the COVID-19 pandemic, the government through BKPM Regulation No. 86/2020 streamlined licensing requirements for manufacturers of pharmaceuticals and medical devices. The Ministry of Health also accelerated product registration and certification for medical devices and household health supplies. Moreover, the Ministry of Trade issued Regulation 28/2020 to relax import requirements for certain medical-related products.
Indonesia offers numerous incentives to foreign and domestic companies that operate in special economic and trade zones throughout Indonesia. The largest zone is the free trade zone (FTZ) island of Batam, Bintan, and Karimun, located just south of Singapore. The Omnibus Law on Job Creation and its implementing regulation, Government Regulation No. 41/2021 strengthened and unified the three islands (Batam, Bintan, and Karimun) into one integrated Free Trade Zone for the next 25 years to create an international logistics hub to support the industrial, trade, maritime, and tourism sectors. Investors in FTZs are exempted from import duty, income tax, VAT, and sales tax on imported capital goods, equipment, and raw materials. Fees are assessed on the portion of production destined for the domestic market which is “exported” to Indonesia, in which case fees are owed only on that portion. Foreign companies are allowed up to 100 percent ownership of companies in FTZs. Companies operating in FTZs may lend machinery and equipment to subcontractors located outside the zone for two years.
Indonesia also has numerous Special Economic Zones (SEZs), regulated under Law No. 39/2009, Government Regulation No. 1/2020 on SEZ management, and Government Regulation No. 12/2020 on SEZ facilities. These benefits include reduction of corporate income taxes (depending on the size of the investment), luxury tax, customs duty and excise, and expedited or simplified administrative processes for import/export, expatriate employment, immigration, and licensing. Under the Omnibus Law on Job Creation, foreign technology start-up investments located within SEZs are exempt from the minimum investment threshold of IDR 10 billion (USD 700,000), excluding land and buildings. There are minimal export processing requirements within the SEZs. New business activities in the education and health sectors (for which licensing services remain under the central government’s authority) will be allocated by zones and determined by the administrator of the SEZ. The Law lifted limits of imported goods into SEZs but maintained restrictions on specific banned goods in accompanying laws and regulations. It also introduced new tax facilities and incentives for taxpayers in SEZs. As of February 2021, Indonesia has identified fifteen SEZs in manufacturing and tourism centers that are operational or under construction, and two more have been approved.
Indonesian law also provides for several other types of zones that enjoy special tax and administrative benefits. Among these are Industrial Zones/Industrial Estates (Kawasan Industri), bonded stockpiling areas (Tempat Penimbunan Berikat), and Integrated Economic Development Zones (Kawasan Pengembangan Ekonomi Terpadu). Indonesia is home to 115 industrial estates that host thousands of industrial and manufacturing companies. Ministry of Finance Regulation No. 105/2016 provides several different tax and customs accommodations available to companies operating out of an industrial estate, including corporate income tax reductions, tax allowances, VAT exemptions, and import duty exemptions depending on the type of industrial estate. Bonded stockpile areas include bonded warehouses, bonded zones, bonded exhibition spaces, duty free shops, bonded auction places, bonded recycling areas, and bonded logistics centers. Companies operating in these areas enjoy concessions in the form of exemption from certain import taxes, luxury goods taxes, and value-added taxes, based on a variety of criteria for each type of location. Most recently, bonded logistics centers (BLCs) were introduced to allow for larger stockpiles, longer temporary storage (up to three years), and a greater number of activities in a single area. The Ministry of Finance issued Regulation No. 28/2018, providing additional guidance on the types of BLCs and shortening approval for BLC applications. By October 2019, Indonesia had designated 106 BLCs in 159 locations, with plans to approve more in eastern Indonesia. In 2018, the Ministry of Finance and the Directorate General for Customs and Excise (DGCE) issued regulations (MOF Regulation No. 131/2018 and DGCE Regulation No. 19/2018) to streamline the licensing process for bonded zones. Together the two regulations are intended to reduce processing times and the number of licenses required to open a bonded zone.
Shipments from FTZs and SEZs to other places in the Indonesia customs area are treated similarly to exports and are subject to taxes and duties. Under MOF Regulation No. 120/2013, bonded zones have a domestic sales quota of 50 percent of the initial realization amount on export, sales to other bonded zones, sales to free trade zones, and sales to other economic areas (unless otherwise authorized by the Indonesian government). Sales to other special economic regions are only allowed for further processing to become capital goods, and to companies with a license from the economic area organizer for the goods relevant to their business.
