Home > Indonesia Under Review

Indonesia Under Review

Indonesia Under Review

December 2014

Political Outlook

On 26 October 2014, President Joko Widodo (“Jokowi”) announced the members of his Working Cabinet. The announcement attracted furious discussion and speculation among observers and practitioners. Jokowi’s selection of cabinet members occurred during a time of similarly frenzied consolidation by the Prabowo Subianto camp, which calls itself the “Red and White Coalition,” while the Jokowi coalition is alternatively named as the “Great Indonesia Coalition”. In the background, yet no less important, technocrat figures such as Boediono and Kuntoro Mangkusubroto had worked under their respective mandates to ready the next administration for the next step in Indonesia’s development. These important, layered, and purposeful consolidations will collide and continue to develop in intricacy, affecting the playing field of Indonesian politics, and therefore all facets of Indonesian life, including legal development and reform and the business community as a whole.

The Working Cabinet

Realistically, we know that the appointment of members of the Working Cabinet is a result of compromises between Jokowi, Vice President Jusuf Kalla, as well as the Democratic Party of Struggle (“PDIP”) party elite. Some of the appointees are a testament to Jokowi’s vision of how to address the many areas of crucial development required in order to fulfill Jokowi’s promise to fight corruption, streamline bureaucracy, and develop specific sectors, namely energy and infrastructure. These Ministers, namely Anies Baswedan (Culture and Education), Susi Pudjiastuti (Maritime Affairs and Fisheries), and Sudirman Said (Energy and Mineral Resources), are either professionals with a similar self-made background as Jokowi, or progressives who share his visions for Indonesian development and reforms. Other names seem to have been chosen as stabilizing agents, namely Sofyan Djalil (Economic Coordination) and Bambang Brodjonegoro (Finance), while others appear to have arisen purely from political compromise, such as Puan Maharani (Human Resources Development and Cultural Affairs Coordination) and Ryamizard Ryacudu (Defense). The real test of the cabinet will be whether the individuals are strong and effective enough to implement concrete policies and effect change in light of existing difficulties and the opposition, or whether the focus will falter and be stuck on advancing a populist image, with little to show in terms of substance.

The composition of the cabinet reflects Jokowi’s focus for the coming administration. Specifically, his choices of Anies Baswedan as Culture and Education (Grade and Middle School) Minister, Susi Pudjiastuti as Maritime Affairs and Fisheries Minister, Sudirman Said as Energy and Mineral Resources (“ESDM”) Minister, and particularly Ignasius Jonan as Transportation Minister, echo his campaign platform of developing these respective sectors. Aside from this general overview, there is as of yet no clear view as to the policies to be pursued in these sectors, though the ESDM sector warrants a closer look below because of recent regulatory shakeups and their implications on the revocation of the fuel subsidy, energy availability, foreign investment, and consequent concerns over the viability of developments of the ESDM sector. It is also important to consider the high likelihood of opposition to policies in these focus sectors by the Red and White Coalition.

The challenge that faces the Working Cabinet is to design and implement policies, especially in the focus sectors, despite the high likelihood of opposition, while still allocating adequate resources in other sectors and delivering on anti-corruption promises. In regards to the latter, the appointment for the Attorney General position of HM Prasetyo, a former prosecutor for general crimes and National Democrat politician, has not been welcomed by anti-corruption supporters. It is clear that a strong Attorney General with a realistic reform agenda will be instrumental in potentially changing the playing field into a very progressive one. The recent corruption cases followed by the Attorney General’s Office (“AGO”), in which the AGO has sought to build precedence in redefining, to highly questionable extents, the interpretation of elements of acts of corruption, highlight a situation in which instruments of the government are not in good coordination with one another. The high level of state capture in Indonesia is primarily to be blamed for this lack of coordination; however, it is also not a significant leap to say that such lack of coordination and leadership in a core area such as legal certainty is a legacy of the previous presidencies. There is disappointingly low confidence that the new Attorney General appointment is anything other than the result of political compromise, and therefore, that the lack of drive for appropriate legal certainty from the AGO will improve in the short to medium term.

Despite the appointment of the Attorney General, which appears as an outlier event, the composition of Jokowi’s cabinet is at least an indicator that, for the focus sectors, Jokowi seems willing to demonstrate a commitment to leadership.

Focus on the Energy Sector

In a recent interview with Tempo magazine, ESDM Minister Sudirman Said laid out a plan that focuses on addressing the coming fuel price hikes, subsequent rechanneling of funds into energy and mining infrastructures, and fighting the sector’s mafia. Mr. Said’s background appears to have equipped him well for Jokowi’s vision in the sector: a blend of professional experience and activism that includes anti-corruption advocacy with the Indonesian Transparency Society, public sector disaster relief with the post 2004 tsunami Reconstruction and Rehabilitation Agency (BRR) Chief Kuntoro Mangkusubroto, military business reform, as well as private sector oil and gas governance compliance. It is clear that this background showcases a focus on reforms, the success of which, as we have learned from the previous presidency, relies almost totally on leadership. The private and public sectors are already abuzz with some of the early decisive actions taken by Mr. Said, such as his replacement of Director General of Oil and Gas. 

