Investment and Law in Indonesia

[This Inforial is a promotional advertisement from the BKPM or Indonesian Board of Investment: it presents an unusually sunny view of Indonesia’s investment environment.

The original Jakarta Post article is here...

The government has launched economic policy packages by phase to boost economic growth, with Investment Coordinating Board (BKPM) highly instrumental in attracting domestic and foreign direct investment. The economic policy package (EPP) volume 1 was announced in 2015 and to date, as many as 15 packages have been launched as of July 2017, with policy reforms focusing on six areas: investment, industry, logistic, tourism, export, and purchasing power.

Lengthy and complicated bureaucratic procedures and inefficiency due to too many permits are among the reasons behind the government’s move to reform the policies pertaining to each sector. “We will continue to reform to simplify our regulations, to open our economy. We keep rolling deregulation measures until we have a good investment climate,” said President Joko Widodo.

Latest data at Coordinating Ministry for Economic Affairs shows that initially, there were 233 regulations which need to be deregulated and based on the further assessment, 11 regulations have been revoked from deregulation process.

As of July 3, 2017, deregulation of 215 regulations are 97 percent completed, comprising 50 regulations at Presidential level and 165 regulations at Ministerial/Institutional level and the remaining seven regulations are under discussion.

In the area of industry, licenses has been made simpler and faster at one-stop service at BKPM to boost industrial competitiveness, with business people no longer required to comply with Indonesian National Standard (SNI) for imports and recommendation letters and surveyor’s verification (LS) for certain imported goods. Apart from that, the government has also provided facilities for investment in in Special Economic Zones (SEZs) that include tax holiday, which reduce income tax; tax allowance, which reduces net income and accelerate depreciation, and 0 percent VAT and luxury goods sales tax.

Under the deregulation package, the government has also issued property ownership for foreigners, ease of visa, residence and investment permits as well as exemption from investment negative list. Apart from that, the government has completed 99 percent deregulations, developed eight SEZs, two of which are already in operation. Following the deregulation measures, 14 provinces have implemented minimum wage formula and additional tax incentives implemented.

Significant progress has also been made in the area of logistics, tourism, export, people’s purchasing power and investment. Under the reform policy on logistics, as many as 12 Bonded Logistics Centers have been inaugurated. Aside from that, BLC Cikarang has underpinned import and storage of cottons for textile industry.

In the area of tourism, the government has increased the number of free visit visa for tourists from the previous 75 countries to 169 countries. Another move in this regards is an offer of up to 100 percent of foreign ownership, especially for three star and above hotels, restaurants, bars and cafes, sport centers and film industry, from production, processing to cinemas; and 67 percent of foreign ownership for hotels (up to 2 stars), private museums, conventional services and exhibitions, golf course, bowling alleys, SPAs and karaokes, natural tourist attractions and travel agencies.

Thanks to the measures, tourism has recorded approximately 6 percent increase of foreign tourist in 2016 and provided business opportunity for local people as 18 new business lines were opened.

To stimulate export, the government gas taken several measures related to export financing and deregulation and debureaucratization as part of export facility that exporters can utilize. In the area of financing, Indonesia Eximbank provides export financing, guarantee and insurance for transactions or projects in commercial difficulties. Aside from that, the government has also set up a consortium of financing industry aimed to accelerate financing for export-oriented, creative industries and SMEs and provide export-oriented business credit (KURBE), which provides complete and integrated credit facilities for SMEs and export credit up to Rp 25 billion (US$1.85 million).

Policy reform on export has led to PT INKA exporting 150 trains worth US$72.3 million to Bangladesh, supported by Eximbank. The reform also saw small-and medium-enterprises (SMEs) in North Sulawesi exporting 167 tons of coconut flour.

President Jowi Widodo expected that deregulation measures aimed to strengthen people’s purchasing power should be felt by the business sector and by the people. Therefore, the measures should include setting a wage formula, small business credit, price stability and low-cost housing. The fair, simplified and projected wages formula is created through the issuance of provincial minimum wage (UMP) regulation and formula for setting yearly wage adjustments, considering inflation and economic growth. Another measure in this regards is by providing small business credit (KUR). The result is that 14 of 34 provinces or around 41 percent have implemented minimum wage formula, including West Java, Banten, Bali and North Sumatera as of 2016.

Meanwhile, KUR-related measures include provide subsidy on KUR and expand criteria for KUR that covers micro and SMEs in productive sectors, overseas Indonesian workers in formal sectors or terminated contracts and family member of salaried workers and overseas Indonesian workers. As a result, interest rate for KUR has been lowered to 9 percent in 2016 and until July of the same year, the realization of KUR reached Rp 59 trillion, or 54 percent of the whole year target.

Ease-of-Doing Business

Under Jokowi – JK administration, Indonesia’s economy is expected to grow on the basis of investment instead of consumption as this will have a long-term effect on the country’s development.

