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Indonesia Under Review

Indonesia Under Review

December 2012

A new, 34th, North Kalimantan province, with Tanjung Selor as its capital, has been separated from East Kalimantan. Notably, the creation of new regions has previously resulted in mining disputes, such as between the state-owned Antam and the Regent of North Konawe in Sulawesi.

Of longer-term significance is the recently proposed trading bloc in the form of a Regional Comprehensive Economic Partnership that would include ASEAN, China, India, Japan, South Korea, Australia, and New Zealand, but notably not the United States. In contrast to the US-led Trans-Pacific Partnership that includes many of the same members, but not China.


The State Auditor (BPK) finally published its report on the alleged corruption in the Hambalang sports facility case, which is one of the cases stemming from the arrest and conviction of Democratic Party’s former treasurer Muhammad Nazaruddin. BPK found wrongdoing on the part of Ministry of Youth and Sports in the contracting process, and procedural impropriety by the Ministry of Finance in approving the funding. The BPK recommended that the Corruption Eradication Commission (KPK) conduct an investigation. The Minister of Youth and Sports, Andi Mallarangeng, has since been named a suspect by the KPK and has consequently resigned his ministerial post.

After intense public pressure, the President intervened in the dispute between the KPK and the National Police over corruption in the procurement of driving simulators. The KPK and the Police were embroiled in an increasingly hostile, on the part of certain factions within the Police, dispute concerning which institution has the jurisdiction to investigate the alleged corruption. The President stated that the KPK has the power to investigate the issue, lower level Police retaliation continues however, such as the withdrawal of KPK investigators by the police.

A potential developing scandal is the alleged extortion of state owned enterprises by a number of members of the House of Representatives (DPR), with the names of the alleged offenders having been submitted to the DPR Ethics Committee by the Minister of State Owned Enterprises.

The Bank Century case continues to be an on-going political issue, with the latest facet being an attempt by the DPR to target Vice President Boediono over the bailout. In a substantive development, the KPK has launched an investigation into the bailout, having previously named former Bank Indonesia deputy governors Budi Mulya and Siti Chalimah Fadjriah as suspects.

It is of note that the plans to revise the Corruption Eradication Commission Law appear to have come to an end with the widespread rejection by the initiative in the DPR.


Indonesian infrastructure continues to attract foreign interest, with the latest development being an MoU between the US Overseas Private Investment Corporation (OPIC), and the Indonesia Infrastructure Guarantee Fund (IIGF). Such outreach by Indonesian public institutions and the associated support will go a long way to attracting potential investors and increase their comfort level with Indonesia-based investments.

After his inauguration as Governor of Jakarta, Jokowi has voiced doubts regarding the plan to construct the MRT, citing costs and ability to recoup the investment. The expectation is now that the plans will be further studied until the end of this year. He has also cancelled the planned issuance of a municipal bond. At the same time there has been further talk of reviving the monorail project by a consortium of state owned firms, with operation planned for 2015. As well as of providing affordable housing close to existing areas occupied by squatters rather than far-off relocation.

In early October, a steering committee announced a $34 billion master plan for Jakarta, following a meeting held in Tokyo with the participation of a number of Japanese companies and Coordinating Minister for Economic Affairs Hatta Rajasa. Notably, the projects merely form a list, while actual implementation, depending on scheme, will have to undergo a tender.

PT Angkasa Pura II’s $2.7 billion expansion of Jakarta’s Soekarno-Hatta Airport appears to be progressing, with financing being planned to be sourced from commercial loans and bonds.

The Ministry of National Development Planning has also stated that 14 Public Private Partnerships (PPP) projects are ready to be offered in 2013 at a total value of around $6 billion.


Legislative Changes

The Defense Industry Law has been issued with the aim of revamping the domestic defense industry by requiring domestic procurement and providing incentives for manufacturers. This comes at a time of Indonesian military spending seeing dramatic increases. A notable forthcoming development is the draft Bill on National Security, which follows the Social Conflict Law, and similarly seeks to expand the role of the National Armed Forces (TNI), allowing deployment for public order without House of Representatives’ approval.

A new Law on Food has been passed to ensure food availability and accessibility. In relation to imports, prioritization of domestic products over imports is required. And a new food agency will be established within 3 years (BPOM’s, the current agency’s, as well as Bulog’s, the state procurement agency that handles strategic import of staples, futures are unclear). The Law also contains provisions on genetically modified (GM) food and food products, which prohibits the production and distribution of unapproved GM foods. The overall goal of the Law is food self-sufficiency, which is likely to result on curbs on imports as well as exports, albeit the specifics of these remain uncertain until the implementing regulations are issued.

The Ministry of Manpower has issued a new regulation on outsourcing that aims to better define what work can and cannot be outsourced. The general intent being that only supporting (in contrast to “primary activities”) work can be outsourced, which requires that the management of the outsourced work is separate and that the work is conducted separately from the primary activities.

An updated set of Government and Ministry of Energy and Mineral Resources (ESDM) regulations on mining services has been issued to more precisely define the list of primary and supporting service providers that are subject to the regulation.