Performance and Data Localization Requirements
Indonesia expects foreign investors to contribute to the training and development of Indonesian nationals, allowing the transfer of skills and technology required for their effective participation in the foreign companies’ management. Generally, a company can hire foreigners only for positions that the government has deemed open to non-Indonesians. Employers must have training programs aimed at replacing foreign workers with Indonesians. If a direct investment enterprise wants to employ foreigners, the enterprise should submit an Expatriate Placement Plan (RPTKA) to the Ministry of Manpower.
Indonesia recently made significant changes to its foreign worker regulations. Government Regulation No. 34/2021, an implementing regulation of the Omnibus Law on Job Creation, on the utilization of foreign workers stipulates specific documents required for the RPTKA and introduces different types of RPTKA for temporary works (e.g. film production, audits, quality control, inspection and installation of machinery), employment for work under six months, employment that does not require payment to the Foreign Worker Utilization Compensation Fund (DKPTKA), and employment in SEZs. Under the regulation, an RPTKA is not required for commissioners or executives. Foreigners working in technology-based startups are also exempted from the RPTKA requirement in the first three months. Expatriates can use an endorsed RPTKA to apply with the immigration office in their place of domicile for a Limited Stay Visa or Semi-Permanent Residence Visa (VITAS/VBS). Expatriates receive a Limited Stay Permit (KITAS) and a blue book, valid for up to two years and renewable for up to two extensions without leaving the country. While a technical recommendation from a relevant ministry is no longer required, ministries may still establish technical competencies or qualifications for certain jobs, or prohibit the use of foreign workers for specific positions, by informing and obtaining approval from the Ministry of Manpower. Foreign workers who plan to work longer than six months in Indonesia must apply for employee social security and/or insurance.
Government Regulation No. 34/2021 outlines the types of businesses that can employ foreign workers, sets requirements to obtain health insurance for expatriate employees, requires companies to appoint local “companion” employees for the transfer of technology and skill development, and requires employers to facilitate Indonesian language training for foreign workers. Any expatriate who holds a work and residence permit must contribute USD 1,200 per year to the DKPTKA for local manpower training at regional manpower offices. Ministry of Manpower Decree No. 228/2019 details the number of jobs open for foreign workers across 18 sectors, ranging from construction, transportation, education, telecommunications, and professionals. Foreign workers must obtain approval from the Manpower Minister or designated officials to apply for positions not listed in the decree. Some U.S. firms report difficulty in renewing KITASs for their foreign executives.
Indonesia notified the WTO of its compliance with Trade-Related Investment Measures (TRIMS) on August 26, 1998. The 2007 Investment Law states that Indonesia shall provide the same treatment to both domestic and foreign investors originating from any country. Nevertheless, the government pursues policies to promote local manufacturing that could be inconsistent with TRIMS requirements, such as linking import approvals to investment pledges or requiring local content targets in some sectors.
In 2019, Indonesia issued Government Regulation No. 71/2019 to replace Regulation No. 82/2012, further detailed in Ministry of Communication and Information Technology (MCIT) Regulation No. 5/2020, which classifies electronic system operators (ESO) into two categories: public and private. Public ESOs are either a state institution or an institution assigned by a state institution but not a financial sector regulator or supervisory authority. Private ESOs are individuals, businesses and communities that operate electronic systems. Public ESOs must manage, process, and store their data in Indonesia, unless the storage technology is not available locally. Private ESOs have the option to choose where they will manage, process, and store their data. However, if private ESOs decide to process data outside of Indonesia, they must provide access to their systems and data for government supervision and law enforcement purposes. For private financial sector ESOs, Government Regulation 71/2019 provides that such firms are “further regulated” by Indonesia’s financial sector supervisory authorities regarding the private sector’s ESO systems, data processing, and data storage.
Additionally, to implement Government Regulation 71/2019, the Financial Services Authority (OJK) issued Regulation No. 13/2020, an amendment to Regulation No. 38/2016, which allows banks to operate their electronic data processing systems and disaster recovery centers outside of Indonesia, provided that the system receives approval from OJK. Certain core banking data must also be stored within Indonesia. OJK will evaluate whether offshore data arrangements could diminish its supervisory efficiency or negatively affect the bank’s performance, and if the data center complies with Indonesia’s laws and regulations. The regulation became effective March 31, 2020.