Established in 1973, BKPM has learned a lot about how to work with investors since its inception. It has received a boost since the election of President Joko Widodo in 2014, who is keen to see foreign investment contribute to the development of the country to give it an extra push up the ladder of success. The board is headed by Thomas Trikasih Lembong, a 1994 Harvard graduate and former Morgan Stanley banker who was elected as a Young Global leader by the World Economic Forum in 2008. Under the leadership of Thomas Lembong, BKPM has taken breakthrough and innovative strides to boost investment climate by, among other things, providing one-stop service for investment, three-hour-investment service and the Direct Construction Investment Service, or KLIK. The endeavors are part of how to improve ease-of-doing business (EoDB).

Under one-stop service for investment procedure, the process of issuing licenses, which previously divided between 22 ministries and government institutions, is integrated into one and moved to the agency under one-stop service – Center (OSS-C) platform. This enabled applicants for investment to process all the documentation at a single desk at BKPM.

As many as 167 permits are delegated to BKPM including power, industry and tourism and as a result, the licensing for investment is much simpler and faster. For example, power generation that requires 25 permits is completed in 256 days, compared to previous 49 permits in 923 days. These changes have ushered in a drastic reduction in the time needed to process the permits and licenses required to set up shop in the country as well as vastly improved transparency.

Since early January 2016, BKPM has adopted a three-hour licensing service method under which the service is conducted at one place, in one visit and in three hours from previously 23 days. The service is for projects valued above Rp 100 billion (or its equivalent in US$) and/ or those that would employ more than 1,000 local workers, issuing in-principle permits allowing work to begin on factory construction immediately. By March of this year, 313 projects have taken advantage of the three-hours services.

Clothing manufacturer Nesia Pan Pacific president director Moon Hyung Joo commented that after 17 years of operating in Indonesia, he is fully aware of the fully improved licensing and permit process operated by BKPM Not only have the processed changed, but the attitude of the officials is impressive, he notes.

“We are really impressed by the spirit and enthusiasm of the officials of BKPM. They do not only assist us with the documentation but also by providing support in the field. If we compared with the past performance, it is very different. Now the government and public servants are extremely transparent and very active in serving the investors.”

“KLIK service” is designed for those eager to invest in industrial estate under priority investment service. Once principle licenses have been obtained, investors can immediately begin constructing plant on any of 32 major industrial estates located in 10 major provinces across the country. Companies are still required to obtain licenses such as building permits and environmental approvals, but these can be processed after construction has commenced. As of May of this year, 90 projects have utilized the “KLIK services.”

Green Lane Facility

BKPM has also made a breakthrough solution to lengthy clearance and customs clearance time by providing Green Lane Facility. The average five to six week total clearance time has been reduced to two days, while the average six day-customs clearance time has been reduced to less than half day.

This simplified processes for the import of machinery and equipment for companies represents cooperation between BKPM and the Indonesian Customs and Excise Service in which direct inspection is not required and only document for the imports need to be checked. To date, 66 companies have received the Green Lance Facility, of which 94 percent have utilized the facility.

Asked to comment on the Green Lane for machinery and equipment imports, officials at Oki Pulp and Paper say that the program was extremely helpful, with faster Customs processing. “This allows us to complete the installation of machinery in our new factory faster and without any disturbances. Since the introduction of the Green Lane, a process that used to take a lot of time can now be accelerated. Our equipment can be released in a single day.”

BKPM’s endeavors to make doing business easier have paid off. Total foreign direct investment (FDI) in the second quarter of 2017 stands at Rp 109.9 trillion, compared to Rp 99.4 trillion in the corresponding period of 2016.

Meanwhile, investment realization in the second quarter of 2017 is registered at Rp 170,9 trillion, increases around 3.1 percent from Rp 165.8 trillion recorded at the first quarter, or increases around 12.7 percent from Rp 151.6 trillion recorded at the second quarter of 2016.

According World Bank, Indonesia has made a significant progress of EoDB. Based on a EoDB survey in October 2016, Indonesia was in the uppermost country on Top Performer list based on improvements made in starting a business, getting electricity, registering property, getting credit, paying taxes, trading across boarders and enforcing contracts.

The country’s ranking on the EoDB index in the World Bank’s flagship annual report has jumped 15 places to 91st place, from the previous rank of 106. The survey’s result put Indonesia on the top – position country with seven indicators of reform that fixes at once.

Despite the increase in the EoDB, Indonesia still lags behind other ASEAN countries such as Singapore that ranks second, Malaysia 23rd, Thailand 46th, Brunei Darussalam 72nd and Vietnam 82nd. That’s why President Joko Widodo has set the target for EoDB for Indonesia at 40th place in 2018.

