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Indonesia Under Review

Indonesia Under Review

August 2013

Indonesia remains on track to hit 6% growth this year (although the World Bank has revised its forecast slightly downwards to 5.9% from 6.2%). An expanding consumer class and correspondingly increasing domestic consumption remain the backbone of growth while at the same time attracting both domestic and foreign investment. However, Bank Indonesia has once again raised the benchmark rate to 6.5%, after a long stretch of maintaining a record low rate of 5.75% and a recent increase to 6%. The increase comes due to increasing concerns over inflation and a weakening Rupiah.

Energy subsidies are being increasingly curtailed, with the upstream gas price being slated for a 40% increase by SKK Migas, and electricity subsidies expected to be reduced at an as of yet undeclared point in the future, although recent developments have showed increased electricity subsidies instead.

The Witness and Victim Protection Agency (“LPSK”) has alleged that a panel of judges of the Jogjakarta Military Court had unduly ignored key evidence in the Cebongan shooting case, indicating that judicial independence had been, in this case, compromised.

DKI Jakarta Governor Jokowi and Deputy Governor Basuki Tjahaja Purnama, known affectionately as Ahok, are now facing an increasing wave of opposition against their infrastructure projects, as demonstrated by recent public arguments between Ahok and certain members of the Jakarta City Council.

In developments related to the Jakarta city infrastructure, PT Arthabuana Margausaha Finance has filed a bankruptcy petition, which has admittedly become a routine strategy, at the Central Jakarta Commercial Court against one of the operators of the Transjakarta transport system, PT Bianglala Metropolitan, which allegedly has failed to pay a debt of Rp. 5.8 billion.

In Jakarta, the regional government has issued a regulation requiring companies carrying out infrastructure construction projects to obtain an Infrastructure Project Permit, which consists of two stages (construction and commissioning).

The government has announced 56 new infrastructure projects for the period of 2014-2017, prioritizing the use of the PPP scheme due to a lack of internal funding. A major focus of the current infrastructure push is on logistics, such as roads and particularly ports (even considering on-going discussions on allowing up to 70% foreign ownership in the logistics sector under a revised Negative Investment List), with the other aspect being the continued construction of power plants, while airports have been deprioritized due to sufficient progress having been already achieved. Four of the priority infrastructure projects are expected to be tendered during the Indonesia International Infrastructure Conference and Exhibition (IIICE) that will be held this November.

At the same time, the National Development Planning Minister, Armida Alishjahbana, has stated that at least 4 of the 11 priority infrastructure projects selected by President Susilo Bambang Yudhoyono will not be completed within the President’ term. The delays were blamed on land acquisition issues and the reluctance of lower level governments to fully support timely implementation of the projects.

Further, there is talk of construction of a Yogyakarta-Surakarta electric railway, and renewed talk of the Sunda Strait bridge with two, unnamed, state owned construction companies being championed as having the capacity to carry out its implementation. The government has also slated the ground breaking of the National Capital integrated Coastal Development (NCICD) project, known as the Jakarta sea wall, to take place in June 2014 with a target completion date of 2025, having been tendered under the public private partnership framework as three separate components prior to that. Finally the physical construction of the Jakarta monorail is reportedly slated to begin in October 2014.

In Jakarta, the subdistricts Kemang and Tebet are set to be reclassified as commercial centres from housing areas under the latest draft of the detailed spatial plan. Similar changes are expected for other areas, with the government acknowledging that in fact this reclassification is a reaction to numerous existing zoning violations, and is largely intended to properly capitalize on the current situation and raise tax revenues. Also notable is the significantly increased demand for condominium units in Jakarta and nearby areas.

Finally, M. Chatib Basri, the former chief of the Investment Coordinating Board (BKPM) has been appointed as the new Minister of Finance.

