Year in Review – Indonesia Law in 2016

New Negative List to attract greater FDI: Following the release in February of the 10th economic stimulus package, the Government renewed the investment negative list which shows a noticeable step forward as an effort to boost foreign direct investment, liberalize the Indonesian economy and at the same time offer proportional protections for domestic investments in various sectors. The new foreign ownership limits under the 2016 Negative List apply to new investment approvals issued as from 18 May 2016.

Duality of BANI: In September, BANI Pembaharuan or Renewed BANI was launched, using a very similar name to that of the arbitration centre that has existed since 1977, BANI (Badan Arbitrase Nasional Indonesia). BANI Pembaharuan has its own code of ethics, rules, procedures, fee structures and list of arbitrators. This duality potentially raises uncertainty when commercial parties wish to enforce their existing agreements by referring disputes to BANI arbitration. A party may delay proceedings by disputing the jurisdiction of the arbitral entity and involving the Indonesian courts in the process.  This situation may also impact parties currently negotiating agreements or with plans to negotiate future contracts which contemplate Indonesian arbitration as the chosen forum for dispute resolution.

Amendment to the Law on Electronic Information and Transactions (EIT Law): Law no. 19 of 2016 aims to accommodate recent developments relating to electronic information and transactions which have evolved since the EIT Law came into force in 2008. Under the amendment, electronic system operators (ESP) must delete irrelevant electronic information under their control at the request of the relevant person based on a court decision (right to be forgotten). An ESP must have a deletion mechanism for electronic information and/or documents.  There are new criminal sanctions and it synchronises the procedural law provisions under the EIT Law with the criminal procedural law. The Government has the right to terminate access and/or order ESPs to terminate access to electronic information and/or documents with content that violates the law. This concurs with the regulation issued by the Minister of Communications and Informatics (MOCI) that MOCI has the right to block internet websites with negative content based on reports from the public, government institutions or law enforcement agencies.

Protection of Personal Data in Electronic Systems: An implementing regulation to the EIT Law and Government Regulation no. 82 of 2012 was issued in December by the Minister of Communication and Informatics, i.e. regulation no. 20 of 2016 (Regulation 20).  Regulation 20 requires an electronic system provider (ESP) to get express written consent from the individual for the collection and utilisation (i.e. processing and analysing, storage, display, announcement, delivery, disclosure and/or access granting, deletion) of personal data. The requirement to get consent is not applicable if the data has been publicly disclosed by an ESP in the public services sector. An ESP must offer options to the individual whether or not the data is confidential and features to enable the individual to change, add or update their data. Personal data must be stored in encrypted form. Regulation 20 sets out the duration for storing personal data, procedures for cross-border data transfer, measures to be taken by an ESP to ensure protection of personal data,  dispute mechanism for failure of protection of personal data, and requirement to ESP to have onshore data centre and disaster recovery centre.

Bridging efforts to manage over-the-top services: Pending the issuance of regulations relating to application services and/or content over the Internet (over-the-top, OTT), the Government, in March, issued a Minister of Communication circular letter (the Circular) as heads up of the upcoming regulations as well as to give time for service providers to prepare and to make adjustments to their business operations. The Circular allows on-shore and off-shore (individual or business entity) providers of OTT services, but off-shore providers must have a permanent establishment presence in Indonesia in an effort by the Government to exercise its sovereignty over cyber resources and to impose certain tax obligations on the OTT service providers. The Circular obliges OTT service providers to carry out data protection and content filtering, obey the censorship requirements, utilise the national payment gateway provided by Indonesian legal entities, use Indonesian Internet Provider domains, agree to provide access for lawful interception relating to criminal investigation, and provide information and the terms relating to use of the OTT services in the Indonesian language.

Financial technology (fintech) regulation by Bank Indonesia (BI): As a commitment to support the rapid growth of fintech transactions in Indonesia and to ensure that digital payments for e-commerce transactions are conducted in a secure and efficient way, BI issued Regulation no. 18/40/PBI/2016 in which set out comprehensive guidelines for the organisation of payment systems involving fintech. Currently, it recognises nine types of payment service operators: principals, issuers, acquirers, clearing operators, final settlement operators, switching operators, payment gateway operators, fund transfer operators and e-wallet operators.