The deregulation measures are also expected to favor the implementation of large-scale infrastructure projects in terms of bringing investment. The infrastructure development project, one of the primary development priorities of the Jokowi-JK administration, requires huge funds. The ongoing projects include the development of 35,000 MW new power plants, 150 new seaports, marine toll, 1,000 new toll roads, 19 new airports and 2,159 km inter-urban railways.

[An editorial in the Jakarta Post six days later responds to the BKPM inforial...]

The original Jakarta Post article is here...

President Joko “Jokowi” Widodo made a surprise visit to the Investment Coordinating Board (BKPM) less than one week after his inauguration in October 2014 and found the licensing bureaucracy to be messy and cumbersome. He immediately pledged to expedite investment/business licensing through a one-stop permit process center.

But almost three years later the business-licensing bureaucracy remains one of the most arduous in the ASEAN region, bogged down in a complex web of rentseeking activity, even though 16 reform packages, mostly deregulation and bureaucratic reform measures, have been launched.

The government acknowledged last week that the actual implementation rate of foreign investment projects as of last December was still very low at 27.5 percent of the total commitment licensed by BKPM. The implementation of licensed domestic investment projects was slightly higher at 31.8 percent.

That only confirms how much of an uphill struggle the task of coordinating and synchronizing business permit processing is, mainly because of strong opposition from vested-interest groups at the central government and at regional administrations that benefit from the rents made possible by the current licensing system.

It is indeed a challenging task to change the mindset of government officials from being providers of permits to being servants of the people.

But we are glad to observe that President Jokowi has not thrown in the towel. Even the authoritarian former president Soeharto, who set up the BKPM in the early 1970s, miserably failed to create a one-stop, integrated center for business licensing within his centralized government. How much trickier is that task in the current democratic, decentralized Indonesia with its regional autonomy, where almost any regulation should be based on a national political consensus.

Jokowi last week launched the 16th economic reform package, which includes measures to further expedite business/investment licensing and special efforts to remove barriers at the central government and regional administrations to the realization of licensed businesses/ investments.

The package is designed to improve horizontal politics (between ministries) and vertical politics (between national and sub-national governments) of coordinating and synchronizing all the laws and regulations on business permits and establishing certainty about fees and timelines for business permits.

We realize that executing the measures to streamline the business-licensing system and reducing both the time and costs of meeting all requirements for starting a business or implementing multi-year investment projects is not easy, because within the Indonesian scheme of things, permits or licenses mean money.

But we are still willing to give Jokowi the benefit of the doubt, because we have observed that once the President sets his mind and attention on a priority program, he will see it carried out thoroughly, as he has been doing with the fast-track program for infrastructure development.

We hope that the 16 reform packages will enable the Jokowi administration to establish a single-submission system for all kinds of business and investment permits under one roof before the end of its term in October 2019.

[It gets complicated. Indonesia’s multiplicity of institutions and interest groups does not present a common front against graft even within the KPK, let alone a common front regarding basics of law for investors...]

The original Jakarta Post article is here...

In any other institution, the action of Brig. Gen. Aris Budiman, director of investigation at the Corruption Eradication Commission (KPK), would merit a severe punishment. Against the wishes of the KPK leadership, Aris, who is seconded by the National Police to the antigraft body, turned up for a hearing held by the House of Representatives to inquire into the antigraft body’s performance.

Aris told lawmakers his job at the KPK had been undermined by a rival faction. Aris did not mention any names, but it was clear he was lashing out against top investigator Novel Baswedan, who opposed his plan to bring in more police officers as KPK investigators. Police officers account for more than 50 percent of KPK investigators, and it is easy to see why KPK commissioners have not yet taken action against Aris.

This could be the biggest crisis the KPK has ever faced. Beyond the serious damage to its image, which for the first time was exposed to the public as a fractious institution, the antigraft body is confronting the coalescing of interests seeking its demise.

In the past, we witnessed many attempts by the National Police to weaken the KPK, especially after the antigraft body acted against police generals on suspicion of graft. In 2012, the police launched an assault on the KPK, including by besieging its headquarters, after former National Police Traffic Corps chief Insp. Gen. Djoko Susilo was named a graft suspect. The attack also included an attempt to bring criminal charges against Novel.

Lawmakers have long plotted the KPK’s downfall. Over the years, they have sought every path to amend the 2002 Corruption Law. Earlier this year, they found a fresh urgency to revise the law and familiarized the public with its draft proposal for the amendment plan. The current House inquiry is their biggest political move against the KPK to date and was launched after the commission kicked off an investigation into the e-ID case that implicates a number of top politicians.

For the first time, these two disparate institutions joined forces to meet their common goal of weakening the KPK. The House will use politics to meet the ultimate goal of disbanding the KPK. A member of the House inquiry team toldTempo that if House politicians failed to achieve the first goal, they would take the second option of amending the law or at the very least remove Novel and his band of supporters from the KPK.