5. Protection of Property Rights
The Basic Agrarian Law of 1960, the predominant body of law governing land rights, recognizes the right of private ownership and provides varying degrees of land rights for Indonesian citizens, foreign nationals, Indonesian corporations, foreign corporations, and other legal entities. Indonesia’s 1945 Constitution states that all natural resources are owned by the government for the benefit of the people. This principle was augmented by the passage of Land Acquisition Law No. 2/2012,which was amended by the Omnibus Law on Job Creation (Law No. 11/2020), that enshrined the concept of eminent domain and established mechanisms for fair market value compensation and appeals. The National Land Agency registers property under Government Regulation No. 18/2021, though the Ministry of Forestry administers all “forest land.” The regulation introduced e-registration to cut bureaucracy and minimize land disputes. Registration is not conclusive evidence of ownership, but rather strong evidence of such. It allows foreigners domiciled in Indonesia to have housing property with land under a “right to use” status for a maximum of 30 years, with extensions available for up to 20 additional years, as well as a “right to own” status for apartments located in special economic zones, free trade zones, and industrial areas. The Omnibus Law on Job Creation aims to reduce uncertainty around the roles of the central and local governments, including around spatial planning and environmental and social impact assessments (AMDALs), by simplifying the licensing process through implementation of a risk-based approach. The Omnibus Law also created a land bank to facilitate land acquisition for priority investment projects.
Intellectual Property Rights
Indonesia remains on the priority watch list in the U.S. Trade Representative’s (USTR) Special 301 Report due to the lack of adequate and effective IP protection and enforcement. Indonesia’s patent law continues to raise serious concerns, including patentability criteria and compulsory licensing. Counterfeiting and piracy are pervasive, IP enforcement remains weak, and there are continued market access restrictions for IP-intensive industries. According to U.S. stakeholders, Indonesia’s failure to protect intellectual property and enforce IP rights laws has resulted in high levels of physical and online piracy. Local industry associations have reported large amounts of pirated films, music, and software in circulation in Indonesia in recent years, causing potentially billions of dollars in losses. Indonesian physical markets, such as Mangga Dua Market, and online markets Tokopedia and Bukalapak, were included in USTR’s Notorious Markets List in 2020.
The Omnibus Law on Job Creation amended key articles in Patent Law No. 13/2016 and the Trademark and Geographical Indications Law No. 20/2016. While Patent Law amendments require the patent holder to exercise their patented invention locally within 36 months after the patent is granted, the new amendments provide flexibility to IP holders to meet local “working” requirements. The new law also revokes a provision requiring patent holders to support technology transfer, investment, and employment in local manufacturing as a condition of patent protection. The law reduces the processing time required for simple patent applications from 12 months to 6 months.
In January 2020, Indonesia ratified the Marrakesh Treaty through Presidential Regulation No. 1/2020 to facilitate access to public works for persons who are blind, visually impaired, or otherwise print-disabled. Indonesia also ratified the Beijing Treaty on IPR protection for audiovisual performances to protect actors through Presidential Regulation No. 21/2020. Indonesia deposited its instrument of accession to the Madrid Protocol with the World Intellectual Property Organization (WIPO) in 2017 and issued implementing regulations in 2018. Under the new rules, applicants desiring international mark protection under the Madrid Protocol must first register their application with DGIP and be Indonesian citizens, domiciled in Indonesia, or have clear industrial or commercial interests in Indonesia. Although the Trademark Law of 2016 expanded recognition of non-traditional marks, Indonesia still does not recognize certification marks. In response to stakeholder concerns over a lack of consistency in the treatment of internationally well-known trademarks, the Supreme Court issued Circular Letter 1/2017, which advised Indonesian judges to recognize cancellation claims for well-known international trademarks with no time limit stipulation.
