Introduction

The Indonesian Parliament rushed through a controversial New Plantations Law at the end of September 2014.

As reported on 23 September (Restrictions on Foreign Shareholdings in Indonesian Plantations), the sticking points were:

  • foreigners could hold 30 per cent only in Indonesian plantation companies; and
  • if foreigners held more than 30 per cent in Indonesian plantation companies, the foreigners would be required to sell down their shareholdings within five years.

These points disappeared in the ultimate law, but are far from resolved. The New Plantations Law merely puts the issue of foreign shareholder limitations on hold.

Foreign investment restrictions?

The issue is a political hot potato, in that:

  • foreign shareholder restrictions, which give foreigners only a minority shareholding in Indonesian plantations, will inevitably limit Foreign Direct Investment (FDI) in plantations; whereas
  • Indonesia generally, and small-scale farmers in particular, should benefit from plantation activities in Indonesia.

The New Plantations Law postpones this debate. Rather than setting foreign shareholder limits now, the limits are to be set out in regulations which will be issued within two years. In other words, the law allows room for the debate to continue, creating uncertainty for foreign investors.

The New Plantations Law explicitly states that one of its purposes is to fix limitations on foreign investment in Indonesian plantations, which must be based on the “national interest”. The national interest will be determined by taking into account the type of plants, the scale of the plantation business, and conditions specific to the location of the plantation.

So we now effectively have a law which allows the debate to continue.

This is similar to the situation faced by mining companies after enactment of the 2009 Mining Law, which said there would be foreign shareholder divestment requirements in further regulations. In 2010, a divestment of 20 per cent at the sixth year of commercial production was set, although this was later changed to a phased divestment of up to 51% from the sixth year to the tenth year of commercial production, and was again changed in 2013 to a 49 per cent foreign shareholder limitation in the majority of Indonesian production mines.

It is not yet clear whether the scenario with respect to Indonesian plantations will follow the same path.

Requirement to divest?

The divestment requirement is now unclear. Originally, the draft contemplated a sell-down by foreign investors to 30 per cent within five years.

However:

  • whether the sell-down is to 30 per cent (or a higher or lower figure) is not yet clear, and may not be for two years or possibly longer – until further Government Regulations are introduced; and
  • implicitly, the law says that foreign investors will not be required to comply with the sell-down obligations until expiry of the plantation land title. Given that most plantation land titles are for 35 years, this is potentially good news for foreign investors. However, whether this interpretation is correct may hinge on the forthcoming Government Regulations.

Transfer of ownership

Transfers of ownership in plantation companies may now only take place if in the “national interest”. This vaguely defined term may lead to more uncertainty, as it is not yet clear what “national interest” means.

The New Plantations Law gives the Ministry of Agriculture (MOA) the authority to accept or reject transfers of shares in plantation companies to foreigners. This probably does not significantly change the existing scenario, where the MOA must “recommend” a transfer to foreigners. It is likely that the existing requirements for the Regency to “recommend” a transfer and the Capital Investment Coordinating Board (BKPM) to “approve” a transfer will continue.

So the new law does not necessarily reduce the bureaucracy in transferring plantation company shares.

Other matters

The following matters that we reported in September were kept in the new law:

  • that plantation companies must utilize at least 30 per cent of their granted land area within three years;
  • that all of the land area must be “technically” utilized within six years;
  • that plantation product processing businesses must source at least 20 per cent of the total required raw materials from their own plantations; and
  • that all plantation companies must develop a plantation area of 20 per cent to be utilized by the local community, being the so-called “plasma” obligation.

The following matters that we reported in September were dropped from the new law:

  • that “plasma” may be developed either inside or outside the plantation area. The existing rule that “plasma” must be developed outside the plantation area therefore continues to apply:
  • that plantation companies must use a domestic bank;
  • that plantation companies should provide internship opportunities and carry out transfer of technology to local businesses; and
  • that plantation companies should utilize domestic processing facilities.