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INDONESIA (DOMESTIC FIRMS): An Introduction

Contributors:
Miriam Andreta
Hans Kurniawan
Walalangi & Partners
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Chambers Global 2021: Country Overview  

Indonesia  

Authors
• Luky I. Walalangi
• Miriam Andreta
• Jeanne Elisabeth Donauw
• Hans Adiputra Kurniawan
• Andhika Indrapraja

General Updates 

As experienced by other countries, the year 2020 was a challenging year for Indonesia. Despite the challenges, however, the year also brought some notable achievements. The Indonesia Investment Coordinating Board reported that the country’s total combined realization of foreign and domestic direct investments reached IDR826.3 trillion (approximately USD58.8 billion) for the period of January–December 2020 – while for the same period the Indonesia Stock Exchange recorded there were 51 companies that listed their shares on the stock exchange, placing Indonesia as the country with the highest total number of companies going public in the ASEAN region.

In addition, the data from the Indonesia Business Competition Supervisory Commission (Komisi Pengawas Persaingan Usaha – KPPU) shows that the Indonesian M&A market in 2020 managed to continue the trend of previous years, with a stronger focus on private rather than public M&A, given the simpler regulatory frameworks and more straightforward procedures.

The country’s resilience can also be evidenced by its success in maintaining its sovereign credit rating at BBB with a stable outlook as per Fitch’s criteria.

Thriving Sectors 

In terms of household spending in 2020 following the outbreak of Covid-19, a survey by the Indonesian Statistics Agency (BPS) recorded that online shopping activities increased by over 30% in areas such as food and beverages (including ready-to-eat food), health products and cellular pre-paid vouchers. The data appears to correspond with certain business sectors that continue to remain active in the midst of the Covid-19 pandemic in 2020, which are, among others, e-commerce/marketplace, food and beverages (excluding restaurants), and health product suppliers/producers. These sectors are predicted to continue their success in 2021.

Economic Growth, Investment and Recovery Efforts

Indonesia expects to achieve economic growth at a rate of 4.5%–5% in 2021 – which will be supported, among others, by investment and government spending. To support this and to create a conducive environment for investments, several efforts (as further discussed below), including regulatory reforms, have been undertaken by the Government.

In early 2021, Indonesia started to roll out its vaccination program, targeting frontline workers followed by its productive population aged between 18 and 59 years. With the vaccination of this working-age group, which makes up around 70% of its total population, the Government expects people will be able to resume economic activities such as spending and production, once it is able to restrain the Covid-19 outbreak, which is estimated to be as early as September 2021.

Key Regulatory Updates and Other Updates 

1. In November 2020, Indonesia’s President signed the ‘Job Creation Law’, also known as the ‘Omnibus Law’, with the aim of providing a solution to the overlapping and contradictory existing laws and regulations which often cause confusion and delays to businesses in implementing their investment plans. The Omnibus Law serves as a ‘super-integrated’ regulation to harmonize inconsistencies between numerous existing regulations across the country, at both the central and the regional levels, and to cut the bureaucratic red tape in order to constantly enhance transparency in Indonesia.

The Omnibus Law impacts nearly 80 existing laws, with specific details and guidelines to be further set out in the relevant implementing regulations but excluding sectoral laws and regulations on capital markets, non-bank financial institutions, electronic information and transactions, and security interests.

Some of the key highlighted provisions under the Omnibus Law are as follows:

– Relaxation of Business Sectors 

The Omnibus Law significantly amends the prevailing investment-related regulations, including by reducing the list of business sectors fully closed to investment from previously 20 to only six business sectors. Among the business sectors that have been taken out from the list are production of alcoholic beverages, operation of land transportation terminals, provision of air navigation services, and operation of monitoring stations for radio-frequency spectrum and satellite orbits. Further implementing regulations are expected to be issued in the first quarter of 2021.

– Licensing Reforms 

The Omnibus Law puts in place a significant reform in the business licensing procedures by introducing a shift in paradigm from the conventional license-based approach, in which businesses were required to obtain multiple permits, to a risk-based approach, in which businesses only need to obtain the ‘Business Authorization’ (Perizinan Berusaha) according to the risk assessment levels, thus causing the entire process to become less time-consuming and more cost-efficient.

– Tax Facilities 

Companies located in special economic zones are eligible to apply for certain tax holidays, tax allowances, and exemption from import duty requirements. The Government is also planning to set out priority sectors comprising over 200 business sectors (mostly in manufacturing) that may enjoy certain fiscal and non-fiscal incentives.

– Employment Reforms 

Indonesia’s previous employment regime on severance pay could be considered as highly rigid and protective to employees compared with other jurisdictions. It was therefore common that business owners often avoided formal hiring due to the expense of sacking underperforming employees. The Omnibus Law is aimed at improving the investment climate and loosening the rigid rules on severance pay. In addition, the law also brought some other key reforms, such as a simplified permit process for foreign experts, and more flexible working hours to allow part-time workers.

– Land policy reform 

Through the Omnibus Law, the Government is introducing new relaxation and greater convenience in land-related matters, including by: (i) allowing certain qualified foreigners to own strata-title units built upon land with Right to Build (Hak Guna Bangunan – HGB) located in specific areas to be designated by the implementing regulation of the Omnibus Law, (ii) mandating the formation of a land bank board (badan bank tanah) with the primary duty to manage and distribute land, (iii) recognizing land titles for space below the land surface, and (iv) allowing the granting of an initial validity period and an advance extension and/or renewal period for an HGB title used for apartments/flats (rumah susun), which in effect should significantly increase the bankability of the land.

2. Indonesia’s first Sovereign Wealth Fund (SWF) was created not long after the passing of the Omnibus Law. The purpose of its creation is to help the Government raise money from foreign investment partners to finance Indonesia’s strategic infrastructure projects. A number of countries, such as Japan, have already expressed their interest in cooperating with the Indonesian SWF.

3. The Government has released a number of regulations to provide more flexibility and to support businesses in response to the Covid-19 pandemic, including (among others) those relating to:

– Use of digital facilities, including videoconferencing, to handle existing and new antitrust cases, which aim to help the KPPU in accelerating antitrust proceedings and assessment of merger notifications.

– Implementation of fit and proper tests for primary parties of non-bank financial institutions through videoconference facilities.

– Implementation of publicly listed companies’ virtual general meeting of shareholders (e-GMS), including by allowing shareholders to grant their respective proxies an electronic power of attorney to attend physical GMS (e-proxy).

– Implementation of registration, assignment, rectification, amendment and deregistration of mortgages by utilizing an electronic system (e-mortgage).

4. The Government is also planning to issue a personal data protection law and has conducted public discussions to discuss the draft law. The law, once issued, would be expected to help protect the public amidst the significant growth of cross-border e-commerce transactions with Indonesian consumers.

With the recovery efforts and reforms, including those discussed above, being underway, Indonesia expects its economy to be able to rebound this year. This is something that we closely monitor.