Ministry of Finance (MOF) Regulation No. 6/2019 grants the Directorate General of Customs and Excise (DGCE) legal authority to hold shipments believed to contain imitation goods for up to two days, pending inspection. Under Regulation No. 6/2019, rights holders are notified by DGCE (through a recordation system) when an incoming shipment is suspected of containing infringing products. If the inspection reveals an infringement, the rights holder has four days to file a court injunction to request a shipment suspension. Rights holders are required to provide a refundable monetary guarantee of IDR 100 million (USD 6,600) when they file a claim with the court. If the court sides with the rights holder, then the guarantee money will be returned to the applicant. DGCE intercepted three suspected infringement product imports in 2020 by using this recordation system, as only 17 trademarks and two copyrights are registered in the recordation system. Despite business stakeholder concerns, the GOI retains a requirement that only companies with offices domiciled in Indonesia may use the recordation system.
Trademark, Patent, and Copyright legislation require a rights-holder complaint for investigation. DGIP and BPOM investigators lack the authority to make arrests so must rely on police cooperation for any enforcement action.
The Indonesia Stock Exchange (IDX) index has 713 listed companies as of December 2020 with a daily trading volume of USD 642.5 million and market capitalization of USD 486 billion. Over the past six years, there has been a 43 percent increase in the number listed companies, but the IDX is dominated by its top 20 listed companies, which represent 55.5 percent of the market cap. There were 51 initial public offerings in 2020 – one more than in 2019. During the fourth quarter of 2020, domestic entities conducted 66 percent of total IDX stock trades.
Government treasury bonds are the most liquid bonds offered by Indonesia. Corporate bonds are less liquid due to less public knowledge of the product and the shallowness of the market. The government also issues sukuk (Islamic treasury notes) as part of its effort to diversify Islamic debt instruments and increase their liquidity. Indonesia’s sovereign debt as of March 2021 was rated as BBB by Standard and Poor’s, BBB by Fitch Ratings and Baa2 by Moody’s.
OJK began overseeing capital markets and non-banking institutions in 2013, replacing the Capital Market and Financial Institution Supervisory Board. In 2014, OJK also assumed BI’s supervisory role over commercial banks. Foreigners have access to the Indonesian capital markets and are a major source of portfolio investment. Indonesia respects International Monetary Fund (IMF) Article VIII by refraining from restrictions on payments and transfers for current international transactions.
Money and Banking System
Although there is some concern regarding the operations of the many small and medium sized family-owned banks, the banking system is generally considered sound, with banks enjoying some of the widest net interest margins in the region. As of December 2020, commercial banks had IDR 9,178 trillion (USD 640 billion) in total assets, with a capital adequacy ratio of 23.9 percent. Outstanding loans fell by 2.4 percent in 2020 compared to growth of 6.08 percent in 2019, due to the COVID-19 pandemic induced recession. Gross non-performing loans (NPL) in December 2020 increased to 3.06 percent from 2.53 percent the previous year. Rising NPL rates were partly mitigated through a loan restructuring program implemented by OJK as part of the COVID-19 recovery efforts.
OJK Regulation No.56/03/2016 limits bank ownership to no more than 40 percent by any single shareholder, applicable to foreign and domestic shareholders. This does not apply to foreign bank branches in Indonesia. Foreign banks may establish branches if the foreign bank is ranked among the top 200 global banks by assets. A special operating license is required from OJK in order to establish a foreign branch. The OJK granted an exception in 2015 for foreign banks buying two small banks and merging them. To establish a representative office, a foreign bank must be ranked in the top 300 global banks by assets.
On March 16, 2020, OJK issued Regulation Number 12/POJK.03/2020 on commercial bank consolidation. The regulation aims to strengthen the structure, and competitiveness of the national banking industry by increasing bank capital and encouraging consolidation of banks in Indonesia. This regulation increases minimum core capital requirements for commercial banks and Capital Equivalency Maintained Asset requirements for foreign banks with branch offices by least IDR 3 trillion (USD 209 million), by December 31, 2022.
In 2015, OJK eased rules for foreigners to open a bank account in Indonesia. Foreigners can open a bank account with a balance between USD 2,000-50,000 with just their passport. For accounts greater than USD 50,000, foreigners must show a supporting document such as a reference letter from a bank in the foreigner’s country of origin, a local domicile address, a spousal identity document, copies of a contract for a local residence, and/or credit/debit statements.