Bank Indonesia Fintech Office: In November, BI launched a Fintech Office to help developers of fintech and monitor fintech models, products and services offered by the industry to ensure innovation continues and consumers are protected. This advisory hub for fintech companies has four main objectives: (1) to facilitate innovation in fintech through the exchange of ideas and information; (2) to prepare Indonesia for fintech, particularly its penetration into the economy through regular meetings between authorities and international institutions; (3) to improve Indonesia’s competitiveness in the financial industry; and (4) to collect information, report and craft policy on the development of fintech, including assessing risk and business models and implementing a regulatory sandbox and providing services to help fintech players understand the regulations.

Government reckons with ride-hailing services: With the growing popularity of mobile ride-hailing services, the Government issued Ministry of Transportation Regulation no. 32 of 2016 (MOT 32). Car transportation services hailed through mobile apps, such as Uber, Grab, and Go-Jek, is now regulated as public transportation, which co-exist alongside licensed taxis and other chartered passenger-carrying vehicles. Ride-hailing application companies must work with licensed car rental companies to provide their services. MOT 32 covers four-wheeled vehicles only. Motorcycle taxis remain unregulated, however, the Government allows them to operate to support public transportation.

Additional provisions regarding expiring Production Sharing Contracts (PSCs): The 2015 Minister of Energy and Mineral Resources (MEMR) regulation no. 15 is amended by regulation no. 30 of 2016 to allow the contractors of the subsequent PSC for the block to fund certain activities prior to the effectiveness of the subsequent PSC. Such activities are to be carried out by the PSC contractor whose contract is about to expire in order to maintain and secure production level when the subsequent PSC begins.

The offering of 10% PSC participating interest to Regional Government-Owned Companies: To further implement the Indonesian standard PSC clauses, MEMR regulation no. 37 of 2016 provides for the procedures in making the offer, including the right of the governor of the relevant region to designate the offeree. One important features of the regulation is that the offer should include a “cooperation scheme” under which the offering contractor will bear the portion of the offeree’s operating costs (past and future) and be paid out from the offeree’s production entitlement without charging interest.    

Power and infrastructure development: Power and infrastructure development has remained a major priority for the Government. The year started off with a flurry of regulatory activity in the power and infrastructure sectors, in particular through the enactment of Presidential Regulation no.3 of 2016 on the Acceleration of National Strategic Project Implementation (Perpres 3) and Presidential Regulation no. 4 of 2016 on the Acceleration of Electrical Infrastructure Development (Perpres 4) that are designed to accelerate the development of electricity and other strategic infrastructures.  Perpres 3 identifies over 200 strategic infrastructure projects outside the power sector which are designated for accelerated development.  Perpres 4 is dedicated to the accelerated development of power infrastructures as part of the Government’s ambitious 35GW power program.  The regulations seek to speed up licensing processes and provide greater flexibility in project procurement methodologies, land and goods/services procurement, zoning and dispute settlement.  They also contemplated new possibilities for government guarantees in support of the financing of project development.  Perpres 4 contemplates that the central and/or regional government may offer fiscal incentives and subsidies for new and renewable forms of energy.

Gas Allocation, Utilisation and Pricing: In implementing Presidential Regulation no. 40 of 2016 on Determination of Natural Gas Prices,  the MEMR issued regulation no. 16 of 2016 on Determining Prices for Certain Natural Gas Users. This regulation sets allocation priorities (end-users or State-Owned Enterprises for onward-sales to specific customers) in the utilisation of domestically produced gas and what criteria will the MEMR use in determining the gas sale price to the customers. The MEMR has also issued regulation no. 6 of 2016 on Allocation, Utilisation and Pricing of Natural Gas pursuant to which certain gas consumers will enjoy a special gas price (less than USD6.00/MMBTU). To support the special price, the regulation provides that only the government revenue entitlement from the upstream gas project will be reduced.