A Draft Bill on Mass Organizations has recently been passed into law, which, according to civil rights groups, has the unfortunate effect of allowing the government to restrict the ability to organize and assemble. Several key provisions in this new law have been criticized by opponents (including labour unions) as being intended to silence opposition. Substantively, the law requires non-profit organizations to comply with a new set of rules, which include the prohibition of certain activities, obtaining permits, and publicizing their donors, as well as other reporting obligations in regards to the funding of Mass Organizations.

The President Director of PT Indosat Mega Media (“IM2”), a wireless communication subsidiary of the partly state owned Indosat, has been convicted by the Court of Corruption Crimes of the corruption offence of causing state losses in a case run by the Attorney General’s Office (“AGO”). The AGO alleged, and successfully convinced the Court of Corruption Crimes, that the losses occurred due to IM2’s use of Indosat’s 3G frequency allocation, while Indosat had received the frequency allocation at a reduced rate due to being partly state owned. The decision is being appealed, and it is notable that the Ministry of Communications and Information has stated that the prosecution is without basis, and that the use of Indosat’s frequencies by IM2 is in accordance with the relevant regulations – which is in direct contradiction of the AGO’s position and the Court of Corruption Crimes’ decision.

Similarly, the PT Chevron Pacific Indonesia (“Chevron”) bioremediation case has resulted in the conviction of two Chevron employees by the Court of Corruption Crimes, in another apparent major success for the AGO. The decision however is being appealed. Similarly to the IM2 case, the element and definition of ‘losses to the state’ in the context of corruption crimes were especially relevant. Previously, employees of contractors who carried out the project have been similarly convicted. The convictions are problematic for a number of reasons, firstly because the basis for the case is causing state losses under the cost recovery Production Sharing Contract (“PSC”) framework, while apparently the costs have not in fact been claimed by Chevron, secondly because one of the defendants only joined Chevron several years after the alleged conduct occurred, and lastly because the prosecution’s expert witness was an employee of a contractor who previously lost the tender process to carry out the bioremediation project, which is particularly troubling and points to the unsettled nature of conflicts of interest under Indonesian law. Other points of particular note include the oil and gas regulator’s statement that the Chevron case is without basis, and that this is an example of a matter under the PSC framework, under which disputes are to be subject to arbitration.

An amendment has been issued to the Government Regulation on Toll Roads, which has provided a basis for toll road projects that are economically viable but do not provide sufficient commercial returns and do not have adequate finances to get started on a purely state-sponsored budget (i.e. purely from the APBN). This has the effect of allowing the government to provide funding for such projects, appoint state owned companies to carry out such projects (via related Presidential Regulations), and involve private business entities in certain stages of the construction and operation, thus allowing the government funding support to enable such toll road projects to be implemented.

The Minister of Finance has issued a regulation on Viability Gap Funding (“VGF”) for Private Public Partnership (“PPP”) projects, which enables the government to contribute funding, and other related support and guarantees, to projects that are economically viable but are not financially viable.

The smog from forest fires in Sumatra, caused by land clearing for cultivation, has become an international relations issue between Indonesia and the adversely affected Malaysia and Singapore. The result so far has been talk of local subsidiaries of Malaysian firms, which own plantations in the area, being charged with causing the fires, and Indonesia promising to finally ratify the regional treaty to fight forest fires, early next year.

Transfer pricing audit procedures have been updated by the Director General of Tax, replacing a 1993 regulation. The regulation defines special relationships, affiliated businesses, specifies the audit method, and the implementation of the arms length principle.

The regulation concerning the import of used capital goods has once again been amended by the Minister of Trade, setting out updated procedures and restrictions.

Singapore’s DBS Group Holdings Ltd has stated that it would not pursue a USD 7 billion takeover of the Indonesian PT Bank Danamon, after the takeover process was halted because regulatory approval could not be obtained in a timely manner.

In terms of upcoming legislative developments, a draft Government Regulation on Hazardous and Toxic Substances and Waste Management is being circulated, which will integrate regulations on the same subject matter from 1999 and 2001, and set out the administrative procedures and the materials classified as hazardous and toxic under various categories.

[Last update: 2013-08-03 04:09:44]

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