Growing digitalization of banking services, spurred on by innovative payment technologies in the financial technology (fintech) sector, complements the conventional banking sector. Peer-to-peer (P2P) lending companies and e-payment services have grown rapidly over the past decade. Indonesian policymakers are hopeful that these fintech services can reach underserved or unbanked populations and micro, small, and medium-sized enterprises (MSMEs). As of June 2020, fintech lending reached IDR 113.46 trillion (USD 7.6 billion) in loan disbursements, while payment transactions using e-money in 2020 are estimated to have increased by 38.5 percent to IDR 201 trillion (USD 14 billion) year-on-year.
Foreign Exchange and Remittances
The rupiah (IDR), the local currency, is freely convertible. Currently, banks must report all foreign exchange transactions and foreign obligations to the central bank, Bank Indonesia (BI). With respect to the physical movement of currency, any person taking rupiah bank notes into or out of Indonesia in the amount of IDR 100 million (USD 6,600) or more, or the equivalent in another currency, must report the amount to the Directorate General of Customs and Excise (DGCE). Taking more than IDR 100 million out of Indonesia in cash also requires prior approval of BI. The limit for any person or entity to bring foreign currency bank notes into or out of Indonesia is the equivalent of IDR 1 billion (USD 66,000).
Banks on their own behalf or for customers may conduct derivative transactions related to derivatives of foreign currency exchange rates, interest rates, and/or a combination thereof. BI requires borrowers to conduct their foreign currency borrowing through domestic banks registered with BI. The regulations apply to borrowing in cash, non-revolving loan agreements, and debt securities.
Under the 2007 Investment Law, Indonesia gives assurance to investors relating to the transfer and repatriation of funds, in foreign currency, on:capital, profit, interest, dividends and other income;
funds required for (i) purchasing raw material, intermediate goods or final goods, and (ii) replacing capital goods for continuation of business operations;
additional funds required for investment;
funds for debt payment;
income of foreign individuals working on the investment;
earnings from the sale or liquidation of the invested company;
compensation for losses; and
compensation for expropriation.
U.S. firms report no difficulties in obtaining foreign exchange.
In 2015, the government announced a regulation requiring the use of the rupiah in domestic transactions. While import and export transactions can still use foreign currency, importers’ transactions with their Indonesian distributors must use rupiah. The central bank may grant a company permission to receive payment in foreign currency upon application, and where the company has invested in a strategic industry.
The government places no restrictions or time limitations on investment remittances. However, certain reporting requirements exist. Banks should adopt Know Your Customer (KYC) principles to carefully identify customers’ profile to match transactions. Indonesia does not engage in currency manipulation.
As of 2015, Indonesia is no longer subject to the intergovernmental Financial Action Task Force (FATF) monitoring process under its on-going global Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) compliance process. It continues to work with the Asia/Pacific Group on Money Laundering (APG) to further strengthen its AML/CTF regime. In 2018, Indonesia was granted observer status by FATF, a necessary milestone toward becoming a full FATF member.
Sovereign Wealth Funds
The Indonesian Investment Authority (INA), also known as the sovereign wealth fund, was legally established by the 2020 Omnibus Law on Job Creation. INA’s supervisory board and board of directors were selected through competitive processes and announced in January and February 2021. The government has capitalized INA with USD 2 billion through injections from the state budget and intends to add another USD 3 to 4 billion in state-owned assets. INA aims to attract foreign equity and invest that capital in long-term Indonesian assets to improve the value of the assets through enhanced management. According to Indonesian government officials, the fund will consist of a master portfolio with sector-specific sub-funds, such as infrastructure, oil and gas, health, tourism, and digital technologies.
7. State-Owned Enterprises
Indonesia had 114 state-owned enterprises (SOEs) and 28 subsidiaries divided into 12 sectors as of December 2019. In April 2020, the Ministry of SOEs began consolidating SOEs, with the target of reducing the total number of SOEs to 41. As of January 2021, 20 were listed on the Indonesian stock exchange. In addition, 14 are special purpose entities under the SOE Ministry and eight are under the Ministry of Finance. Since mid-2016, the Indonesian government has been publicizing plans to consolidate SOEs into six holding companies based on sector of operations. In 2017, Indonesia announced the creation of a mining holding company, PT Inalum, the first of the six planned SOE-holding companies. The others under discussion include plantations, fertilizer, and oil and gas. In 2020, two holding companies in pharmaceuticals and insurance were established, and three state-owned sharia banks were merged. A holding company in tourism is being prepared with a target of completion by the end of 2021.
