Indonesia’s Foreign Investment Regime Liberalised By New OSS System.
Legal News & Analysis - Asia Pacific - Indonesia - FDI
3 August, 2018
In its efforts to encourage and accelerate investment, the Indonesian government has issued a set of regulations reforming existing business licence regulations and establishing an online one-stop business licensing system known as Online Single Submission (“OSS”).
We believe this represents a fundamental reform with a potentially far-reaching impact on Indonesia’s foreign investment regime. While online (paperless) registration already existed in Indonesia, it required Indonesian Investment Coordinating Board (“BKPM”) officials to review business licence applications. In contrast, the OSS system is a fully online system no longer requiring officials to issue the key licences (i.e., NIB and Business Licence – see below).
Business actors, including foreign investors, will need to take responsibility for arranging their own business licensing in good faith, at the risk of later being found non-compliant by BKPM and/or the relevant ministries once the business has begun operating.
In this bulletin, we consider the potential consequences of Presidential Regulation No. 91 of 2017 regarding Acceleration of Business Implementation (“PR 91”) and Government Regulation No. 24 of 2018 regarding the Electronic Integrated Business Licensing Service (“GR 24”) and their implementing regulations, summarise the key changes and potential impacts, and highlight several areas needing attention.
Business licensing reform
GR 24 contains a comprehensive list of licences, permits and regulatory recommendations for various sectors – including electricity, healthcare, food and drugs, financial services, trade, and employment – which are classified as either a “Business Licence” or a “Commercial/Operational Licence” and thus covered by the OSS system. GR 24 also revokes certain licences and combines others to minimise duplication, following a review of all existing business licences by relevant governmental ministries and institutions. It appears that this list will be amended from time to time since ministries and institutions have been asked to further review their existing regulations and policies in order to support business licensing reform.
Both BKPM and the Ministry of Trade (“MOT”) recently issued implementing regulations for GR 24. Various other government ministries and institutions are expected to issue their own implementing regulations in the coming months in order to align with GR 24.
Under BKPM Regulation No. 6 of 2018 regarding Guidelines and Procedures on Investment Licensing and Facilities (“BKPM Reg 6”), a number of licences are expressly excluded from the OSS system, with BKPM retaining responsibility for issuing them.
A list of these licences can be found in Article 4(2) of BKPM Reg 6 which is available on the BKPM website (Indonesian language). BKPM’s one-door integrated services will continue to handle certain licences in the energy, natural resources and real estate sectors, and several others, using its own online SPIPISE system. BKPM Reg 6 also revokes the controversial BKPM Regulation No. 13 of 2017 regarding Guidelines and Procedures on Investment Licensing and Facilities, covered in our January 2018 bulletin.
The MOT has issued MOT Regulation No. 77 of 2018 regarding Integrated Business Licensing Online Services in the Trading Sectors (“MOT Reg 77”) which principally revokes several business licences, including those for business management consulting, machinery leasing services, and warehousing, while combining other licences.
New OSS system
The new OSS system was launched on 9 July 2018 and is currently run by the Coordinating Ministry for Economic Affairs (“CMEA”). The OSS system is intended to unify the licensing system in Indonesia through an online one-stop service and expedite the licensing process. The Chairman of BKPM stated in a press release dated 29 June 2018 that BKPM will likely take over the OSS system from CMEA in November 2018.
When establishing a new business, including a foreign investment (PMA) company, a business actor must now register on the OSS system and apply for a Business Licence and, if applicable, a Commercial/Operational Licence, before commencing commercial operations.
Key changes and impacts
- Single registration number: The OSS system introduces a new Business Registration Number (Nomor Induk Berusaha or “NIB”) which also functions as a Company Registration Certificate (Tanda Daftar Perusahaan or “TDP”), Importer Identification Number (Angka Pengenal Importir or “API”), and customs access rights. Business actors with an NIB are automatically registered with the national healthcare and employment social security schemes (“BPJS”). For PMA companies, the NIB appears to replace the previous “In-Principle” licences issued by BKPM. The NIB is needed to process the Business Licence and Commercial/Operational Licences.
- Simplified and expedited business establishment: Based on our recent experience, the issuance of an NIB and a Business Licence for a straightforward licence application now take only a day, with no officials involved in issuing such licences. Under the new system, business actors need two types of licence to conduct business in Indonesia – a Business Licence and, if applicable, a Commercial/Operational Licence. The Business Licence and Commercial/Operational Licence will become effective and the business actor may commence commercial operations after it has fulfilled its commitments and paid any applicable licensing fees.
- Business Licence: The Business Licence will be issued by the OSS agency automatically. Once it has been issued, the business actor must commit to obtaining all applicable licences, namely location permit, water location permit, environmental permit, and/or construction permit (Izin Mendirikan Bangunan or “IMB”), as applicable.