Year to come – Indonesia Law in 2017

Proposed amendment to the Competition Law: The House of People's Representatives (Dewan Perwakilan Rakyat) has initiated an amendment to the Competition Law (Law No. 5 of 1999). The draft amendment provides the following key changes: (1) the scope of transactions that require notification to the KPPU (the Indonesian Business Competition Supervisory Commission) will be expanded to include asset acquisitions and joint ventures in addition to mergers, consolidations and share acquisitions; (2) requirements that notifications be made prior to the effectiveness of merger, consolidation, share acquisition, asset acquisition or joint venture (currently, a prior notification is voluntary); and (3) the introduction of the leniency or amnesty programs: companies that provide information about anti-competitive activities or violation of the Competition Law involving oligopoly, price fixing, predatory pricing, territorial separation, boycott, cartel, trust, oligopsony, agreement with foreign party which may cause monopolistic practices, or unfair business competition, in which they partake might receive full or partial immunity from the relevant sanction imposed by the KPPU. The draft also proposes to extend to extraterritorial coverage of foreign conduct impacting Indonesia and to provide the KPPU a basis for asserting extraterritorial jurisdiction as such would obviate reliance on the single economic entity doctrine (a theory invoked by the KPPU in the Temasek case) to reach foreign conduct. The KPPU will have additional powers to enable it to become an investigator and judge concurrently, to seek police assistance in compelling defendants, witnesses or experts to participate in its proceedings, to conduct searches and seize evidence in cases where business actors refuse. A panel of KPPU commissioners would be vested with powers to issue an interim decision to order a temporary suspension of challenged conduct. The draft amendment, in many instances, still requires further clarification. The final form may be substantially different from the current form. We will continue monitoring it.

Draft Banking Bill: Although the draft has been on the Parliament’s agenda since 2015, the bill has yet to make significant progress. The Parliament plans to start discussions in 2017 and expects to pass it in the same year. It will focus on the fundamental provisions in the banking sector, among others: bank establishments, permitted activities of commercial and rural banks, bank secrecy and exemptions thereto, and consumer protection. The Government is committed to open up the bank secrecy policy for tax purposes, allowing the country to exchange tax-related information with other countries, which would be a major step in the fight against tax evasion and financial fraud. Other significant policies include (1) a 40% foreign investment restriction and the requirement for foreign investors holding shares in excess of that 40% to divest the excess to Indonesian citizens or legal entities within 10 years of the effective date of the law; and (2) the requirement for commercial banks, including branch offices of foreign banks in Indonesia, to be incorporated as an Indonesian limited liability company.

Revision of Law No. 22/2001 on Oil and Gas: It is expected that the House of Representatives and the Government will commence official deliberation of the revision in 2017. One of the key points that will be debated is whether Pertamina should be designated as the sole grantee of the upstream license with whom oil companies must contract in doing exploration and exploitation in Indonesia. The alternative scheme is to change SKK Migas to become a state-owned enterprise to whom will be given all upstream licenses (for further cooperation with oil companies) except for working areas which will be “self-operated” by Pertamina.

Governance of the natural gas industry: Further deliberation may take place regarding a draft presidential regulation which implements the “aggregator” concept with respect to the supply and distribution of natural gas to the domestic market with the aim of securing the supply of gas at affordable price.

