17 March, 2014
Legal News & Analysis – Asia Pacific – Indonesia – Construction & Real Estate
Indonesia is a blessed country with prosperous natural resources and potential energy resources. These factors have attracted foreign investors to invest in this natural resources sector, amongst others, in oil and gas, coal and minerals mining. Citing from the data provided by the Ministry of Energy and Mineral Resources, in 2012, the total production of oil and gas reached 279,412,000 barrel with proved reserve of oil and gas resources of 3,74bn of barrel and potential resources of 3,66bn of barrel. Meanwhile, Indonesia’s production of coal in 2011 reached the number of 353,387,341 tons and the export number of 272,671,351 tons. This have not included potential geothermal resources which is predicted as a home of 40% of geothermal world resources, as promoted by BKPM in their website.
Foreign Investment In Infrastructure
1. Imbalance Infrastructure Facility
However, despite the abundant of natural resources, Indonesia still has imbalanced infrastructure facilities in its regions. There has been a gap in the development of infrastructure facilities between Java Island, where the infrastructure grows better than other islands, and other islands or provinces. Until 2013, there have been 34 provinces established in Indonesia. This situation leaves challenges for government, but also opportunity for private sector to participate in the development of infrastructure project.
2. Laws
Undang-Undang Nomor 18 Tahun 1999 tentang Jasa Konstruksi or Law Number 18 Year 1999 regarding Construction Services (“Construction Law”) is the governing law in relation to construction services. Construction Law requires all service users and service providers of construction services which is conducted or performed in the Republic of Indonesia to comply with the requirements of the Construction Law. This obligation covers domestic and foreign nationality or incorporation.
In general, Article 1(1) of Construction Law describes that jasa konstruksi or construction services include:
- consultancy services for construction work planning;
- implementation services for construction work; and
- consultancy services for supervision to construction work
(“Construction Services”).
Further elaboration of Construction Services is found under Article 16 of Construction Law, as follows:
(a) Construction design
According to Government Regulation No. 4 of 2010 regarding Amendment to Government Regulation No. 28 of 2000 regarding Role of Construction Services Community (“GR 4/2010”), construction design is as follows:
(i) survey;
(ii) general plan, macro study and micro study;
(iii) feasibility, industrial and production study;
(iv) technical and operational plan, and maintenance; and
(v) research.
(b) construction performance; and
(c) construction supervision.
According to Article 5 of GR 4/2010, the scope of construction supervision is as follows:
(i) supervision of construction work; and
(ii) supervision of quality assurance and result of the construction work.
The above services are conducted by each construction service provider separately during a construction work. However, design, procurement and supervision services can be conducted collaboratively by taking into account the scale, the cost, the use of advanced technology and the high risk for the parties or the public interest in a construction work.
According to Article 5(4) of Construction Law, construction works that are high risk, require high technology or involve substantial expenses may only be conducted by service providers in the form of limited liability companies or foreign service providers of similar form.
3. Foreign Shares Ownership
In relation to direct foreign investment opportunity in Indonesia, Law No. 25 of 2007 regarding Investments (“Investment Law”) requires foreign investor to establish a limited liability company in Indonesia (“PMA”). The establishment of and the corporate governance of such PMA shall comply with the provisions of Law No. 40 of 2007 regarding Limited Liability Companies.
The implementing regulation of the Investment Law, which is President Regulation No. 36 of 2010 regarding the List of Business that is Closed and Open with Conditions for Investments (“Negative List”), allows foreign investment in construction sector. The Negative List stipulates 3 categories of construction services and requirements of foreign shares ownerships related thereof, as follows:
- Construction implementation services using advanced technology and/or with high risk and/or with a project value of more than IDR1 billion, which are open for foreign ownership of a maximum of 67%;
- Construction business services/construction consultancy services, which are open for foreign shares ownership of a maximum 55%; and
- Engineering, Procurement and Construction (EPC) services, which are open for foreign shares ownership of a maximum of 95%.
Capital Investment Coordinating Board (“BKPM”) as the ruling government body in direct investment scheme, will have sole discretion to determine the proper line of business once it has reviewed the formal application and supporting documents from the applicant.
4. Permits
According to Regulation of the Minister of Public Works No. 04/PRT/M/2011 regarding Guidelines on Requirements for the Granting of the Construction Business License (“Regulation on Permits”) a limited liability company or a PMA must obtain a construction business license or Izin Usaha Jasa Konstruksi (“IUJK”) from the Regent/Mayor who has jurisdiction in the domicile of the applicant.
Currently, by delegation of authorisation, BKPM including the relevant One Stop Services unit in regions may issue the IUJK. According to the regulation of BKPM No. 5 of 2013, a PMA that has obtained principle license to perform construction consultancy services business and construction implementer service business is required to obtain SIUJK when it ready to commence its operational activities. Prior applying for SIUJK, the PMA must firstly obtain the following certifications in relation to construction fields:
- Business Certificate or Sertifikat Badan Usaha (SBU) that has been registered by the Lembaga Pengembangan Jasa Konstruksi (“LPJK”); and
- Certificate of Expertise or Sertifikat Keahlian (SKA) and/or Skill Certificate or Sertifikat Ketrampilan (SKT) from the technical executive of the business entity or penanggung jawab teknik badan usaha (“PJT-BU”) that has been registered by the LPJK.
IUJK is valid for 3 years and can be extended, also in all territories of the Republic of Indonesia.
5. Foreign Representative Office
Establishing a PMA is commonly purposed for a long term of investment plan. Meanwhile, if a foreign construction company is at the stage of researching possibility of having a construction business/investment in Indonesia, the other option of it is to establish a Representative Office of Foreign Construction Service Business Entity or Perwakilan Badan Usaha Jasa Konstruksi Asing (“RO”). To establish a RO, foreign construction company must submit an application to the Ministry of Public of Work, as the government body who also set the requirements for such application. Administration fees shall also be paid to the state treasury depends on the type of the expected registered activities in Indonesia, such as follows:
- construction consultancy services sector: USD5,000; or
- construction implementation service sector: USD10,000
It is important to note that the RO permit will only be issued to a foreign construction company which qualifies the requirements if the Ministry of Public Works.
The rights of the RO shall be as follows:
(a) it may contact persons/companies/the government or national private institutions to obtain market information;
(b) it may be involved on the procurement of construction services; and
(c) it may appoint foreign manpower or Indonesian manpower in accordance with the applicable laws and regulations.
Meanwhile, the obligations of the RO amongst others are:
(a) to comply with the applicable laws and regulations;
(b) to enter into a joint operation with a qualified Indonesian Construction Company.
(c) to perform transfer of knowledge to the qualified Indonesian Construction Company as a partner in a join operation.
(d) to submit an RO activities report annually.
There is a limitation applies to the concept of RO, that is the qualified foreign construction company and its RO is only permitted to conduct complicated construction projects which utilise high technology and/or are high risk in Indonesia.
With reference to the above, the decision of a foreign investor to invest in construction sector in Indonesia, whether by option of establishing a PMA or a RO, shall depend on the long-term of short-term of its commercial business and qualification (applies for RO). If the goal is to have a long-term business in Indonesia, establishment of a PMA would be a better option compared to RO. Since RO shall enter into a joint operation with an Indonesian construction company to implement the work in Indonesia. Meanwhile, by establishing a PMA, foreign investor may utilise the opportunity of having majority shares in such PMA.
For further information, please contact:
Anangga W. Roosdiono, Partner, ZICOlaw