Since his appointment by President Jokowi in November 2019, Minister of SOEs Erick Thohir has underscored the need to reform SOEs in line with President Jokowi’s second-term economic agenda. Thohir has noted the need to liquidate underperforming SOEs, ensure that SOEs improve their efficiency by focusing on core business operations, and introduce better corporate governance principles. Thohir has spoken publicly about his intent to push SOEs to undertake initial public offerings (IPOs) on the Indonesian Stock Exchange. He also encourages SOEs to increase outbound investment to support Indonesia’s supply chain in strategic markets, including through acquisition of cattle farms, phosphate mines, and salt mines.
Information regarding SOEs can be found at the SOE Ministry website (http://www.bumn.go.id/ ) (Indonesian language only).
There are also an unknown number of SOEs owned by regional or local governments. SOEs are present in almost all sectors/industries including banking (finance), tourism (travel), agriculture, forestry, mining, construction, fishing, energy, and telecommunications (information and communications).
Indonesia is not a party to the WTO’s Government Procurement Agreement. Private enterprises can compete with SOEs under the same terms and conditions with respect to access to markets, credit, and other business operations. However, in reality, many sectors report that SOEs receive strong preference for government projects. SOEs purchase some goods and services from private sector and foreign firms. SOEs publish an annual report and are audited by the Supreme Audit Agency (BPK), the Financial and Development Supervisory Agency (BPKP), and external and internal auditors.
While some state-owned enterprises have offered shares on the stock market, Indonesia does not have an active privatization program. The government plans to capitalize the Indonesia Investment Authority (INA) with USD 4 billion in state-owned assets to attract equity investments in those assets, which may eventually be sold to investors or listed on the stock market.
8. Responsible Business Conduct
Indonesian businesses are required to undertake responsible business conduct (RBC) activities under Law No. 40/2007 concerning Limited Liability Companies. In addition, sectoral laws and regulations have further specific provisions on RBC. Indonesian companies tend to focus on corporate social responsibility (CSR) programs offering community and economic development, and educational projects and programs. This is at least in part caused by the fact that such projects are often required as part of the environmental impact permits (AMDAL) of resource extraction companies, which face domestic and international scrutiny of their operations. Because a large proportion of resource extraction activity occurs in remote and rural areas where government services are reported to be limited or absent, these companies face very high community expectations to provide such services themselves. Despite significant investments – especially by large multinational firms – in CSR projects, businesses have noted that there is limited general awareness of those projects, even among government regulators and officials.
The government does not have an overarching strategy to encourage or enforce RBC, but regulates each area through the relevant laws (environment, labor, corruption, etc.). Some companies report that these laws are not always enforced evenly. In 2017, the National Commission on Human Rights launched a National Action Plan on Business and Human Rights in Indonesia, based on the UN Guiding Principles on Business and Human Rights.
OJK regulates corporate governance issues, but the regulations and enforcement are not yet up to international standards for shareholder protection.
Indonesia does not adhere to the OECD Guidelines for Multinational Enterprises, and the government is not known to have encouraged adherence to those guidelines. Many companies claim that the government does not encourage adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas or any other supply chain management due diligence guidance. Indonesia participates in the Extractive Industries Transparency Initiative (EITI).
President Jokowi was elected on a strong good-governance platform. However, corruption remains a serious problem in the view of many, including some U.S. companies. The Indonesian government has issued detailed directions on combating corruption in targeted ministries and agencies, and the 2018 release of the updated and streamlined National Anti-Corruption Strategy mandates corruption prevention efforts across the government in three focus areas (licenses, state finances, and law enforcement reform). The Corruption Eradication Commission (KPK) was established in 2002 as the lead government agency to investigate and prosecute corruption. KPK is one of the most trusted and respected institutions in Indonesia. The KPK has taken steps to encourage companies to establish effective internal controls, ethics, and compliance programs to detect and prevent bribery of public officials. By law, the KPK is authorized to conduct investigations, file indictments, and prosecute corruption cases involving law enforcement officers, government executives, or other parties connected to corrupt acts committed by those entities; attracting the “attention and the dismay” of the general public; and/or involving a loss to the state of at least IDR 1 billion (approximately USD 66,000). The government began prosecuting companies that engage in public corruption under new corporate criminal liability guidance issued in a 2016 Supreme Court regulation, with the first conviction of a corporate entity in January 2019. Giving or accepting a bribe is a criminal act, with possible fines ranging from USD 3,850 to USD 77,000 and imprisonment up to a maximum of 20 years to life, depending on the severity of the charge. Presidential decree No. 13/2018 issued in March 2018 clarifies the definition of beneficial ownership and outlines annual reporting requirements and sanctions for non-compliance.