This week, the police lent a hand in achieving that last objective. The Jakarta Police are processing a defamation case filed by Aris against Novel. Now they are handling a second defamation case against Novel.

Again, the KPK has been left to its own devices in dealing with the onslaught. If Jokowi fails to show his commitment to protecting the KPK, this will be the umpteenth time this year we will call for the relaunch of the 2009 cicak lawan buaya (gecko versus crocodile) campaign, during which the public took to the streets in defense of the KPK.

The original Bali Discovery article is here...

In an article written by, Lisa Allen, a Senior Writer from The Australian, the many charms and advantages for Australians wishing to purchase a prestige “dream villa” in Bali are enumerated.

Allen says that “for a song” a chosen few Australians can pick up a beachfront Bali villa “replete with swimming pool and cheap labor” via a leasehold or long-term rental contract. Adding temptingly: “Think rock-star lifestyle with 24-hour butlers, chefs, chauffeurs, and gardeners.”

The same article champions the purchase of Bali villas by quoting Matthew Georgeson, director of Elite Haven/Knight Frank in Bali who, when talking about Bali real estate, insists “You can buy very well.”

The article admits in passing that while it is actually illegal for foreigners to “own property outright” - AU$1.5 million will net a 400-500 square meter villa on a 1,000 square meters of land in Batubelig in “trendy Seminyak” that can be purchased in partnership with a local.

What is not revealed by the article are the grave legal problems experienced by legions of foreigners in Bali purchasing property using local Indonesians as the nominee owner. Legally wrong from the get-go, it is a well-accepted principle of law that any legal device purposely configured to circumvent or frustrate both the letter and spirit of the law are ipso facto legally null and void and therefore without legal force. And, on this count, foreign buyers should have no doubt that the Indonesian Constitution is absolutely clear in its opposition to ownership of Indonesian property by non-Indonesians.

Underlining this fact are a large number of cases of nominee deals gone bad in which foreigners have lost their “dream properties” due to their inability to enforce legal agreements created outside the law. Add to this, is the precarious position compliant nominee owners now find themselves in the changing legal environment in Indonesia where officials are taking sterner steps to halt money-laundering, asking the source of funds used to purchase properties by so-called nominees.

The Australian article quotes Tony Smith, an Australian entrepreneur living in Bali, citing his arguable claim that rental rates are rising rapidly in Bali due to Airbnb. In a seeming contradiction, Smith rightly warns that in order to rent a property in Bali the “home owner” must first obtain a pondok wisata license. The pondok wisata license can only be issued to an Indonesian property owner and is not available to foreigners holding property under a Hak Pakai arrangement, a problematic class of property ownership open to facilitate long-term control and occupation of an individual property by a foreigner that does not, however, permit sub-leasing or short term rental.

Georgeson told Lisa Allen that Australians still make up “a significant proportion of buyers, but Indonesians make up most of the market.”

What Foreign Property Buyers in Bali Aren’t Being Told

Here are come of the things not being shared with the foreign customers in Bali by those promoting property sales:

• The fact remains that foreigners still can’t own land in Indonesia.
• Nominee arrangements for foreigners trying to own land in Bali aren't legal and are increasing coming to grief before the Courts, almost invariably at the cost of the foreign party.
• Even if you trust your nominee 100% - you effectively do not own anything tangible despite whatever power of attorneys, and performa/fictive loan agreements you have been put together with a Notary.
• Those setting up an Indonesian company to own a property should know the Investment Coordinating Board (BKPM)currently at requires USD 1 Million commitment for newForeign Direct Investments (FDI) with an upfront cash equity injection of USD 250,000.
• A new Foreign Investment Company (PMA) cannot be formed for the sole purpose of acquiring a single residential property.
• The law also stipulates that a Hak Pakai title – the only class of “ownership” available to foreigner purchasers - CAN ONLY be obtained from an Indonesian seller. This means that when you decide to sell, you cannot sell it to another foreigner. Moreover, the plot thickens: Since Indonesians generally aren’t interested in purchasing Hak Pakai, the question becomes: Whom are you going to sell your property to? And if, you leave Indonesia or die, the clock starts clicking. There is only one 1 year available to dispose of your property or the government will do it for you at an indeterminate price.

Those considering buying a villa as an investment should consider that a Hak Pakai property held by a foreign national cannot in principle be rented out. The government grants foreigners the Hak Pakai facility for “a single residential property” to provide housing to the subject purchaser. Hak Pakai properties held by foreigners cannot therefore be legally subleased and cannot obtain a Pondok Wisata license that can only be issued to an Indonesian citizen.

Sadly, the article in The Australian smacks more of being an advertorial parading as news presented by Bali-based realtors than anything resembling a factual news report on the possible pitfalls of foreign nationals trying to buy property in Bali.