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Indonesia Under Review

Indonesia Under Review

August 2012

Indonesian development has continued apace so far this year, with Nielsen recently releasing research results that place Indonesia in the top position in its global consumer confidence survey. At the same time, however, inflation has also increased, and currently stands towards the upper end of Bank Indonesia’s target (4.56% year-on-year for July) while the Indonesian Rupiah has declined. This is likely to prevent any further reductions in the already historically low interest rate of 5.75%, and may indeed serve as a catalyst for rate increases in the medium term future.


Corruption and the KPK

There has been a large number of what unfortunately has become commonplace corruption investigations and prosecutions, involving the full range of political parties, and the usual institutions.

The active pursuit by the KPK of the notoriously corrupt National Police is a welcome development in terms of cleaning up Indonesia’s institutions and particularly in respect to addressing the public’s well placed concerns about the police force. The driver’s license simulator case involving the Police Traffic Corps (Korlantas) is likely to become a direct confrontation between the Police and the KPK that has the potential to become a second chapter to the Bibit-Chandra Police/KPK conflict saga. The KPK’s raid of the Korlantas offices led to KPK investigators being barred from leaving the premises with the evidence by Police officers. The chief of Korlantas, Djoko Susilo, has been named a suspect in the case by the KPK. The fresh conflict has reaffirmed strong support from the general public of the KPK.

The public’s support of the KPK was also in full view during the new KPK building debacle – a project to relocate the KPK offices into a new building in order to accommodate the KPK’s increasing size, which was rejected by the House of Representatives (DPR). As a result, a public fund-raising project was initiated and raised around $20,000 in its first week. The funds will have to be first channelled via the Ministry of Finance into the State Budget before they can be used by the KPK.

Notably, the KPK has interviewed Artalyta Suryani, who was released in 2011 following a 60-month bribery-related sentence that underwent several remissions, in Singapore in relation to her alleged connection to the bribery case implicating Democratic Party politician and businesswomen Hartati Murdaya.


Mining Industry Developments

Mining revenues, and consequently state tax income, has decreased markedly in the first half of 2012 due to falling commodity prices. So far this has resulted in Fuad Rahmany, the Director General of Taxation, stating that he will focus on the trade sector in an attempt to make up the decline in tax revenue.

Another interesting side-note to the mineral export restrictions and tax is the experience of the palm oil industry, which saw the introduction of an Indonesian tax regime that encouraged domestic refining. This was met by an adjustment of the import duties by India to penalize imports of refined palm oil so as to restore the competitiveness of their domestic refining industry. With respect to the mineral export restrictions Japan has indicated that it may pursue a WTO complaint, similar to the one it, EU, and the US, are currently pursuing against China in relation to rare earths, should talks fail and the outright ban on unprocessed exports be implemented in 2014.

The Constitutional Court decision on the Newmont divestment recently went against the Government in its dispute with the DPR over whether the Government’s purchase of 7% should have been approved by the DPR, which has previously opposed the purchase.

The Mining Law has been subject to three successful challenges (related to small scale mining and public opinion consideration in determining mining areas), and there has been talk of challenging the constitutionality of the delegation of mining license issuance to local government and the potential contradiction between the requirement that Contracts of Work be honored, and at the same time adjusted in accordance with the Mining Law. This, and the looming 2014 unprocessed mineral export ban that is unlikely to be implementable given the timelines for smelter construction, and which also coincides with a Presidential election, may be an omen of a potential attempt at a revision.

The operation of the 51% divestment obligation appears likely to be tested in its applicability to listed companies, which are currently generally seen as being exempt from the obligation to divest, with the planned Freeport IPO. This would raise the issue at a much more politically sensitive time and in the context of a unique asset, than previous interaction of legislation restricting foreign ownership and its applicability to listed companies.

The Churchill Mining case has emerged as an issue of national significance, having started out as a story of a purported substantial coal discovery that was followed by numerous challenges to, and the eventual revocation of, the mining license by local authorities. The dispute is now before the International Centre for Settlement of Investment Disputes (ICSID) in Washington D.C., with Churchill Mining claiming $1.8 billion from Indonesia for the alleged violation of the UK-Indonesia bilateral investment agreement. This development has resulted in Indonesian authorities exhibiting signs of increased caution with respect to international agreements that are entered into, and a drive to increase capacity to adequately review such agreements prior to signing. This is set to materialize through the near term establishment of centres in cooperation with universities, and in longer term focus on tailored education, both at universities and among state employee and private practice counsel.


Legislative Developments

The amendment of a Government Regulation on Procedures for Conversion of Allocation and Functions of Forest Areas simplifies land replacement for permanent or limited production forests by removing the “adjacent to a forest” requirement. And an amendment of a Government Regulation on Forest Area Utilization is intended to provide certainty for borrow to use license holders, allow strategic industries to operate in forest areas, and reconcile conflicts with the 2007 Spatial Planning Law. The amendment ensures that borrow to use permits remain valid until expiry (but does not address renewal) even if spatial planning designations are changed, but also requires mining license holders with pre-2007 licenses who operate in production forests to apply for a borrow to use permit before the end of the year.

Of some note is the Draft Bill on Mass Organizations, which is expected to regulate the operation of NGOs. In particular, there is likely to be tighter regulation, including monitoring, of the operation of foreign NGOs, and the introduction of a legal basis for the monitoring of NGO finances.

Finally, there is plan to change the taxation regime of founder’s shares during an IPO, which will result in higher taxes, and appears to be accelerating the IPO plans of some companies in an effort to list before the deadline.


Infrastructure Developments

A major issue that is emerging in the gubernatorial runoff election, as voiced by Agus Martowardojo, the Minister of Finance, on election day, will be the development of transport infrastructure. On this matter there are plans being voiced to establish the Jakarta Transportation Authority that would involve DKI Jakarta, West Java and Banten, and serve as a coordinating body. Meanwhile, with current projects, land acquisition continues to cause delays. Ultimately, however, the transport infrastructure issues are not merely ones of coordination but also of political will, legislative certainty, and sufficient funding.

The Sunda Strait Bridge project has been in the news recently, with proposals for a revision of the implementing Presidential Regulation, and a subsequent decision to implement any changes through a Regulation of Coordinating Minister for Economic Affairs instead. The revision is to accommodate the Ministry of Finance’s proposal to use state funds for the feasibility study, effectively taking the project away from the initiator consortium that included local governments and a private party.

Ministry of National Development Planning (Bappenas) has issued the 2012 PPP Book consisting of 58 projects worth $51 billion. The projects consist of three ready-to-offer projects, 26 priority projects, and 29 potential projects. Additionally, it has been estimated, by the Coordinating Ministry for Economic Affairs, that so far there are 84 MP3EI projects, of which 20 will be ready for ground-breaking in 2012.


[Last update: 2012-08-08 10:52:18]

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