Indonesia’s ranking in Transparency International’s Corruption Perceptions Index in 2020 dropped to 102 out of 180 countries surveyed, compared to 85 out of 180 countries in 2019. Indonesia’s score of public corruption in the country, according to Transparency International, dropped to 37 in 2020 from 40 in 2019 (scale of 0/very corrupt to 100/very clean). Indonesia ranks below neighboring Timor Leste, Malaysia, and Brunei.
Corruption reportedly remains pervasive despite laws to combat it. In September 2019, the Indonesia House of Representatives (DPR) passed Law No. 19/2019 on the Corruption Eradication Commission (KPK) which revised the KPK’s original charter, reducing the Commission’s independence and limiting its ability to pursue corruption investigations without political interference. The current KPK Commissioner has stated that KPK’s main role will no longer be prosecution, but education and prevention. This has led to overall case numbers dropping significantly.
Indonesia ratified the UN Convention against Corruption in September 2006. However, Indonesia is not yet compliant with key components of the convention, including provisions on foreign bribery. Indonesia has not yet acceded to the OECD Anti-Bribery Convention but attends meetings of the OECD Anti-Corruption Working Group. Several civil society organizations function as vocal and competent corruption watchdogs, including Transparency International Indonesia and Indonesia Corruption Watch.
Resources to Report Corruption
Komisi Pemberantasan Korupsi (Anti-Corruption Commission)
Jln. Kuningan Persada Kav 4, Setiabudi
Jakarta Selatan 12950
Indonesia Corruption Watch
Jl. Kalibata Timur IV/D No. 6 Jakarta Selatan 12740
Tel: +6221.7901885 or +6221.7994015
10. Political and Security Environment
As in other democracies, politically motivated demonstrations occasionally occur throughout Indonesia, but are not a major or ongoing concern for most foreign investors. Since the Bali bombings in 2002 that killed over 200 people, Indonesian authorities have aggressively continued to pursue terrorist cells throughout the country, disrupting multiple aspirational plots. Despite these successes, violent extremist networks and terrorist cells remain intact and have the capacity to conduct attacks with little or no warning, as do lone wolf-style ISIS sympathizers.
Foreign investors in Papua face certain unique challenges. Indonesian security forces occasionally conduct operations against the Free Papua Movement, a small armed separatist group that is most active in the central highlands region. Low-intensity communal, tribal, and political conflict also exists in Papua and has caused deaths and injuries. Anti-government protests have resulted in deaths and injuries, and violence has been committed against employees and contractors of at least one large corporation there, including the death of a New Zealand citizen in an attack on March 30, 2020, as well as armed groups seizing aircraft and temporarily holding pilots and passengers hostage. Additionally, racially-motivated attacks against ethnic Papuans in East Java province led to violence in Papua and West Papua in late 2019, including riots in Wamena, Papua that left dozens dead and thousands more displaced. Continued attacks and counter attacks between security personnel and local armed groups have exacerbated the region’s issues with internally displaced persons.
Companies have reported that the labor market faces a number of structural barriers, including skills shortages and lagging productivity, restrictions on the use of contract workers, and complicated labor laws. Recent significant increases in the minimum wage for many provinces have made unskilled and semi-skilled labor more costly. In the bellwether Jakarta area, the minimum wage was raised from IDR 3.94 million (USD 260) per month in 2019 to IDR 4.26 million (USD 296) per month in 2020. Unions staged largely peaceful protests across Indonesia in 2019 demanding the government increase the minimum wage, decrease the price for basic needs, and stop companies from outsourcing and employing foreign workers.
The 2020 Omnibus Law on Job Creation introduced labor reforms, intended to attract investors, boost economic growth and create jobs. The Law aims to make the labor market more flexible to encourage job creation and more formal sector employment, as over half of Indonesia’s workers are in the informal sector. Restrictions on the types of work that can be outsourced were lifted and a new working hours arrangement was established to accommodate jobs in the digital economy era. The Law abolished sectoral minimum wages and reformulated the calculation of minimum wage at the provincial and regency/city level based on economic growth or inflation variables. A new unemployment benefit is now officially part of the public safety net for workers, and severance pay requirements were reduced. The business community’s initial reactions to the law were cautiously optimistic, while labor unions, student groups, and religious organizations staged strikes and protests against the law’s labor reforms. Labor unions cite the loss of limits on temporary employment contracts and expansion of outsourcing flexibility as concerns.
