This content is from: Local Insights

New investment law

After a planning process spanning years and a parliamentary debate lasting 11 months, Indonesia has on May 2 2007 passed a new investment law (Law 25/2007). The Law replaces the two separate laws which dealt with domestic and foreign investment respectively and covers capital investment in all sectors. The Law is an attempt to boost Indonesia's investment climate and give teeth to the drive to accelerate the development of the national economy. Indonesia is yet to fully recover from the 1998 Asian financial crisis: investment last year was 3% of total gross domestic product, well below the 10% of GDP realized before the crisis.

Most prominently, the Law provides for equal treatment between domestic and foreign investment, although different entry conditions remain in place through a system of maximum foreign participation percentages in many investment sectors (the Negative List). The requirement of gradual divestment has been abolished. Investment assurances such as the right to appoint foreign management, the prohibition to effect nationalization without indemnification (now against market value) and the submission of disputes to ICSID arbitration have been retained. The same goes for repatriation rights. However, repatriation may now be suspended by a court for as long as the investor has not fulfilled its responsibilities under the Law.

No new land titles are created, but validity periods are extended: for instance, the initial title to cultivation and plantation land is for 60 years, and that to general commercial land is for 50 years, in each case subject to extension and renewal (by 35 and 30 years respectively). Reversing the policy not to grant tax holidays, reductions in income tax, import duty, VAT and land tax and accelerated depreciation are to be set out in accordance with the cabinet's industry policy.

As regards manpower, the Law adopts a dualistic approach: the investment must give priority to Indonesian workers, but foreign experts may be employed for particular positions and skills. In addition, training and transfer of technology must be put in place. Industrial relation disputes are to be settled by tripartite mediation, failing which they are submitted to the existing industrial court.

Meanwhile, the Investment Coordinating Board BKPM currently under coordination from the Trade Ministry (although in practice considerably independent), will become a non-departmental coordinating institution that reports directly to the president. It will cease issuing the investment licence required under the old law. Since the introduction of regional autonomy five years ago, there was uncertainty as to the licensing authority for regional investments. Now the Law specifies that coordination of all investment is to be with the regions, except the coordination of investment in non-renewable resources with high environmental risk, high-priority national industries, regional communications, defense and security, as well as foreign investment by a foreign government, which remains the responsibility of the central government. Coordination both on a central and regional level will be entrusted to organizations issuing on behalf of the various ministries involved in operational licenses through a so-called one-door integrated service. A separate investment license will no longer be required and the 30-year limit that used to apply is replaced by the validity of the operational permits.

The Law also introduces many new requirements for investors, and distinguishes between "obligations" and "responsibilities". It requires, amongst others, by way of obligation, investors to practice good corporate governance and respect local traditions and culture. The Law provides that if investors fail to fulfill such obligations they may, after a sequence of warnings, have their business closed. Somewhat controversially, corporate social responsibility has recently been declared a statutory obligation for companies engaged in natural resources. As a result it constitutes an obligation under the Law. So the failure to implement CSR could at least in theory be ground for closure of the business (and for suspension of repatriation rights). Amongst others it is now also an investor's responsibility to settle all obligations and losses if the investor "ends, leaves or abandons the investment unilaterally". Finally, the Law prohibits and declares null and void agreements entered into by a foreign or domestic investor under which shares are held for the account of another person, targeting nominee arrangements that attempt to evade maximum ownership restrictions.

Existing investment approvals, including maximum foreign investment limits, are grandfathered: the Law provides that existing approvals remain in effect until their validity period expires, and that implementing regulations under the preceding laws remain in place to the extent not contradicting the Law.

The Law has been or will be followed up by several implementing regulations, including a general investment policy, the Negative List and the criteria for foreign share-ownership restriction, mandatory partnership with national small scale businesses, regional authority over investment, special economic zones and investment procedures, including the one door integrated service.

Theodoor Bakker/Emir Nurmansyah

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