The National Land Agency (BPN) has issued an implementing regulation (of the Presidential Regulation that itself implements the Law on Land Acquisition for Public Interest) on land acquisition for public interest. The BPN regulation is the first of three required implementing regulations (others being on funding, to be issued by the Minister of Finance and the Minister of Internal Affairs), and serves as a technical guide for acquiring land. Notably, the BPN regulation cements the Presidential Regulation’s essential elimination of compensation in “other form agreed by both parties” by restricting it to combinations of the enumerated forms of compensation (out of which shares have been defined as only being shares of state owned enterprises that are acquiring the land).

A new Cooperatives Law replaced the previous 1992 law and expanded on the regulatory framework applicable to cooperatives by addressing the types, capital structure, management, and government support in more detail.

Minister of the Environment issued regulations on community involvement in, and the procedures for the drafting of, environmental documents (AMDAL). And the Ministry of Forestry amended its regulation on borrow to use permits in accordance with the earlier amendment of the government regulation that it implements.

A further franchise regulation from the Minister of Trade limited the number of company-owned franchise outlets to 150, in an effort to encourage engagement with local businesses.

Minister of Trade relaxed its regulation on Importer Identification Numbers (API) to allow more flexibility for importers and transfer of goods imported by manufacturers.

Of note is the government regulation on electronic systems and transactions that covers the activities of a broadly defined range of “electronic system operators”. Specifically, the Regulation mandates information system operators to set up data centres in Indonesia. The Regulation also prohibits data disclosure without prior user approval.


The Ministry of Energy and Mineral Resources (ESDM) issued the seventh list of clean and clear mining concessions, a status that is becoming increasingly important as the central government attempts to regain control over regionally issued mining licenses. The ESDM is also conducting the final reconciliations, following which it will no longer accept IUPs that originate from pre-2009 converted KPs, but will continue to review the already submitted documents.

Of some note is the issuance of a price benchmark regulation for crude oil by the Ministry of Energy and Mineral Resources, which continues the benchmarking trend seen in relation to other commodities.

KPPU Issued two new regulations, on M&A reporting guidelines, expanding applicability to certain foreign transactions and sister companies and clarifying that newly established JV companies do not fall under the consolidation definition. And separated the guidelines on the imposition of fines for delayed notification submission.

Ministry of Finance amended tax incentives for investment, providing more comprehensive requirements and clearer and stricter rules for receiving income tax incentives.

The national annual non-taxable income threshold has been raised from IDR 15.8 to 24.3 million. And the monthly minimum wage in Jakarta has been increased by 44% to IDR 2.2 million (approx. $230), coming in the context of continuing protests (many fueled by forced sweeps of industrial areas) in relation to the issues of outsourcing and minimum wages. West Java has followed with a roughly 25% increase in the minimum wage, and other areas can be expected to announce similar increases.

Bank Indonesia has issued a number of regulations, most notably on trust services (which only banks may offer and only legal entities may take advantage of), foreign bank capital requirements of 8%, and the imposition of variable capital requirements from 8 to 14% depending on a bank’s risk profile.

Court Cases

The Supreme Court has annulled parts of the mineral export ban that has previously been haphazardly implemented, including essentially converting the ban into a tax, by a series of ministerial regulations, and the government has responded by stating that it will reinstitute the provisions containing the actual ban in a compliant manner, apparently under the Ministry of Trade. The Constitutional Court held that the determination of mining areas (based on which mining licenses are then auctioned) has to be jointly determined by the local and the central government, rather than principally by the central government (with a mere consultation with the local government). A further Constitutional Court review of the Mining Law is also pending. And there is increased talk of adjusting the divestment obligation, with some indicating a 25-30 year timeline rather than the current 10 years.

The Constitutional Court declared the production sharing contract (PSC) framework for oil and gas exploitation as unconstitutional due insufficient state control (suggesting a licensing, to state owned enterprises (SOE), model, combined with SOE signed PSCs), with the consequence of dissolving BP Migas, the government contracting agency, but explicitly stating that existing PSCs remain valid until expiry. Subsequently, the President has issued a regulation placing BP Migas’ duties, functions and organizations under the Ministry of Energy and Natural Resources, and transforming it into a temporary upstream oil and gas provisional working unit (SKSP Migas), and affirming PSC validity (it is notable that immediately after the court decision it was suggested that the national oil and gas company, Pertamina, may take over from BP Migas).

The four Chevron employees who ha been detained over allegedly causing losses to the state in the context of an environmental cleanup under a production sharing contract have been released following an order by the South Jakarta District Court that found that there were no legal grounds for the charges. The Attorney General’s office has since submitted the case to the Corruption Court.

Of note is that the earlier Telkomsel bankruptcy decision has been overturned by the Supreme Court, adding to a number of similar strategic bankruptcy cases initially decided by the Central Jakarta Commercial Court and subsequently overturned at cassation.


[Last update: 2012-12-19 03:43:01]

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