Mr. Said’s biggest asset may be his cognizance that he faces an uphill battle in reforming the ESDM sector. In giving form to Jokowi’s campaign promises in the sector, the ESDM Ministry will need to make the difficult decisions that have been pending for the last decade. The most urgent task after the fuel price hikes, to be pursued in parallel with fighting the sector’s mafia, will be to coordinate the Ministry’s relationship with the private sector in relation to central issues such as the mineral ore export ban and the renegotiation of the coal contracts of work. It would be an understatement to say that such relationship has been mishandled, perhaps primarily an effect of rushing the regulations and government actions through before the coming of the new administration. It would not be surprising for the Ministry to discover that their relationship with the private sector generally and with investors specifically would be greatly improved just through the introduction of clarity and leadership. In terms of experience in reforms and compliance, there is strong indication that Mr. Said should be well qualified to deliver the aforementioned leadership.

The recent appointment of former KPK Commissioner Amien Sunaryadi as head of the Upstream Oil and Gas Regulatory Special Task Force (“SKK Migas”) has been received very well by anti-corruption supporters. The former KPK Commissioner was instrumental in designing and implementing many of the systems and methodology within KPK that has been essential in allowing the KPK, in the past decade, to outperform every other institution mandated in investigating and prosecuting corruption.

The similarly recent appointment of economist Faisal Basri as Chairman of the Committee for Oil and Gas Management Reform appears to further cement the regime’s commitment to cleaning up the oil and gas sector. In 2012, Faisal Basri ran against Joko Widodo for the position of Jakarta Governor as an independent candidate. Although the campaign was not successful, the original attempt showed that traditional Indonesian party politics and campaign methods are no longer superior to modern campaign methods. It is possible that this experience even inspired the Jokowi presidential campaign’s success.

A month ago, on 14 October, Head of the Presidential Delivery Unit for Development Monitoring and Oversight, Kuntoro Mangkusubroto, presented the 2030 Bandung Scenarios, a series of distinct possible outcomes for the Indonesian energy sector, to the public. The 2030 Bandung Scenarios were the result of a think tank process that involved practitioners from the energy sector’s public and private players. The four Scenarios all focus on different emphasis, but they all appear to agree that none of the scenarios predict an easy time for the Indonesian people with regards to energy availability, and that, yes, difficult decisions will need to be made. After the ESDM Ministry establishes a foothold on how it wants to address the urgent matters described above, its next major task will be to determine the course Indonesia will take and how the Scenarios will be navigated.

Political Will and Support for Infrastructure Development

The necessity of a special focus on the energy sector, as discussed above, is tied extremely closely with Indonesia’s need to seriously address its infrastructure issues. The problem of Indonesia’s energy availability is ironic because the nation is practically awash in a form of energy it doesn’t have the infrastructure to use; we are referring here to natural gas, and specifically to Liquefied Natural Gas (“LNG”) which could allow the transport of gas throughout the archipelago.

At present, despite record low investment and actualization of much needed energy exploration in Indonesia, we are producing a rapidly rising amount of natural gas, and only using about half of it, despite a humiliatingly low level of access to electricity, especially in Eastern Indonesia. If the ESDM Ministry is able to push through its policies as planned, namely to fund infrastructure development for the energy sector by way of the fuel price hikes, then there is a good chance that LNG use in Indonesia will be as ubiquitous as coal and diesel use, which will substantially calm fears in regards to energy availability, especially by making more readily available the kind of energy that is required for further industrial development of the energy and mining sector. It is understood that the changes in the mineral ore export law, for example, were a part of regulatory changes intended to incentivize such industrial development, and it is also understood that this shift requires substantial and sequential follow-up actions that require great political will and support for related infrastructure development.

The challenges faced by the energy and mining sector, as well as the infrastructure sector, mirror the challenges faced in other sectors by Jokowi’s administration. Primarily, the main challenge is to surmount the level of state capture that has fragmented sectors for decades. The only way to surmount this obstacle is to raise the level of coordination between the private and public sector to resist and eradicate systems of state that had been captured. Of course, this is no simple matter, and quite possibly not a short term issue to be handled quickly. It is both reassuring and refreshing, then, that Jokowi is not expected to be a short-term oriented president. Nonetheless, the issues are urgent, and while it may not be realistic to expect concrete results in the first 100 days, as the press is sure to focus on, it is similarly not possible to wait until the end of the five-year term to commence substantive reform.

Challenges Ahead

The Red and White Coalition are undoubtedly a challenge that the Jokowi cabinet will have to surmount, however, it is dangerous to view them as the singular roadblock on the road to success of the Jokowi cabinet, as this merely invites blame shifting for non-performance, while failing to provide concrete results that have been promised to the electorate. The Red and White Coalition, as well as multiple other political, social, financial, and many other challenges are, and were, all well known features of governing Indonesia, and overcoming them is an essential pre-requisite.