- Commercial/Operational Licence: The OSS agency will issue a Commercial/Operational Licence based on a commitment made by the business actor to satisfy applicable standards, certifications and licences and/or to register goods and services in accordance with the type of product or service being marketed by the business actor, as applicable. These licences include mandatory standards, certifications and licences, such as Indonesian National Standard (“SNI”) registration and Good Manufacturing Practice (“GMP”) certification. The ministries concerned will inform the OSS agency once these commitments have been met.
- Increased responsibility of notaries: Except in certain limited sectors retained by BKPM, notaries will in practice take over BKPM’s role in vetting foreign investment coming into Indonesia. Notaries must ensure that the line of business set out in the articles of association (“AOA”) reflects the correct Indonesian Standard Business Classification (“KBLI”) code and complies with the restrictions under the current Negative Investment List. Previously, BKPM would grant an “In-Principle” licence, but this licence is no longer needed under the OSS system. This puts the onus firmly on the notaries who process establishment of the new business to make the right call. So, foreign investors will now need to carefully select notaries based on the notaries’ good commercial sense.
- Supervision by OSS agency: The OSS system is intended to be a unified online licensing system, overseen by the OSS agency. BKPM Reg 6 defines the OSS agency as BKPM. The various ministries, institutions and regional governments will continue to supervise business actors to ensure they meet their commitments, imposing sanctions for non-compliance through the OSS agency. The OSS agency may impose administrative sanctions ranging from written warnings to temporary business suspension, fines and business licence revocation if the business actor does not meet its commitments for the Business Licence and/or Commercial/Operational Licence. The relevant ministry, institution or regional government will inform the OSS agency which sanctions it wishes to impose on a noncompliant business actor, and the OSS agency will then impose those sanctions through the OSS system.
- Increased regulatory risk due to post-establishment audits: Under the previous system, foreign investors had to complete a detailed application form for an In-Principle Licence in order to convince BKPM that they were establishing a legitimate business bringing value to the Indonesian economy and people – for instance, by creating jobs or transferring technology. While the OSS system speeds up issuance of business licences, it increases regulatory risk since business licences can be challenged by BKPM and/or the relevant ministry following an audit after commercial operations have commenced. It remains to be seen how these audits will be conducted in practice.
Regulatory guidance needed
We have identified below some of the key issues for foreign investors that will require clear guidance from regulators following the issuance of GR 24:
- Existing PMA companies: It remains unclear how the new OSS system will accommodate grandfathered licences under previous Negative Investment Lists, which restrict foreign investment in specified lines of business. For instance, under the current Negative Investment List (see our June 2016 bulletin), a wholesale distribution business not affiliated with manufacturing is only open to 67% foreign ownership. Previously, such a line of business was open to 100% foreign ownership but the foreign ownership level applicable to this line of business has since been the subject of numerous changes.
- Establishment of new complex businesses: Complex businesses are in a grey area where discretionary policy will be needed. It remains unclear which institution has the authority to interpret the Negative Investment List and the lines of business under the KBLI classifications. To illustrate this point, under the current Negative Investment List, “Operators of Trading Transactions Through Electronic System” (e.g., “platform-based marketplace”, “daily deals”, “price grabber”, and “online classified advertisement”) with an investment value of at least IDR100 billion are open to 100% foreign ownership, but foreign ownership for those businesses with an investment value of less than IDR100 billion is capped at 49%. We query how this will be accommodated under the OSS system.
The issuance of PR 91 by President Joko Widodo, with the aim of reforming Indonesia’s business licensing regulations and unifying its licensing system through an online one-stop service, is welcome.
Having said that, in order for the OSS system to work properly, numerous areas will require guidance from regulators and strong coordination will be needed between ministries. A central authority may well be needed to supervise the OSS system and the respective ministries to ensure alignment with GR 24. It is currently unclear whether CMEA will assume this role while BKPM continues to interface with foreign investors.
As various government ministries issue their implementing regulations over the next few months, we suspect that inconsistencies between regulations may arise. For example, we note that MOT Reg 77 revokes business licences for business management consultancy, machinery leasing and warehousing, while these licences are all still recognised by GR 24.
It is also unclear whether BKPM or another regulatory authority will guide investors on the grey areas where policy discretion is needed. The verbal guidance commonly provided by regulators up to now may be of limited use in case of a post-establishment audit.
The fully online system also imposes an onerous burden on notaries, who may respond by attempting to shift the responsibility to the foreign investors, as they have done in the past to deal with increased regulatory responsibility. They could, for instance, ask investors to sign declarations on compliance of their lines of business with applicable laws.
We will continue to monitor and report on developments as new regulations are issued by various ministries.
For further information, please contact:
David Dawborn, Partner, Herbert Smith Freehills