Summary: Welcome to the latest edition of BLP’s quarterly update on legal developments in Indonesia. We have distilled the latest Indonesia news into this ‘speed read’. Please get in touch for more information.

1. Can recent bright sparks rekindle Indonesia’s renewable power potential?

At a National Energy Board meeting in July 2016, President Jokowi called for an acceleration of renewable energy development in Indonesia, reportedly stating that such development is a “national commitment”. In line with President Jokowi’s comments, Indonesia’s National Energy Policy sets a target for almost 20% of the total energy mix to be sourced from renewables by 2025 (this was recently reduced from 23%).

In order to meet the 2025 target, the Indonesian government anticipates that existing renewable capacity must be expanded by a 5x multiple. This will undoubtedly involve an undertaking of huge proportions. Despite recent setbacks such as the unexpected exit of Energy and Mining Minister Arcandra Tahar and budget cuts at EBTKE [1], there have been positive developments too.

New solar power regime

In a bid to renew investor interest and reduce regulatory uncertainty, Indonesia recently introduced a new solar power regime offering at least 5-GW of solar capacity, with fixed tariffs for the first tranche. Read our analysis of the ministerial regulation which gives effect to the regime.

Despite progress in other developing economies, the Indonesian solar power industry remains underdeveloped, confronted by challenges such as inadequate grid infrastructure, lack of solar data and land issues. The new solar regulation is not a magic bullet, but has the potential to get solar projects moving again, provided steps are taken to address other outstanding challenges, as outlined in our detailed analysis.

2. MEMR launches new geothermal power tenders

Green power developers have the opportunity to participate in 8 greenfield geothermal tender pre-qualifications to be launched by the Ministry of Energy and Mineral Resources (“MEMR”) during the remainder of 2016.

As we understand, the tenders will involve a combined PPA capacity of 525-MW, and are spread over a variety of provinces. Certain tenderers may have a “right to match”, after conducting preliminary site surveys on behalf of PT PLN (Persero).

Ceiling feed-in tariffs may range from US$ 0.15 to US$ 0.226. The relevant projects are listed below for ease of reference. Further information may be obtained from the Directorate for Geothermal at EBTKE.

Geothermal working area Province Capacity MW - PPA
Gunung Galanggung West Java 110
Gunung Amiding North Maluku 20
Gunung Wilis East Java 2 X 10
Ciremai West Java 2 X 55
Simbolon Samosir North Sumatra 110
Gunung Geurendong Aceh (Sumatra) 55
Gunung Pandan East Java 40
Graho Nyabu Jambi (Sumatra) 2 X 55

3. Long-term plans to create holding companies for Indonesian SOEs: a new sovereign wealth fund?

State-owned companies (“SOEs”) play a major role in the Indonesian capital markets and the business landscape, and therefore are likely to be encountered by many investors doing business in Indonesia. The government has had long-standing plans to reduce the number of SOEs, despite political delays and setbacks. It has recently been reported that by 2019, the government intends to set up a number of holding companies (some of which are listed below) and reduce the number of SOEs from 199 to 85.

By merging similar SOEs under a holding company structure, the government hopes to improve overall value, debt leverage and efficiency. Recent plans include creating a “super-holding” body to oversee operations and potentially act as a form of sovereign wealth fund for Indonesia.

The government has stated that it is working on a new SOE law to allow the formation of the holding companies. The current target is to pass the law by the end of 2016, although delays may be expected given the political nature of the proposal.

The relevant holding companies will be as follows:

  1. aluminum producer PT Indonesia Asahan Aluminum (Inalum) will be the holding company for mining;
  2. investment firm Danareska (Persero) will be the holding company for financial sector;
  3. toll road operator Hutama Karya will be the holding company for construction and engineering;
  4. State Logistics Agency Bulog will be the holding company for food commodities sector;
  5. State Housing Company (Perumnas) will be the holding company for the property sector; and
  6. oil and gas firm Pertamina will be holding company for the oil and gas.

4. Competition law update

The Indonesian government has launched various initiatives to reform the legal system of the country. Key goals of the reform include promoting certainty and effective enforcement, and bringing international standards to the legal system. Indonesia’s competition law in particular has been under review.

The proposed amendments to the competition legislation (currently being discussed in the legislative body) include:

  1. expanding the territorial reach of the law to cover anticompetitive conduct that has an effect in Indonesia, even if that conduct takes place outside Indonesia;
  2. prohibiting “abuse of dominant bargaining power” for business with market power; and
  3. introducing mandatory merger control notification.

Coupled with the exercise to refine the competition regime, the KPPU has become more active in enforcing the competition law. As part of a five-year target set in 2012, the KPPU is focusing on detecting and enforcing against illegal conduct in key sectors of the economy, including health, education, infrastructure, banking, finance, food and energy. Recent high-profile cases include an investigation on price fixing for small scooters between local subsidiaries of Yamaha and Honda, and a Supreme Court decision imposing fines totalling 77 billion Rupiah (c.US $60m) on telecom companies including Hutchison CP, Smart Telecom and Mobile-8 Telecom, for their participation in an illegal text message cartel.

These proposed amendments and recent decisions reinforce the importance of ensuring compliance for businesses, particularly foreign entities with sales or activities in Indonesia. Corporations are encouraged to conduct “health check” to review and identify business practice which may be potentially anticompetitive.

5. Indonesian aviation sector safe again

A comeback year for Indonesian aviation has seen the US Federal Aviation Administration grant Indonesia an International Aviation Safety Assessment (IASA) Category 1 rating nearly 10 years after a downgrade, prompted by several fatal crashes. The up-rating clears the way for Indonesian airlines to code-share with US airlines, to commence direct flights to the US and follows similar EU moves earlier this year.

While Garuda is the only airline likely to benefit in the short term, given the cost and expense of adding routes to New York or London, the improving safety record indicates the investment in infrastructure, people and facilities is bearing fruit. The government’s continued focus in these areas, as seen in Soekarno-Hatta’s ambition to join the 3R club, bodes well for the development of the domestic aviation market, which is expected to grow 15% in 2016.