New draft mining bill: The draft attempts to address unresolved issues under the current Mining Law, in particular the divestment obligation of foreign shareholders and mandatory in-country processing. The draft contemplates continuing the current relaxation to the export ban of ore for a further five years for mining companies which already have set up processing facilities and are in the process of building refining facilities. The current draft mining bill provides a stringent approach to the conversion of current comprehensive concession agreements (known as “contracts of work”) into permits (known as Izin Usaha Pertambangan, IUP).  The draft contemplates that all existing contracts of work must be converted into a special IUP within one year after the enactment of the law.  This implies that most of the substantial elements that are currently agreed in the contracts of work (i.e. tax, royalty, and divestment) will be subject to the prevailing regulation. The draft mining bill was intended to be finalized in 2016 to anticipate the allowance of export of minerals that will cease on 11 January 2017. However, this has not happened. This has forced the Government to look to address these issues in a Government Regulation in order to prevent the shutdown of Indonesia’s two largest mining projects, Grasberg and Batu Hijau, both of which are reliant on the ability to export copper concentrate.  The latest indication from the Government is that they will allow these and other mining companies to continue to export without fully processing their ore for a further period of five years, provided that they convert their contract of work into a special IUP, pay export tax and agree to construct a smelter facility.  The Government indicated that Freeport and others may also be allowed to apply for extensions five years before the expiry of their concessions, signalling an effort to resolve the long-running controversy over the future of Indonesia’s largest mining project, Grasberg. These will be critical issues for the Government to resolve early in the new year.

e-Commerce Roadmap to 2020: In November, the Government announced an ambitious regulatory plan for the e-commerce and digital technology sector, aimed at supporting growth of industries in a coordinated, holistic manner. The Government forecasts that the value of Indonesia's e-commerce transactions will reach US$130 billion by 2020, if it successfully implements the roadmap. In line with this, Indonesia is promoting digital entrepreneurship, and targets to nurture 1,000 technopreneurs with new businesses worth US$10 billion, also by 2020.  The roadmap sets out eight areas of development to guide the various relevant sectoral regulators in law and policy-making. Highlights include the followings. Financing: there will be efforts to improve access to funding for e-commerce start-ups. The Government will increase funding of micro, small and medium-sized enterprises (MSMEs) through Government-subsidized bank loans. In addition, proceeds from the Universal Service Obligation fund, containing mandatory payments collected from telecommunication operators, will be deployed to help fund e-commerce start-ups and MSMEs involved in digital businesses. Other initiatives and forms financing will include efforts to introduce tech start-ups to angel investors, the recognition of crowdfunding (where funds are collected from members of the public) and the bapak angkat scheme (where larger corporates are encouraged to 'adopt' smaller businesses by providing them with seed capital). Tax incentives: smaller tech-related businesses with annual turnover of less than Rp4.8 billion (US$360,000) will benefit from lower corporate tax rates, and simplified procedures for securing permits. Local businesses that invest in tech start-ups are also expected to receive tax benefits. Consumer protection, e-commerce education and cyber security: regulations concerning various aspects of consumer electronic transactions are expected to be harmonised. This covers electronic certification, payment, dispute resolution, data protection and security certification. There will be greater efforts to promote consumer awareness and further investments to advance the knowledge of e-commerce players and law enforcers. Communication infrastructure and logistics: the roadmap also addresses the main bugbear e-commerce businesses in Indonesia, and acknowledges the need to improve the logistics system and cut transportation costs. It envisages a more important role for Pos Indonesia for domestic route deliveries. The Government will establish a team to monitor and evaluate the implementation of the e-commerce roadmap. We are expecting to see new regulations that implement the roadmap in early 2017.

Master Agreement for Indonesia derivatives transactions: Bank Indonesia indicated that it will issue guidelines for the standard contract of derivatives transactions for Indonesian parties, to be known as Perjanjian Induk Derivatif Indonesia (PIDI) or Master Agreement for Indonesia derivatives transactions. The PIDI is based on the 2002 ISDA Master Agreement, and tailored to include certain local terms, such as the use of Indonesian laws and Indonesian language as the governing law and language, based on the assumption that the contracting parties are Indonesians, and Rupiah as the termination currency. This effort is to assist banks in preparing derivative contracts that are comprehensible for customers. Bank Indonesia will attach the format of PIDI to the upcoming regulation or circular letter, and parties may use it as a reference for their deals. Bank Indonesia sees that derivative transactions are still under-developed in money markets in Indonesia, despite the more relaxed rules recently issued by the central bank, such as the lifting of the prohibition on structured products and the regulation on call spread options, and hopes that the guidelines will attract forex hedging transactions to onshore practices in support of international trade, investment portfolio and credit and financing.