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Indonesia in Focus July 2017


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Summary: Welcome to our second 2017 edition of BLP's quarterly update on legal developments in Indonesia. We have distilled the latest Indonesia news into this 'speed read'. Please get in touch for more information.

1. Does the criminal investigation of PT Duta Graha Indah herald a change of focus for the KPK?

The KPK (Komisi Pemberantasan Korupsi), Indonesia’s Corruption Eradication Commission, has recently named publicly listed construction company PT Duta Graha Indah in a corruption related criminal investigation. The investigation relates to allegations of graft for the construction between 2009 and 2010 of the Udayana University hospital in Bali.

Since its establishment in 2002, the KPK has focused its efforts on investigating and prosecuting corrupt acts in government authorities. Nearly all previous prosecutions have stemmed from public sector recipients of bribes. Despite a range of different types of investigations, the prosecution of individuals from the private sector has been extremely limited and private sector employees are often interviewed as witnesses only, rather than suspects.

This all now appears to be changing.

Read our article which summarises the key changes and KPK's future strategy.

2. Anticipated easing of foreign ownership restrictions set to boost airport development

Local media sources report that Indonesia will soon revise its “Negative List”, which stipulates to what degree certain sectors may be closed for foreign investment. The revisions are likely to be decided in a technical meeting of the Coordinating Ministry for Economic Affairs, led by Minister Darmin Nasution.

The Ministry has suggested that the FDI parameters around the transportation and pharmaceutical sectors may be favourably revised. Further, Transportation Minister Budi Karya Sumadi has intimated that he wishes to discuss the potential for increased foreign ownership of airport management companies at the upcoming meeting, with a view to encouraging further foreign investment in the sector.

Read our article how this would impact airport development in Indonesia.

3. How to harness the power of the sun: a first mover advantage for Indonesia’s solar PV industry?

Indonesia’s target of 6.5 GW of solar in a 45 GW renewable portfolio by 2025 has been frustrated by the government’s decision to cap the price of support for solar to the average cost of regional generation, with reference to all sources of generation including coal.

This article sets out our take on the new pricing scheme and a patchwork of other 2017 regulations, including Regulation No.42 of 2017 that was issued by ESDM on 14 July 2017.

Without a robust local supply chain, from panels to inverters, the new feed-in-tariff caps stretch the economics of many potential PV projects. Defying the critics, however, recent solar tenders have enjoyed a significant amount of preliminary interest. It remains to be seen if interest will be limited to the eastern islands and other less developed regions where feed-in tariffs may be capped at a higher level due to use of diesel generators in those regions.

Our article discusses the new pricing scheme and other 2017 regulations impacting Indonesia’s solar PV industry.

4. Inflation rate at risk due to subsidies cut

Indonesia’s inflation rate is at risk of rising above the central bank’s upper limit inflation target of 5%, as President Joko Widodo aims to curtail electricity subsidies. The government has raised electricity tariffs a number of times already this year with the objective of eliminating the existing (highly criticised) electricity subsidies. While the move is undoubtedly a positive one for the power industry – it should in theory improve the credit position of the state offtaker PLN - the impact of these price hikes on consumers could threaten the recovering economy.

Read our summary on the inflation over the past two months

5. Consolidation of Indonesia’s mining licensing regime

Regulation No. 34 of 2017 by the Ministry of Energy and Mineral Resources on Licensing within the Minerals and Coal Mining Sector unifies a diverse patchwork of several former regulations relating to six types of coal and mineral business licenses for Business Entities, Cooperatives and Individuals.

The new regulation, which covers IUJP mining services licenses as well as IUP/IUPKs, aims to simplify the existing licencing regime and reduce inconsistencies between the previous regulations. Accordingly, it should be welcomed as reinforcing the Indonesian government’s position on certain aspects of mining permitting, as described in this article.

Read more for the updates on the mining license regime

6. Update on Chinese investment into Indonesia

Chinese investment in Indonesia was strongly encouraged in the One Belt, One Road Conference, on which BLP reported in the December 2016 edition of 'Indonesia in Focus'.

Undoubtedly, Chinese investment in Indonesia has the potential to reach new heights. However, there are a number of challenges. First, it is more difficult to acquire land for infrastructure projects in Indonesia than in China. Multiple approvals from local and national government departments, which are often in conflict, are required. This is a real problem: “If there’s no land, there’s no business,” as senior Chinese diplomat Zhao Baige opined. Other barriers include unclear government policies, and cultural sensitivities. Although Indonesia’s investment-coordinating board (BKPM) recorded $2.7 billion of pledges of Chinese direct investment last year, Bank Indonesia said that only half of that was realised.

Please see here for more updates on Chinese investment into Indonesia.

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