Until the onset of the COVID-19 pandemic, unemployment had remained steady at 4.38 percent. As of August 2020, Statistics Indonesia recorded that the unemployment rate jumped to 7.07 percent, or 9.77 million people, while the number of workers who were furloughed due to COVID-19 was much higher.
Employers note that the skills provided by the education system is lower than that of neighboring countries, and successive Labor Ministers have listed improved vocational training as a top priority. Labor contracts are relatively straightforward to negotiate but are subject to renegotiation, despite the existence of written agreements. Local courts often side with citizens in labor disputes, contracts notwithstanding. On the other hand, some foreign investors view Indonesia’s labor regulatory framework, respect for freedom of association, and the right to unionize as an advantage to investing in the country. Expert local human resources advice is essential for U.S. companies doing business in Indonesia, even those only opening representative offices.
Labor unions are independent of the government; about 7.6 percent of the workforce is unionized. The law, with some restrictions, protects the rights of workers to join independent unions, conduct legal strikes, and bargain collectively. Indonesia has ratified all eight of the core ILO conventions underpinning internationally accepted labor norms. The Ministry of Manpower maintains an inspectorate to monitor labor norms, but enforcement is stronger in the formal sector. A revised Social Security Law, which took effect in 2014, requires all formal sector workers to participate. Subject to a wage ceiling, employers must contribute an amount equal to 4 percent of workers’ salaries to this plan. In 2015, Indonesia established the Social Security Organizing Body of Employment (BPJS-Employment), a national agency to support workers in the event of work accident, death, retirement, or old age.
Additional information on child labor, trafficking in persons, and human rights in Indonesia can be found online through the following references:
12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs
The U.S. International Development Finance Corporation (DFC) and its predecessor, the Overseas Private Investment Corporation (OPIC), have invested USD 2.35 billion across 116 projects in Indonesia since 1974, including in the power generation, financial services, and agricultural sectors. DFC’s largest project to date in Indonesia is the UPC Renewables Sidrap Bayu wind power plant in South Sulawesi, where a USD 120 million investment supported the construction of Indonesia’s first commercial wind farm. In March 2020, DFC approved a USD 190 million loan to Trans Pacific Networks (TPN) to support the world’s longest subsea telecommunications cable. The cable will directly connect Singapore, Indonesia, and the United States and have the capability to serve several markets in Southeast Asia and the Pacific. Indonesia is one of the DFC’s priority markets and the DFC remains interested in projects in the transportation, energy, agriculture, health, and digital economy sectors.
Indonesia has joined the Multilateral Investment Guarantee Agency (MIGA). MIGA, a part of the World Bank Group, is an investment guarantee agency to insure investors and lenders against losses relating to currency transfer restrictions, expropriation, war and civil disturbance, and breach of contract. In 2018, MIGA provided a loan guarantee to Indonesian state-owned financial institutions and financed a hydroelectric power plant.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source*
USG or international statistical source
USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Host Country Gross Domestic Product (GDP) ($M USD)
*Indonesia Investment Coordinating Board (BKPM), January 2021
There is a discrepancy between U.S. FDI recorded by BKPM and BEA due to differing methodologies. While BEA recorded transactions in balance of payments, BKPM relies on company realization reports. BKPM also excludes investments in oil and gas, non-bank financial institutions, and insurance.
Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment 2019
Outward Direct Investment 2019
China (PR Mainland)
“0” reflects amounts rounded to +/- USD 500,000.
Source: IMF Coordinated Direct Investment Survey, 2019 for inward and outward investment data.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets 2019
Top Five Partners (Millions, US Dollars)
Total Debt Securities
China (PR Mainland)
China (PR Hong Kong)
United Arab Emirates
Source: IMF Coordinated Portfolio Investment Survey, 2019. Sources of portfolio investment are not tax havens.
The Bank of Indonesia published comparable data.
14. Contact for More Information
U.S. Embassy Jakarta