On 5 October, the Indonesian Parliament approved the job creation law (RUU Cipta Kerja, commonly known as the "Omnibus Law"), which introduces key amendments to several sectors, including the plantation sector.
This client alert specifically covers key changes and implications in the plantation sector as set out in the Omnibus Law.
Implications for the plantation sector
The Omnibus Law amends Law No. 39 of 2014 on Plantation ("Plantation Law").
What the Omnibus Law says
We describe below some notable provisions of the Omnibus Law for the plantation sector:
1. Integration of licensing related to plantation activities
The Omnibus Law shifts a substantial portion of the local governments' and the relevant ministry's licensing authorities to the central government (i.e., the president). The Omnibus Law does still say that the local governments have the authority to issue plantation related licenses - but they must follow the norms, standards, procedures and criteria set out by the central government.
While clearly this may be a welcome development for many investors, we expect this to be one of the challenges of the Omnibus Law going forward. In relation to this, although the local governments can still issue regional government approvals (for instance, in the environment sector, e.g., environmental feasibility approval (AMDAL approval) or B3 waste management permit), it will be subject to the standards, procedures and criteria determined by the central government.
Additionally, and presumably as an expansion of the one-stop shop concept being introduced through the Online Single Submission ("OSS") system, the Omnibus Law is seeking to introduce a new integrated single business licensing scheme. As a result, environmental permits will be integrated into a single business license (this is detailed more fully in our client alert. Plantation companies will presumably need to adjust their current licenses to comply with this new scheme. While this should be a relatively straightforward administrative process, as we have experienced with the OSS scheme, we anticipate that there may be 'teething' problems initially, as companies seek to get their licenses re-registered.
2. Removal of environmental permits as the requirements for the plantation business license
The Omnibus Law still requires plantation companies to maintain environmental sustainability. However, the environmental permit is no longer a prerequisite to obtaining a plantation business license and it is integrated into the business license (perizinan berusaha). More detailed information on the new environmental regulatory regime under the Omnibus Law can be accessed here.
3. Requirement for only certain plantation companies to facilitate the development of plasma
Previously, the Plantation Law stipulated that all types of plantation companies are obliged to construct a plasma plantation. Now, under the Omnibus Law, the requirement to develop a plasma plantation is only imposed on cultivation plantation companies with the land that is wholly or partly derived from:
- non-forest areas (area penggunaan lain) that are located outside HGU land title area; and/or
- the release of forest area
Consequently, this amendment provides a carve-out that if the land (in the form of HGU) is obtained from another party (e.g., community or plantation companies that have fulfilled the plasma plantation obligations), the plasma plantation obligation no longer applies.
4. Changes to the restriction of foreign investment
Under the Omnibus Law, a foreign investor that wishes to engage in plantation business activities in Indonesia is not obliged to establish a joint venture with a domestic plantation company. Previously, under the Plantation Law, a joint venture had to be established between the foreign investor and domestic companies. Nevertheless, the foreign entity must adhere to the prevailing investment regulation. Consequently, the removal of this requirement will expedite and simplify the process for a foreign investor to conduct plantation business in Indonesia.
5. Restriction for certain types of plantation company to transfer their granted land area
Only plantation companies that carry out partnership (kemitraan) or plasma nucleus (inti plasma) activities are now prohibited from transferring their rights over the land that results in the relevant plantation companies holding less than the minimum plantation land area required under the Omnibus Law. Previously, under the Plantation Law, this restriction applied to all types of plantation companies.
Further, under the Plantation Law, noncompliance with this requirement was subject to administrative sanctions. The Omnibus Law eradicates these administrative sanctions.
From the language, it appears the government intends to exclude plantation companies that only hold a plantation processing license from this restriction. However, since the plantation processing license holders are still required to carry out partnership with the local community, they may still be subject to the restriction. Hopefully, the implementing government regulation will clarify this point.
6. Acceleration of plantation cultivating obligations
The Omnibus Law stipulates that within two years after a plantation company obtains a land title, it is obliged to cultivate its land area (now without a minimum cultivated area). Previously, under the Plantation Law, plantation companies were required to cultivate at least 30% of their land area within three years after obtaining the land title, and then within six years, the plantation companies were required to cultivate all of their land area.
This shorter period and the removal of the minimum area to cultivate may pose different interpretations, as now they do not have a benchmark for the acceptable minimum cultivated area based on the government's view. However, the removal of the minimum cultivation area may mean that any cultivation activity (regardless of the area) is evidence that the plantation company has complied with this requirement.
Further, with the introduction of the land bank (please see point 9 below below), the plantation companies' failure to fulfil the obligation to cultivate the land within the deadline may also result in uncultivated lands being categorized as "abandoned". That would trigger the right of the government to revoke the land title, resulting in the ownership and possession of the land being returned to the government.
Under the Plantation Law, noncompliance with this requirement is subject to administrative sanctions. The Omnibus Law eradicates these administrative sanctions. It remains to be seen how this provision will be implemented in practice.
7. Obligation for a plantation company to have a business license and the land title before it starts operating
Under the current regulatory regime, plantation cultivation and plantation product processing business activities can only be conducted after the company obtains the land title and the plantation business license. This provision exists as a consequence of the change of the interpretation of Article 42 of the Plantation Law based on Constitutional Court Decision No. 138/PUU-XIII/2015.
The adoption of this Constitutional Court decision in practice has created operational challenges as this will delay the total lead time to develop a plantation. To date, the process of obtaining land titles (HGU in this case) is time consuming as it may take two - three years.
The Omnibus Law reinforces this provision, i.e., requiring plantation companies to have a business license and the land title before they start operating. Therefore, this is not a new concept that can respond to the challenges in the plantation business practice. For legal certainty and to ensure that investors remain interested in investing in this sector, the government must continue its efforts to ensure that land titles and licenses can be issued in a timely manner.
8. Requirement for certain plantation processing companies to construct a plantation area
Each plantation processing company that imports its raw materials from outside Indonesia is required to build a plantation (without a specific timeframe). This plantation must be integrated with the processing unit after it starts to operate. This will be further regulated in the government regulation. Therefore, the implementation remains to be seen.
9. Introduction of land bank
The land bank is one of the breakthroughs of the Omnibus Law. The land bank, which will be formed by the central government, will generally collect vacant land so it can be redistributed by the government.
The government previously introduced a similar concept through Government Regulation No. 11 of 2010 on Control and Utilization of Neglected Land ("Regulation 11"). However, the implementation of this regulation was not effective. We presume that the land bank concept will replace Regulation 11.
A government regulation will be issued to further regulate this matter.
10. Removal of criminal sanctions for a company that operates without a plantation license
The Omnibus Law has removed the criminal sanctions for a plantation company that operates without a plantation license and replaced it with administrative sanctions. These administrative sanctions are in the form of (i) suspension of plantation activities, (ii) fines, and/or (iii) enforcement from the central government (pemaksaan pemerintah pusat). It remains to be seen on (i) how the government intends to apply these administrative sanctions, and (ii) how the relevant authorities will react in relation to ongoing criminal investigations in relation to this.
A government regulation will be issued to further regulate this matter.
Actions to consider
Business players do not need to take any immediate action in light of the above changes for the plantation industry. The Omnibus Law states that further provisions will be provided in government regulations. We would suggest monitoring the development of this Omnibus Law and the issuance of the technical implementing regulations. We expect to get more clarity in the coming three months, the period within which the Omnibus Law requires all government regulations to be issued.