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The approval of the new Insurance Act by the outgoing House of Representatives ("DPR") on 23 September 2014, turned out to be less contentious than had originally been expected, with the Government managing to dissuade the DPR from imposing retroactive statutory ownership limitations in a sector where foreign investment and expertise has traditionally played a key role.
Up to one month before the enactment of the legislation, it had been expected that the DPR would cap foreign ownership in the insurance industry at 49%, much lower than the current cap of 80%. Having a lower cap of 49% would prevent new foreign entrants from acquiring controlling interests, and would at the same time require existing foreign-owned insurance firms to divest stakes to satisfy the 49% cap. Should the new cap have been approved, it would have caused a major shake-up in the Indonesian insurance industry, which continues to be dominated by joint ventures backed by international firms.
The fact that the DPR refrained from imposing an inflexible statutory cap on foreign ownership in the sector can only be welcomed as it allows the government to sit back and carefully evaluate what ownership limits are (or are not) desirable, having regard to all the circumstances and exigencies of the industry.
While many of the provisions of the Act are similar to those of the 1992 Act or were incorporated in government regulations, it nevertheless provides a more solid and comprehensive statutory framework for the development of the Indonesian insurance industry. It tightens up capitalization requirements and closes off various loopholes that could serve to undermine the stability of the industry. It also provides for the hiving off of sharia-compliant insurers from their conventional parents and imposes higher capital requirements on the Islamic sector. The Act also affords greater protection of policy holders and increases the size of fines.
The Government, through Government Regulation No 77 of 2014 ("GR 77"), has issued a third amendment to Government Regulation No 23 of 2010 on Commercial Mineral and Coal Mining. GR 77 came into operation on 14 October 2014.
The amendments are aimed at: (i) ensuring greater business certainty for holders of Mining Licenses and Special Mining Licenses (IUP and IUPK) issued in the domestic investment framework; (ii) rearranging the Indonesian shareholding requirements in the foreign direct investment ("FDI") framework; and (iii) providing optimum benefits to the State and business certainty to holders of Contracts of Work and Coal Contracts of Work.
With respect to the first objective (ensuring greater business certainty for holders IUP and IUPK issued in the domestic investment framework), GR 77/2014 stipulates shareholding composition rules during the exploration and production operation stages of mining operations. In terms of rearranging the Indonesian shareholding requirements in the FDI framework, the Regulation sets out revised divestment obligations based on stipulated timeframes and prescribed mechanisms. There are also instances where licensees are exempted from the divestment obligation. In so far as the third objective is concerned, GR 77/2014 regulates divestment obligations, area coverage and continuity of operations subsequent to the termination of Contracts.
The Plantation Act 2014 ("Act"), passed by a plenary session of the House of Representatives ("DPR") on 29 September 2014, has received a generally warm welcome from both social commentators and the industry. For the former, the Act provides better protection to smallholders and indigenous communities, while for the latter relief is the order of the day after the threat of a retroactive foreign ownership cap of 30% evaporated just ten days before the Act was passed.
Restrictions on foreign direct investment in Indonesia are set out in the Negative Investment List ("NIL", the latest version of which was issued and entered into effect on 24 April 2014. In the case of estate agriculture, the NIL provides that 95 percent foreign ownership is permitted. The Negative List system is flexible as the list can be amended by Presidential Regulation. However, the DPR-initiated Plantation Bill originally capped foreign ownership in the sector at a maximum of 30%, effective retroactively. The expressed intention was to open up the sector to smaller local players. As this cap was set out in the legislation, it would have been very difficult to amend it (unlike in the case of a Presidential Regulation).
When the news of the 30% cap emerged, it came as something of a bombshell, especially given the government's stated goal of increasing palm oil output by a third to 40 million tonnes by 2020. Furthermore, the industry claimed that it had been excluded from the deliberations on the Bill.
Under pressure from the Government, the House special committee deliberating the Bill eventually relented by dropping the 30% cap. Thus, the Act as passed adopts a middle road, with specific foreign ownership caps for each crop to be subsequently determined by Government Regulations, having regard to the type of crop, economies of scale, and both the national interest and the interests of Indonesian planters (Article 95). Such Government Regulations must be issued within two years from the date of the legislation’s promulgation. Until such time as it is issued, the plantation sector rules in the NIL will continue in effect.
For existing foreign investors in the sector, the news is even better as their current arrangements are grandfathered until the expiry of their HGU (Hak Guna Usaha) leasehold titles (after which time they must bring themselves into line with the Act's provisions). By contrast, existing domestic investors that do not possess a Commercial Plantation License (Izin Usaha Perkebunan) must obtain one within one year of the promulgation of the Act, while those that already possess such a license must harmonize their operations with the Act's provisions within five years.
The Act also liberalizes the rules governing the acquisition of existing plantations by foreign investors. Whereas under the Plantation Act 2004 this could only be done with the consent of the Minister in the case of plantation land that had been left idle or where the concessionaire was insolvent, it is now possible in all circumstances with the approval of the Minister, having regard to the national interest.
The Constitutional Court recently handed down its decision ("Decision") on a challenge to the constitutionality of certain provisions of the State Finances Act 2003 and the State Audit Board Act 2006. In its judgment, the Court held that public assets vested in state or local government enterprises remain, subject to the normal state budgetary and accountability rules, including auditing by the country's national audit board ("BPK").
The petitioners had argued that a state enterprise, particularly one that is semi-privatized, becomes a separate legal person as soon as its deed of incorporation is drawn before the notary, in accordance with normal company law principles. At that point in time, all of the enterprise's assets, irrespective of whether they are contributed by the state or any other shareholder, become the assets and property of the enterprise.
However, the Court did not see it that way, holding instead that all state enterprises (whatever their shareholding composition) are direct extensions of the state, and that the vesting of state assets in a state enterprise does not transfer title to the enterprise from the state nor sever the link between the asset and the state. Thus, state assets vested in a state enterprise remain state assets, rather than assets of the enterprise. Accordingly, the Court found that the BPK is fully entitled to conduct audits on all state enterprises, including those that are publicly listed.
Although the Court did urge the legislature to enact legislation so as to ensure that the BPK applies business principles when auditing state undertakings, it ignored the issue of separate corporate personality and corporate assets under the general principles of company law.
The Minister of Energy and Mineral Resources ("Minister") has issued a new regulation governing the purchase prices payable by state power utility PT Perusahaan Listrik Negara (Persero) ("PLN") for electricity produced by geothermal power plants and for geothermal steam that is used in generating electricity. The regulation ("New Regulation"), which was issued on 3 June 2014, entered into effect on the same date and specifically revokes Minister of Energy and Mineral Resources Regulation No. 22 of 2012.
The New Regulation requires PLN to purchase electricity generated from geothermal power plants operated by independent power producers ("IPP") holding electricity supply business licenses ("IUPTL"), and steam for the purpose of generating electricity from the holders of geothermal exploitation licenses ("IUP"). The purchase price for electricity is negotiable but must not be higher than the relevant ceiling price set out in the New Regulation. The purchase price is dependent on the area where the power plant is located and the commercial operation date ("COD"), subject to approval of the Minister. The mechanism for determining the COD is governed by the Power Purchase Agreement.
Please note that whilst the information in this Update is correct to the best of our knowledge and belief at the time of writing, it is only
intended to provide a general guide to the subject matter and should not be treated as a substitute for specific professional advice.
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