Investment Licensing under the Indonesian Omnibus Law

published on 14 December 2020 | reading time approx. 4 minutes

On 5 October 2020 the Indonesian House of Representatives approved the job creation law, which is commonly known as "Omnibus Law". The Omnibus Law has been promulgated after being signed by President Joko Widodo on 2 November. On the same date, it was also signed by the Minister of Law and Human Rights and is now effective as Law No. 11 of 2020, issued in the State Gazette of the Republic of Indonesia No. 245 of 2020. This legal instrument aims to attract investment and stimulate the economy by i.a. simplifying the licensing process and harmonizing various business related laws and regulations that are deemed to be obstructive towards foreign investments. The Omnibus Law supersedes earlier provisions on the same regulated subject matter. It governs a range of topics, e.g. employment or environmental issues, but in this article we take a look at the investment licensing mechanisms which appear of certain interest from foreign investment perspective.

     
The Investment Law of 2007 and guiding legislation remain the main reference for capital investment activities in Indonesia, but the Omnibus Law opens a broader range of sectors to foreign direct investment which were previously at least partially closed. So far, Article 12(1) of the Investment Law stated that “all business fields are open to direct investment, except for those that are declared as closed to investment or open subject to conditions.” This provision has been amended under the Omnibus Law to read as follows: “All business fields are open to direct investment, except for those that are declared as closed to investment or which constitute activities that are reserved to the central government.” Hence, the removal of the wording “open subject to conditions” can be interpreted to mean that all business activities will become either fully open or closed for capital investment, or may only be conducted by the central government. This can also be seen from the deletion of paras 4 and 5 in Art 12 of the Investment Law; esp. para 4 made reference to criteria and requirements for business fields that are closed or open with requirements, which so far was particularly done in the Negative List, which governs investment conditions and restrictions under a presidential decree. It is not yet clear whether and to what extent the amendments will lead to a removal or substantial revision of the current Negative List. The omnibus law states that further provisions regarding investment requirements shall be governed by a Presidential Regulation, which so far has not been issued. We understand from a recent statement of the Coordinating Minister for Economic Affairs that the implementing regulations are expected to be ready three months after the entry into force of the omnibus law, which would mean early February 2021. With regard to this implementing legislation it remains to be seen (i) what the future criteria of the different sectors are (possibly large-size investment, investment in labor intensive business sectors, as well as high-tech and digital-based business sectors will remain relevant), (ii) what investment requirements will be imposed by the central government for the different sectors and (iii) how foreign ownership restrictions, which are currently imposed on many sectors, e.g. distribution or transportation, will be regulated.

The Omnibus Law revises the business licensing mechanism by introducing a new concept of risk-based business. Accordingly, business activities are divided into low, medium and high risk categories. Business licensing will be processed through an electronic system. The granting of the concerned license or permission is determined by the risk level and the business scale rating. The respective assessment shall take into account aspects such as the (i) type of business activities, (ii) business location, (iv) scarcity of resources or (iv) volatility risks. The risk level and business scale rating are divided into different categories.

Low Risk business requires a Business Identification Number (NIB), which is the legal requirement for the implementation of business activities. The NIB is the proof of registration of business actors to carry out business activities and as an identity for business actors in carrying out their business activities.

Medium risk activities are further sub-divided. A medium-low risk business activity requires a NIB and a standard certification in form of a statement by business actors to fulfill business standards for their activities. Further, medium-high risk business activities require a NIB and a standard certification in form of a certificate issued by the Central or Regional Government based on the results of a compliance verification with applicable business standards. Beyond these requirements, in case medium risk activities require compliance with certain product standards, the Central Government issues a standard product certificate based on the results of the compliance standard verification that business actors must meet before carrying out the product commercialization.

High risk business requires the NIB and a license in form of the Central or Regional Government’s approval for the implementation of the envisaged business activities that must be obtained before commencement of operations. If high-risk business activities further require compliance with certain business, industrial or product standards, the aforementioned certificate issuance in line with the compliance standard verification is required as well.

It is, however, still unclear how this assessment and risk level determination will be conducted by the Government. The implementation and enforcement of this process will be incorporated in the implementing Government Regulations to be issued within three months after the entry-into-force of the Omnibus Law. We thus need to wait until early February for the implementing legislation and subsequently have to see how respective administrative practice will develop.

The Omnibus Law provides several rules for simplification of the basic requirements for Business Licensing. One is the “suitability of space utilization”, which means the suitability of a location for the intended business activity as determined in a detailed spatial plan issued by the Government. The Local Government is obliged to prepare and provide this spatial plan in digital form which should be easily accessible by the public. The Central Government is moreover obliged to integrate the plan in digital form into the electronic business licensing system. If business actors have obtained the location permit for their activity which must be in line with the spatial plan, then the business actor has to submit an application concerning the suitability to use the space for the concerned business activities through the electronic business licensing system. After obtaining the confirmation of the suitability of the activity for the respective space utilization, business actors can proceed the business licensing. We understand that the Central Government shall be authorized to cancel all approvals issued by Local Governments which do not comply with the Spatial Plan. So there seems to remain a certain procedural risk here from our initial impression.

The Central Government is obliged to supervise and provide guidance to the practical implementation of a business license. If there is a violation of the provisions in a business license, it will be subject to administrative sanctions to the owner of the Business License in the form of warnings, temporary suspension of business activities, imposition of administrative fines, in some cases even imposition of police force, and in extreme cases the revocation of license, certification or approvals.

According to the transition provisions of the omnibus law, with the entry into force of the law business licenses or sector permits that have been issued before entry into force remain valid until their expiry date. Business Licensing which is currently in the application process needs to be adjusted to the provisions of this law. This might lead to some delays with regard to the lacking implementing legislation and there is no practice yet as to how authorities will deal with this for the moment.

We will further monitor this legislative development and provide further update particularly with regard to the implementing guidelines.