BLOG

The Risks of Investment in Indonesia

Indonesia is the largest economy in South East Asia. Its estimated gross domestic product, as of 2017, is US$1.020 trillion while GDP in PPP terms is US$$3.257 trillion. It is the 16th largest economy in the world by nominal GDP  and is the 7th largest in terms of GDP (PPP). As of 2017, per capita GDP in PPP is US$12,432 (international dollars) while nominal per capita GDP  is US$3,895.

The debt ratio to GDP is 26%.The services is the economy’s largest and accounts for 43.3% of GDP (2016), this is followed by manufacturing sector  (42.9%) and agriculture (13.7%).Since 2012, the service sector has employed more people than other sectors. In 2014 accounting for 44.8% of the total labour force was employed on service sector, this has been followed by agriculture (34.3%) and industry (20.9%).Agriculture, however, had been the country’s largest employer for centuries.

Indonesia is the 5th most populated country in the world with population of 240 million people.  28 million of which belongs to the country’s fast growing middle class. Euromoney International data shows that Indonesia currently has 19.6 million of middle class households, which is expected to rise to 23.9 million in 2030, making this group a prominent consumer force in the country and potential export market for any consumer product manufacturers.

Investment in Indonesia was recorded at Rp 165.8 trillion (US$12.5 billion) in the first quarter of the year, or 24.4 percent of the 2017 investment target of Rp 678.8 trillion. This figure is a 13.2 percent increase from the Rp 146.5 trillion in investment in the same quarter last year. Investment from local investors progressed significantly by 36.4 percent year-on-year (yoy) to Rp 68.8 trillion, while investment from foreign investors only grew by 0.94 percent to Rp 97 trillion. A majority, or 80 percent of total local and foreign investment in the quarter, was fresh investment, while 20 percent was expansion.

The top investment sectors are mining, food, transportation, warehouses and telecommunications. The top three investment destinations are West Java, Jakarta and East Java. Singapore, Japan and China remain the top three investors – just like they were in the first quarter of 2016 – with $2.1 billion, $1.4 billion and $600 million in investment, respectively.

Interesting to note that, the number of middle class consumer does not attract more foreign invetsment. The seemingly stagnant growth in foreign investment is because of the stronger rupiah although the main reason is more nuanced than a weaker dollar.

Indonesia is ranked 72 among 190 economies in the ease of doing business, according to the latest World Bank annual ratings. The rank of Indonesia improved to 72 in 2017 from 91 in 2016. Ease of Doing Business in Indonesia averaged 113.10 from 2008 until 2017, reaching an all time low of 129 in 2008 and a record high of 72 in 2017.

Legal and bureaucratic reforms contributed to the improvement in the ranking but implementation of these reforms are often different in practice. Here are some of the key issues and risks that foreign investor must understand before doing any business in Indonesia.

1. LENGTHY BUREAUCRACY

In January 2015, Indonesia Investment Coordinating Agency (“BKPM”) announced the release of an online database and one stop system for foreign investment licensing and establishment. However, it is important to note that some investment sectors would require additional licensing from a ministry of its corresponding field or the local government.

Generally the establishment of foreign investment company (“PT PMA”) and the corresponding business permit would take around 5 weeks with the following breakdown:

No Activities Product Issuing Authority Expected Timeline (working days)
1 Request of PT PMA name PT PMA Name The Ministry of Law and Human Rights 1
2 Submission for Principal License Principal License BKPM 7
3 Deed of Establishment Deed of Establishment & Article of Association The Public Notary 3
4 Legalization of Article of Association SK KEMENHUHAM The Ministry of Law and Human Rights 3
5 Domicile of Company Letter of Domicile Kelurahan 3
6 Tax Registration Tax Identification Number (“NPWP”) AND Tax Registration Certificate Tax Office 5
7 Company License Company Registration (“TDP”) Local Government 7
8 Permanent Business License Permanent Business License (“IUT”) BKPM 7-10

 

2. DECENTRALIZATION and REGULATION INCONSISTENCY

Law No 23 of 2014 regarding Regional Government sets out the framework for regional autonomy, which consists of two levels, provinces and districts/cities. The differentiated roles between the central and regional government creates regulatory problems in the form of conflicting laws from different authorities. Furthermore, regional officials are granted significant discretionary powers relevant to the industrial sectors. Without a central repository, this system births legal uncertainty.

The following are some permits granted by regional authorities:

GENERAL PERMIT FOR CONSTRUCTION

Location Permit (Izin Lokasi) A certificate confirming the general planning designation of the area where a parcel of land is located
Advice Planning Permit/Land Use Certificate (“IPPT”) A certificate issued to confirm the planning parameters applicable to a parcel of property (building height coefficient, lot coverage coefficient, setbacks)
Building Permit (“IMB”) Issued by the city government to authorize the construction of a specific location on a specific parcel of land in the city or regency.

