A. Background

Following criticism from both foreign and domestic construction companies of Minister of Public Works & Housing Regulation No. 09/PRT/M/2019 (the “Regulation”),[1] the Ministry of Public Works and Housing (the “Ministry”) has now signaled a willingness to listen to what industry participants have to say and to revise the Regulation.

The Regulation, which came into effect on 13 June 2019, was issued as an implementing regulation for the new Construction Services Law.[2] It applies to both the representative offices in Indonesia of foreign-domiciled construction companies and foreign-invested construction companies domiciled in Indonesia, that is to say, majority foreign-owned construction companies that are incorporated in Indonesia under the country’s foreign direct investment regime (foreign-invested companies are generally referred to in Indonesia by the abbreviation PMA[3]).

Currently, under the Negative Investment List[4] set out in Presidential Regulation No. 44 of 2016,[5] a PMA operating in the construction sector (“Construction PMA”) may be a maximum of (i) 67% foreign-owned by a non-ASEAN investor, or (ii) 70% foreign-owned by an ASEAN investor.

B. Key Issue

In this ABNR Legal Update, we shall confine our analysis to the principal objection laid by construction industry participants against the Regulation, namely, that it fails to grandfather existing business licenses. In particular, it fails to grandfather the business licenses of Construction PMAs that were established prior to 2007, when the construction sector was 100% open to foreign investment, meaning that a Construction PMA could be up to 100% foreign owned.

The lack of grandfathering in the Regulation implies that if a pre-2007 foreign-owned Construction PMA wishes to renew their business license upon its expiry, they will have to satisfy the local ownership requirements set out in the current Negative Investment List. In the case of a 100% foreign-owned Construction PMA, this would mean that that they would have to divest 33% or 30% of their shares, as the case may be, to local companies.

Further, shares may only be divested to local construction companies that are classified as large undertakings, and such construction companies must focus on the same business lines as the divesting Construction PMA.

If a pre-2007 Construction PMA fails to comply with the divestment requirements, then they run the risk of ultimately losing their business license, meaning that they would have to close up shop. Given that there are a number of big, pre-2007 Construction PMAs in Indonesia that provide work to local construction companies through joint projects, such prospect has caused widespread concern in the industry.

As has been pointed out by industry participants, the lack of grandfathering in the Regulation is clearly in contravention of Article 37(4) of the Investment Law,[6] which provides that business licenses granted prior to the coming into effect of the Investment Law may continue to be extended. Further, it also conflicts with Presidential Regulation No. 44 of 2016,[7] Article 13 of which expressly provides that the Negative Investment List is not applicable to investments that were approved prior to its issuance.

C. Ministry’s Response

In response to the criticism by industry participants, the Ministry’s Director General of Construction Development, Mr. Syarief Burhanuddin, recently said that letters had been sent to all relevant business and professional associations, inviting them to provide input on revision of the Regulation. He further stated that the Regulation “is currently being evaluated with a view to its revision. Hopefully the process will be concluded this week.”[9]

D. ABNR Commentary

The controversy over the Regulation once again highlights the difficulties that Indonesia’s civil law system of hierarchical legislation can give rise to when relevant stakeholders in government fail to work together so as to coordinate policy. At a time when the Government is focused on promoting foreign investment, improving Indonesia’s ease-of-doing business ranking, and remedying the country’s chronic infrastructure deficit, it is difficult to think of any logical reason that could possibly justify the elimination of grandfathering for existing Construction PMAs.

Given the unease and uncertainty the Regulation has caused in the construction sector, it is sincerely to be hoped that it will be amended at the earliest opportunity.