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Indonesia Under Review


Indonesia Under Review

July 2012

The second quarter of 2012 has seen a tightening of Indonesian regulatory regimes for a number of business sectors, in many cases in ways that were not immediately clear, and in some cases in ways that remain uncertain. At the same time there have been some notable political developments, not the least because the starting shift in focus to the 2014 election cycle. However, even with the populist legislation that seeks to control ownership and engineer certain aspects of business, Indonesia has remained as one of the few rapidly growing economies and a sought-after investment destination.

 

Energy, Subsidies, and Politics

The perpetually delayed subsidized fuel price increase is now slated to occur if oil prices exceed the budgeted $105 by 15%, which they have not up to this point. Despite the government earlier appearing to have finally decided to curtail the costly fuel subsidy programme, but failing to reach consensus for an immediate increase in the House of Representatives (DPR) at the last moment, it remains to be seen if the increase is implemented, considering substantial public opposition, the political ambitions of the ruling coalition’s members, and concerns over the impacts. Similarly, the previously anticipated electricity tariff increase appears to have been analogously postponed. Furthermore, the market price based scheme of operation is potentially susceptible to a constitutional challenge.

One of the fallouts from this has been that S&P has forgone an Indonesian sovereign ratings upgrade, citing mining sector policies (the increased divestment requirement, and the domestic processing obligation combined with the export tax) and the failure to implement an immediate price increase for subsidized fuel.

However, the disputes over the end to the fuel subsidy appear to have benefited the Golkar Party, headed by Aburizal Bakrie, who has since announced his candidacy for the 2014 presidential election.

At the same time, the Jakarta Governor election has been a disappointment for Golkar, with the endorsed candidate ranking in the single digits. And for the incumbent, Fauzi Bowo (Democrat), who has placed second and now faces a September 20th runoff against Joko Widodo (PDI-P), the current Mayor of Surakarta.

Of some note is a minor furor that erupted over deputy ministers, with the Constitutional Court rejecting the requirement that deputy ministers be chosen from career civil servants, and President Susilo Bambang Yudhoyono reappointing the deputy ministers by means of a redrafted regulation and decree.

Finally, a limited but nonetheless significant cabinet reshuffle saw Muhammad Chatib Basri, a respected economist who has previously shown a tendency for pragmatism, appointed to head Indonesia’s investment promotion agency. Hendarman Supanji, the former Attorney General, appointed to head the National Land Agency (BPN) that will see its importance further increase due to its role under Law No. 2 of 2012 on Land Acquisition for Public Interest, which leaves the critical question of the ability to ensure effective enforcement. Nafsiah Mboi as the Minister of Health. And Rudi Rubiandini as the Deputy Minister of Energy and Mineral Resources, replacing the recently deceased Widjajono Partowidagdo, who had been instrumental in many of the domestic processing and export restriction policies.

 
Corruption

Muhammad Nazaruddin, former treasurer of the President’s Democrat Party has been convicted of corruption offences in connection with rigged construction tenders during last year’s Southeast Asian Games and jailed for 4 years and 10 months. Considering the magnitude of the corruption, the defendant’s attempts to escape prosecution by fleeing Indonesia, and general uncooperativeness, the sentence is seen as extremely light. However, Nazaruddin’s conviction does not bring this political and corruption saga to a partial concludion, with fallout and investigations from the scandal actively continuing to this day and likely for months to come. Notably, Nazaruddin’s wife, Neneng Sri Wahyuni, has since also been arrested by the KPK at her home after stealthily returning to Indonesia through Batam.

Another notable corruption case is that of Nunun Nurbaeti in relation to traveller’s cheques in exchange for votes for a Bank Indonesia deputy governor. Nunun’s denials and arrogant behaviour are a source of on-going absurdity during the trial, that has commenced after she had been forcefully returned to Indonesia from extended travel for alleged medical treatment that spanned Singapore, Thailand and Cambodia.

While a particularly headline grabbing incident has been the developing case of the Ministry of Religious Affairs and Koran procurement, particularly as it plays out in relation to the Golkar Party being able to distance itself from the suspect.

 
Banks and the OJK

The creation of the OJK (Financial Service Authority), and the resulting reallocation of regulatory and supervisory powers from the central bank (Bank Indonesia) has resulted in a new Law on Banking being drafted. The current draft provides the OJK with wide scope to regulate the banking sector, and contains a number of notable changes from the present regime: branch offices of foreign banks would have to incorporate as Indonesian limited liability companies (PT) and ownership of banks will be subject to stricter regulation. Earlier drafts of the law sought to restrict foreign ownership to 49%, the current draft sidesteps the issue by delegating to the OJK, who will have the authority to set any restrictions on ownership, both foreign and domestic.

Relating to restrictions on ownership, there has been a substantial volume of commentary from Bank Indonesia regarding imposing restrictions on ownership in banks. Early comments suggested a plan for a limit on foreign ownership, which later shifted to an intention to regulate any ownership, with planned limits of 40% for financial institutions, 30% for companies and families, and 20% for individuals. The latest comments, by the Deputy Governor of Bank Indonesia Muliaman D. Hadad, suggest that higher levels of ownership, including by foreign parties, will be allowed as long as certain financial health and corporate governance criteria are met.