 

At the moment, there are 17 procedures – including obtaining all necessary clearances, licenses, permits and certificates – required to build a warehouse. The total number of days required to complete a procedure in practice is 191 days. In addition to the 39 days stated in chart 1, investor must wait another 191 days before it can undertake the actual business operation. Please be reminded that the timeline varies between sector.

 

PERMITS FOR MINING AND INDUSTRY

Environmental Review (“UKL/UPL”) Required for projects or activities that do not yet require an Environmental Impact Analysis (“AMDAL”)
Distrubance Permit (“HO Permit/Hinderordonnantie”) Issued to authorize activities that have economic, social, environmental or community psychology impacts, often granted after exacting some form of compensation or offset for those impacts.

The same decentralization process has also destabilized the regulatory environment for many foreign investors in Indonesia. Local governments in Indonesia now have the independent authority to formulate, implement, and enforce laws and regulations.

This is the case even when those local laws and regulations are inconsistent or even conflict with corresponding regulations that the central government issues. As a result, investors in Indonesia have to take on the burden of complying with a large inventory of different regulatory regimes since those laws and regulations can vary greatly across the country.

 

3. POOR JUSTICE SYSTEM

390 days is the average time to resolve a dispute, counted from the moment the plaintiff files the lawsuit in court until payment. This includes both the days when actions take place and the waiting periods between. Foreign investors distrust also looks at the quality of judicial processes in Indonesia. World Bank scores Indonesia 8 out of 18 in terms of good practices in its court system whereas assessment derived from four areas: court structure and proceedings, case management, court automation and alternative dispute resolution. In addition to the poor justice system, bribery and corruption revolving arround law enforcement agency has been so rampant and severe.

The lengthy and cumbersome Indonesian court proceedings leads corporation to seek out arbitration, outside of the country. Despite Indonesia has Law No 30 of 1999 regarding Arbitration and Alternative Dispute Resolutions in place, enforcing an arbitral award requires a court decision. Defendant may contest the arbitral award which will lead to suspension of judgment on recognition and enforcement of the award.

 

4. LAND ACQUISITION

Land acquisition faces risks of increased costs due to land owners expect compensations higher than the prevalent market price. Foreign companies have to be aware that land acquisition ventures tend to end up in aggression from land owners and rejection based on human rights violation. Many infrastructure projects had to be postponed due to difficulties in procuring land.

Presidential Decree No 30 of 2015 regarding Land Procurement Provision for the Development of Public Interest serves as a stepping stone in facilitating private investment during land acquisition process, where previously all financing had to be conducted through regional or state budget through State Owned Enterprises. This, along with the Land Fund act as support facilities to a stable infrastructure investment environment in land procurement.

Whereas Law No 2 of 2012 regarding Land Procurement for Public Utilities Construction and Head of National Land Agency (“BPN”) Regulation No 5 of 2012 regarding Technical Guidance on the Implementation of Land Procurement put land acquisition process to take around 319 working days or 583 if there is any objection or appeal requests.

 

5. LABOR STRIKE and DEMONSTRATION

In order to increase the population’s skill base, the Government enacts Law No 13 of 2013 regarding Labor to ensure the limitation of the number of expatriates in a company with requirements for transfer of knowledge and plan of replacement to their local counterparts.

The biggest risk in employment lays in that the Labor Law does not allow termination initiated by the employer unless the employee agree to the termination and accepts the offered compensation. Otherwise, termination of an employee is only permissible with a labor court decision.

As a growing democracy, demonstration features often in the daily lives of the Indonesian populace. Matters brought in protest range from political and economic to social and religious. In some cases, demonstrations have been known to turn violent and hinder day to day business activity.

 

6. BRIBERY AND CORRUPTION

Corruption has become a regular fixture in business ventures in Indonesia, and to overcome this the Corruption Eradication Commission (“KPK”) was established under Law No 30 of 2002 regarding the Commission for the Eradication of Criminal Acts of Corruption. KPK monitors interactions between companies and their staff and government officials related to the delivery of public services.

Prior to KPK, corruption investigation and indictment are conducted by National Police together with State Attorney office. However, given the bribery and corruption have infiltrated these law enforcement bodies, an independent agency focuses on corruption investigation and indictment is in dire need. National Police and State Attorney office, nevertheless, have not lost their authority to investigate and indict corruption cases, therefore in few cases we can see how their existence can sometime overlap with each other (and not in a positive way).

Despite World Bank has praised Indonesia and labeled it as the country that made the biggest improvement in business regulations among Asia Pacific nations since 2005, the reality Indonesia is still very volatile. Any minor change in leadership or structure whether it is provincial or national can and will affect the laws and regulation as well as performance of the people who are in charge of the authority. This will no doubt affect investment and business activity in general.

Author:    
Marini Sulaeman
Managing Partnerm.sulaeman@legisperitus.co.id

Felicia Tania
Associatef.tania@legisperitus.co.id

 



Share this Articles: