Construction Regulatory Regime - Indonesia

In recent years, Indonesian construction law has gone through many changes and most recently, it has been impacted by the enactment of Omnibus Law which is one of the most significant regulatory reforms since Indonesia’s independence. In this article, we give a short description of the regulatory regime as it now applies to the construction industry and highlight the issues which foreign contractors need to know when working in Indonesia.

2017 Construction Law

Law No. 2 of 2017 on Construction Services (the "2017 Construction Law") was issued with the fundamental purpose of improving the Indonesian construction regulatory framework to reflect the dynamics and modern developments in construction service businesses in Indonesia. However, in reality, the 2017 Construction Law brought about few meaningful reforms to the heavily regulated construction industry beyond the four key points summarised below:

(i) Foreign investment in the construction industry

To participate in the Indonesian construction industry, foreign entities could only do so through either a foreign construction representative office or an Indonesian-incorporated joint-venture company. The 2017 Construction Law maintained this requirement, and these foreign construction representative offices and foreign-owned Indonesian-incorporated joint venture companies are still only permitted to be involved in projects considered to be high-risk, using high or advanced technology, and involving high cost.

(ii) Construction contracts

In addition to the existing regulations requiring the inclusion of prescribed minimum provisions and requirements in construction contracts, the 2017 Construction Law expressly adds that the Indonesian language version of a bilingual construction services contract must prevail in the event of any inconsistency with the English language version.

(iii) Classification of Construction Services Business

The 2017 Construction Law introduced "integrated construction services" as a new category of construction services business in addition to the existing categories, namely “construction consultation services” and "construction performance services".

(iv) No criminal sanctions

There are no criminal sanctions under the 2017 Construction Law, unlike in the previous law, and there is a new emphasis on resolving disputes or breaches amicably or through the application of civil and administrative sanctions in a way intended to limit the interference with (or suspension of) the delivery of construction services in Indonesia.

Omnibus Law 2020

Indonesia’s 2020 Job Creation Law (generally known as the "Omnibus Law"), introduced changes to a range of areas including its laws on investment, employment, immigration, environmental standards, business licensing and building permits. Reforms to the construction industry under the Omnibus Law include the following:

(i) Construction industry licensing

With the simplification of business licensing requirements, the Omnibus Law now requires construction companies to only obtain a single business licence from the Central Government (through the Online Single Submission system) instead of a separate construction services business licence and construction representative office licence, to name only two.

(ii) Procurement of construction services

The tender/selection/appointment procurement process which previously applied to the appointment of construction companies to handle projects financed with State funds has been extended and will now apply to the appointment of construction companies that are affiliates of the building owner for public services projects.

New Investment List

The Omnibus Law has also revised Indonesia’s Investment Law. Following the enactment of the Omnibus Law, the Indonesian Government published its long-awaited investment list under Presidential Regulation No. 10 of 2021 regarding Investment Sectors (the "New Investment List"). The New Investment List came into effect on 4 March 2021, and replaced Presidential Regulation No. 44 of 2016 (the "2016 Negative List"). Some important changes introduced to foreign direct investment principles related to the construction sector are as follows:

• The foreign ownership limitation of 67 percent (or 70 percent for investors from ASEAN countries) for construction services using high-level technology and/or considered high risk under the 2016 Negative List is now removed. This is also applicable to construction consultancy services and to construction implementation services. However, the 2017 Construction Law as amended by the Omnibus Law (the "Construction Services Law") continues to require foreign investors to establish an Indonesian construction service company through a joint venture with a locally owned construction service company. The Construction Services Law does not prescribe the minimum shareholding which must be held by locally owned construction service companies. As a result, it appears that (unless the Construction Services Law is further amended) locally owned construction service companies must continue to have at least some shareholding in foreign-owned construction service companies but no specified minimum is required. This could be very important for foreign contractors.
• The construction of buildings and installations using simple and/or medium technology must be undertaken in partnership with local cooperatives, micro, small and medium enterprises (CMSMEs). The New Investment List does not provide any (i) definition of simple and/or medium technology and (ii) guidance to foreign investors on how the requirement for a partnership with CMSMEs may be satisfied. It is expected that the Indonesian Government will continue to apply its current interpretation whereby the required partnership arrangement may be satisfied in the form of a contractual profit sharing, operational cooperation (kerja sama operasional), outsourcing, distribution or subcontracting arrangement.

Conclusion

Indonesian construction law has changed a great deal in recent years, and if foreign companies wish to succeed in the market it is vital to stay up to date. New opportunities now exist with the possibility of increased foreign ownership and the simplification of business licensing requirements; but there continue to be significant differences between Indonesia and other markets, such as the requirement for bilingual contracts in which the Indonesian language version must prevail. Knowing the up-to-date regulatory position will be key to finding opportunities and to exploiting them successfully.