Recently, seven OJK Commissioners have been selected by the House of Representatives (DPR) (Bank Indonesia and the Ministry of Finance will each also appoint a Commissioner), with, Muliaman D. Hadad being appointed as the Chairman. Considering this, it would appear likely that the above-described restrictions are likely to continue after the shift in regulatory power from Bank Indonesia to the OJK. Also, among the reorganization, the securities market regulator, Bapepam-LK, will be detached from the Ministry of Finance and merged into the OJK prior to the OJK’s expected commencement of operations on 1 January 2013.

Also of note are the Bank Indonesia rules for house and car loans that set the maximum mortgage amount to 70% of the property value and require minimum down payments of 30% for cars and 25% for motorbikes financed through banks (and 25% and 20% through specialist finance firms). Similarly, credit card issuers have been restricted by limiting excessive rates and by barring some lower-income individuals from holding cards and requiring others to apply for a special assessment before taking out credit cards from more than two issuers. These moves are seen as an attempt to reign in excessive growth without having to resort to increasing interest rates, which Bank Indonesia has been keeping at a record low of 5.75%.

 
The Mining Industry
CSR

A Government Regulation has been issued to implement the corporate social and environmental responsibilities and obligations that were introduced by the 2007 Company Law. The Regulation clarifies which companies are subject to the obligations by defining “companies related to the natural resource sector” as those that have an impact on the function of natural resources, including the conservation of the environment. This is a change from how the obligation was previously understood, in that it now applies to all companies that have an environmental impact, and not merely those whose business activities are in, or directly related to, the natural resource sector. A company’s Board of Directors is tasked with formulating an annual work plan that consists of planned actions and budgets for implementation. In fulfilling the obligation, consideration is given to the appropriateness and reasonableness of the planned actions and budgets, in light of the company’s financial capacity and the social and environmental effects of its business activities.

 

Raw Mineral Ore Export Restrictions

The raw mineral export restrictions have come into force after much discussion, numerous regulations being issued, and amended, and continuing debate over the overall goals and effects of the policy. As it stands, 65 minerals and rocks have to either be processed to the levels set out by the Ministry of Energy and Mineral Resources (ESDM), or the exporter has to obtain registration and shipment-by-shipment permission from the Ministry of Trade to export in a form that does not meet the processing requirements. The export permission relies on a recommendation from the ESDM Director General, which is based on having, and progressing in for subsequent shipments, a plan to construct a processing facility (smelter). Furthermore, the Ministry of Finance has imposed a 20% tax on the non-processed exports, which is in turn based on monthly benchmark prices that are set by the Ministry of Trade.

Coal has notably been left out of the above legislative framework, with Jero Wacik, Minister of Energy and Mineral Resources, stating that no export tax would be imposed. However, an expanded domestic market obligation has been mentioned and a ban on lower grade exports has been speculated on, as well as increases in royalty payments. Also of note is that Gita Wirjawan, the Minister of Trade, has voiced a negative view of the plans to restrict coal exports.

 

Other Legal Developments

The Indonesia – Hong Kong Double Taxation Treaty has been ratified by means of a presidential regulation. The treaty is notable for providing lower withholding rates than the Indonesia – Singapore treaty and containing an exemption from capital gains for certain share transfers where the company derives more than half of its value from immovable property. However, such advantages must be qualified by the fact that Hong Kong has a more limited tax treaty network than Singapore and by the Indonesian beneficial owner regulations (substance and anti-avoidance).

Recently there has been a number of populist policies, such as the above-discussed mining divestment and raw mineral ore export restrictions, the upcoming restriction on bank ownership, and a range of more technical, but nonetheless restrictive, import policy adjustments (such as restrictions on fresh produce imports to certain ports and on finished goods imports by manufacturers). These will be joined by the National Standardization Agency, which is gearing up to issue a total of 825 Indonesia National Standards (SNI) for a wide range of goods in 2012 and 2013, which will serve as non-tariff barriers to trade.

An exemption for certain labour services from value added tax (VAT), under a recent Minister of Finance regulation is also of note. It provides for three potentially exempt categories: labour services, labour supplier services, and labour training organizer services.

The capital markets regulator, Bapepam-LK has revised Rule VIII.G.7 on financial reporting with an aim to converge the reporting standards to the International Financial Reporting Standards (“IFRS”).

The Law on Land Acquisition for Public Interest is set to be implemented by means of a Presidential Regulation in the near future. While this is being drafted, a possibility of an interim Ministry of Law and Human Rights circular had been considered, but has since been scrapped. As such, this critical issue for infrastructure development continues to remain a source of uncertainty.

Law No. 7 of 2012 on Social Conflicts is notable for assigning a role to the military in the resolution of social conflicts (which it defines widely). This is significant for two reasons: as an indication that the military has shown that it has progressed with reforms, and that there appears to be a distrust of the police to handle such disputes.

 

Notable Infrastructure Developments

The national electricity company (PLN) is preparing to tender the Sumatra-Java interconnection project; and there has been increasing news surrounding the Sunda Strait Bridge, which notably has not been tendered yet, indicating that some sort of agreement was signed with China Railways during President Yudhoyono’s visit to Beijing, and later with the central government taking over the feasibility study from the initiator consortium in an effort to speed up the process. A Presidential Regulation has been issued assigning the national railway company, PT Kereta Api Indonesia, to organize the construction of the Jakarta-Soekarno-Hatta airport railway, with an expected completion date of late 2013.

 

[Last update: 2012-07-13 04:47:18]

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