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10/12/2019

Concrete Development in Building Sector: Problematic Regulation That Threatened Licenses of Foreign-owned Construction Companies Revoked After Widespread Criticism

 

A. INTRODUCTION

 

In an ABNR legal update published on 10 October 2019 (click here), we reported how the Public Works & Housing Ministry had agreed to review Regulation No. 09/PRT/M/2019 (the “Regulation”,[1] effective 13 June 2019) following widespread criticism by construction industry participants. The Regulation, which was issued pursuant to the Construction Services Law,[2]  set out the requirements and procedures for the licensing of foreign construction services providers, consisting of (a) the Indonesian representative offices of foreign construction companies, and (b) foreign invested construction companies established in Indonesia (“Construction PMA[3]).

 

The Ministry has remained true to its word, with the Regulation being recently revoked by Minister of Public Works & Housing Regulation No. 17/PRT/M/2019 (the “Revoking Regulation,”[4] effective 18 November 2019).

 

Before discussing the latest developments, it may be useful first to recall the principal problem that the Regulation gave rise to.

 

B. KEY OBJECTION TO THE REGULATION

 

In essence, the main objection to the Regulation was that it failed to grandfather the business licenses of Construction PMAs that were established prior to 2007, when the construction sector was 100% open to foreign investment (meaning that a Construction PMA could be up to 100% foreign owned). By contrast, under the current iteration of the Negative Investment List,[5] as set out in Presidential Regulation No. 44 of 2016,[6] a Construction PMA may be a maximum of (i) 67% foreign-owned by a non-ASEAN investor, or (ii) 70% foreign-owned by an ASEAN investor.

 

The lack of grandfathering in the Regulation meant that if a pre-2007 Construction PMA wished to renew their business license upon its expiry, they would have to satisfy the local ownership requirements (as described above), which would mean that a 100% foreign-owned Construction PMA would have to divest 33% or 30% of their share capital, as the case may be, to local investors.

 

To make things even more  difficult for the divesting Construction PMA, the Regulation provided that shares could only be divested to local construction companies that were classified as large undertakings, and that such construction companies had to focus on the same business lines as the divesting Construction PMA.

 

A failure by a pre-2007 Construction PMA to comply with the divestment requirements under the Regulation would ultimately result in their business licenses not being renewed.

 

C. LATEST DEVELOPMENTS

 

The Revoking Regulation’s Article 2 provides that the licensing of foreign construction services companies shall be governed by guidelines to be prescribed by the Minister of Public Works and Housing. These guidelines have now been issued in the form of a Ministerial Circular that entered into effect on 19 November 2019. Overall, the requirements and procedures set out in the guidelines are significantly less onerous than those incorporated in the Regulation and, crucially for Construction PMAs, all mention of the divestment requirements referred to in Section B above has been omitted.

 

Acting on the Circular, the Directorate General of Construction Sector Development recently sent out a letter advising Construction PMAs to resubmit any licensing applications that experienced difficulties as a result of the Regulation.  

 

D. ABNR COMMENTARY

 

The Regulation is a classic example of pretty much everything that can go wrong with subordinate legislation. Not only did it conflict was the previous government’s policy of facilitating and promoting foreign direct investment (FDI), but it also clearly contravened at least two higher legal instruments, namely, the Investment Law,[7] Article 37(4) of which expressly provides that business licenses granted prior to the coming into effect of the Investment Law may continue to be extended, and Presidential Regulation No. 44 of 2016 on the Negative Investment List (NIV), Article 13 of which stipulates that the NIV does not apply to investments that were approved prior to its issuance.

 

As we pointed out in our earlier legal update on the Regulation, many found it difficult to comprehend what could possibly have prompted the previous Minister of Public Works & Housing to eliminate grandfathering for Construction PMAs established prior to 2007, given the controversy and uncertainty, not to mention injustice, that this would assuredly give rise to. The most charitable explanation would be that it was simply an oversight by the drafters. However, given the long-standing emphasis on the protection of existing investor rights under Indonesia’s FDI regime, it is not easy to envisage how the grandfathering issue could have been overlooked.

 

On a broader note, the Circular states that it will remain in effect until the enactment of the proposed omnibus law[8] to eliminate statutory obstacles to investment and job creation. As both the Regulation and the Circular were issued to give effect to certain provisions of the Construction Services Law, this reference to the mooted omnibus law may indicate that at least some provisions of the Construction Services Law are being lined up for repeal, notwithstanding that the legislation has only been on the statute book for less than three years.

 

Whatever the case, the revocation of the Regulation is most encouraging, demonstrating as it does a refreshing level of responsiveness to industry concerns. Indeed, it is real and tangible action such as this that will truly demonstrate the new government’s economic-reform credentials to investors.

 

By Agus Ahadi Deradjat (aderadjat@abnrlaw.com) and Adri Dharma (adharma@abnrlaw.com)

 

 

[1] Minister of Public Works and Housing Regulation No. 09/PRT/M/2019 on Guidelines for the Licensing of Foreign Construction Services Providers (Peraturan Menteri Pekerjaan Umum dan Perumahan Rakyat No. 09/PRT/M/2019 Tentang Pedoman Pelayanan Perizinan Badan Usaha Jasa Konstruksi Asing).

[2] Law No. 2 of 2017 on Construction Services (Undang-undang No. 2 Tahun 2017 Tentang Jasa Konstruksi)

[3] Companies that are incorporated in Indonesia under the country’s foreign direct investment regime (foreign-invested companies) are generally referred to by the Indonesian abbreviation “PMA” (“perusahaan modal asing”).

[4] Minister of Public Works and Housing Regulation No. 17/PRT/M/2019 on the Revocation of Regulation No. 09/PRT/M/2019 on Guidelines for the Licensing of Foreign Construction Services Providers (Peraturan Menteri Pekerjaan Umum dan Perumahan Rakyat No. 17/PRT/M/2019 Tentang Pencabutan Peraturan Menteri Pekerjaan Umum dan Perumahan Rakyat No. 09/PRT/M/2019 Tentang Pedoman Pelayanan Perizinan Badan Usaha Jasa Konstruksi Asing).

[5] A list of business lines that are either fully closed, fully open or partially open to investment.

[6] Presidential Regulation No. 44 of 2016 on Business Lines that are Closed or Conditionally Open to Investment (Peraturan Presiden Nomor 44 Tahun 2016 Tentang Daftar Bidang Usaha yang Tertutup dan Bidang Usaha yang Terbuka dengan Persyaratan di Bidang Penanaman Modal)

[7] Law No. 25 of 2007 on Investment (Undang-undang No. 25 Tahun 2007 Tentang Penanaman Modal)

[8] An “omnibus law” is a single statute that addresses a range of disparate or unrelated issues. The word “omnibus” means “everything” in Latin.

 

 

This ABNR News and its contents are intended solely to provide a general overview, for informational purposes, of selected recent developments in Indonesian law. They do not constitute legal advice and should not be relied upon as such. Accordingly, ABNR accepts no liability of any kind in respect of any statement, opinion, view, error, or omission that may be contained in this legal update. In all circumstances, you are strongly advised to consult a licensed Indonesian legal practitioner before taking any action that could adversely affect your rights and obligations under Indonesian law.