In the eyes of the Indonesian public, the behavior of the Parliament (DPR), not even two weeks after the announcement of the new cabinet, has resulted in a massive loss of faith in the democratic system. It is difficult to ignore the likelihood that this is an outcome desired by the Red and White Coalition, which benefits from the administration being seen as being in disarray, and with certain established elements benefiting from the preservation of the status quo and a prevention of an environment of civic maturity developing within the populace. Thankfully, Jokowi’s administration may still have a chance to weather this initial attack and cement lasting change. In order to do this, Jokowi will need to ensure coordinated movements in his focus sectors, prepared for and buffered against opposition tactics. At the same time, short, medium and long-term efforts will need to be made to improve civic participation by the Indonesian populace, which can only be done through education. The Jokowi administration will need to ensure that these efforts are planned and executed well, with full support from the Indonesian public in general, as well as the private sector, investors, civil society reformists, and other stakeholders. The more recent volatility of the relations within the Red and White Coalition also highlights a need for Indonesian society as a whole to discriminate between healthy democratic principles and practices and a political system that has been corrupted by money politics.

Legal Developments

New coal export procedures have been introduced by the Ministry of Trade and implemented by the Directorate General of Minerals and Coal at the Ministry of Energy and Mineral Resources (ESDM). The newly introduced procedures only allow coal export by Registered Exporters, who, among other things, must have their mining concessions classified as being Clean & Clear (i.e. properly issued and not overlapping). Additionally, royalties must now be paid before the shipment is transported out of the regency/city/province/country.

The mineral export ban has also seen a revision, with substantial relaxation for companies who are in the process of building a smelter. Specifically, the Ministry of Finance has revised the mineral export duty to:

Companies who have not committed to constructing a smelter are subject to the normal export duty tariff of 20%, increasing to 60%.

The mining divestment obligation has also been revised, making the required divestment dependent on processing and mining method, setting maximum foreign ownership as follows:

There also appears to be a change in how Contract of Work renewal is handled, with the first renewal being a Contract of Work, but the second renewal having to be a conversion into an IUP/IUPK, without a tender (previously two renewals were permitted).

A revised Geothermal Law has been passed, revising the 2003 law, with the aim of boosting the development of the geothermal business sector as an alternative source of energy, and to address Indonesia’s current electricity shortages and energy needs. The new Geothermal Law is expected to provide a greater contribution to the local economy, although the central government will take back authority from local administrations to issue geothermal concessions.

The Copyright Law has also been revised, notably making premise owners/managers liable for copyright infringement taking place within their premises and dividing copyright into two categories, moral rights and economic rights. Where a “moral right” is defined as a right conferred and attached to the creator’s work which does not perish over time.

Under the new Plantation Law the foreign ownership restriction has been omitted, which is notable considering earlier discussions of capping foreign ownership at 30%. However, implementing Government Regulations are likely to further address this issue, potentially introducing some sort of limitations

The Insurance Law has been revised, notably introducing the concept of a “controlling party,” defined as an entity or individual having the capacity to directly or indirectly control the Board of Directors and the Board of Commissioners. We interpret this broad definition to mean shareholders within the insurer’s articles of association as well as the ultimate shareholder in a wider corporate structure. Such Controlling Party(s) have the following responsibilities:

(i)    taking responsibility in the event the entity fails to fulfill its obligations to the policyholders, the insured or the participants, where such failure is caused by the influence of such party; and

(ii)           to take responsibility for the losses suffered by the entity it controls.

Additionally, a single-presence policy for controlling shareholders, different from a controlling party, is also introduced.

A Halal Products Law has been passed, dealing with certification, albeit leaving significant areas to be further clarified through implementing regulations.

Land Procurement for public interest has seen a number of regulatory amendments, as a number of infrastructure projects continue to struggle with securing the required land, and solutions continue to be sought to create an adequate regulatory regime that would allow the required infrastructure development to take place.

The new Banking Law has not been passed under the previous DPR, and now remains to be reconsidered by the new DPR. Additionally, the opposition, which controls the DPR, has stated that it plans to amend one hundred laws, including Banking, Oil & Gas and Mining.

The Indonesia Stock Exchange (IDX) has relaxed its listing requirements for mining companies, seeking to encourage additional listings and the development of the industry.

Foreign loans remain a concern for Bank Indonesia, which has repeatedly expressed concern regarding the falling Rupiah and the exposure of the Indonesian economy. Specifically, Bank Indonesia is set to introduce hedging requirement for foreign loans from 1 January 2015. Similarly, the Financial Services Authority (OJK) has sought to impose a range of controls relating to the health of the market, setting caps on interest rates that banks can offer, having previously set floors on insurance rates.


LGSonline – www.lgsonline.com

Arief Surowidjojo
Filipp Levin
Adil Surowidjojo

[Last update: 2014-12-10 04:41:06]

About LGS Online

A New Cornerstone of Legal Services in Indonesia

Indonesia Under Review

Periodical Review of Indonesian Politics, Economy and Other Public Issues

LGS Online Newsletter

LGS Newsletter on Various Legal and Business Issues

Who's Who in Indonesia

Government Officials and Prominent Business Actors in Indonesia

Important Addresses

Important Addresses You Should Know

LGS Online. Copyright 2012. All Rights Reserved.