Issuu on Google+

12


About BritCham  Formally established in May 1999.  Highly representative Board of 20 including from KADIN, UKTI and the British Council.  950 nominees representing more than 230 entities, predominantly, but not exclusively with British interests.  A 7-person executive office managing over 100 events per annum including networking, sector groups, Young Professionals, Professional Women, CSR activities, briefings, speaker breakfasts and lunches.  Actively representing Britain in South East Asia (BiSEA) – founding conference member.  Actively promoting Indonesia at road shows in the UK and throughout Asia.

2012 Landmarks  The establishment of the RBS Smart Office at BritCham as a ‘Touchdown’ mentoring facility for British SME’s, in collaboration with UK Asia Business Council (UKABC).  Collaborative partner with other Chambers and the EU Commission for the European Indonesia Business Dialogue (EIBD 2012).  Updated Sector Position Papers.  An Ease of Doing Business in Indonesia document.  A comprehensive review of the impact of the UK Anti Bribery & Corruption Act.  The launch of today’s BritCham Business Confidence Index.


12 1

Event Calender 2013.............................................................................................2 The Ease of Doing Business – Creating a new Perception for Investors..................5 The UK Anti Bribery Act........................................................................................10 UK Anti Bribery – Comparative Study........................................................16 Best Practice Recommendations....................................................................20 Sectors 1. Food, Forestry, Fisheries and Agriculture...................................................24 2. Human Resources.......................................................................................34 3. Infrastructure.............................................................................................39 4. Energy Mining....................................................................................................55 Oil & Gas & Power..................................................................................57 5.Environmental Issues..................................................................................62

BritCham Business & Sector Positions 2012/2013

SECTOROF1 CONTENTS TABLE : FOOD & BEVERAGES

TABLE OF CONTENTS


EVENTS CALENDER : 2013

2

Event Calender - 2013 JANUARY

FEBRUARY

MARCH

APRIL

MAY

JUNE

*dates provisional

Signature Events

Fixed Events

BritCham Business & Sector Positions 2012/2013

Industry Updates

Talking Trends


3

Focus on People

AUGUST

SEPTEMBER

Focus on Finance

OCTOBER

NOVEMBER DECEMBER

Misc. Business Services

BritCham Business & Sector Positions 2012/2013

EVENTS CALENDER : 2013

JULY


The Ease of Doing Business


5

Indonesia’s Attraction for Foreign Investors Indonesia possesses a number of significant attractions for foreign direct investment, whether British in origin or from elsewhere. These include: • Favourable demographics; a large young energetic work force in need of employment plus a rapidly emerging middle class with rising disposable incomes. • Abundant natural resources in high demand from the global economy including oil and natural gas, hard rock minerals, fertile agricultural land, exploitable forests and fisheries. • Stable politics including smooth changes of government at local and national level after democratic elections. • Highly regarded macroeconomic management for more than a decade since the Asian economic/financial crisis • Sustained economic growth especially since the onset of the global crisis and recession since 2008.

British Investment in Indonesia Britain has been a major investor in Indonesia since before independence. Some British companies in Indonesia can trace their origins to more than a century ago. Few other foreign countries have had a longer history of investing in Indonesia than Britain. During even some of the most challenging years of Indonesia’s history, British companies have maintained their commitment. Cumulatively, Britain is among the very largest foreign investors in Indonesia and has stakes across a wide range of sectors including oil and natural gas exploration and production; banking, insurance and financial services; agribusiness; manufacturing; aerospace; consumer goods; large scale retail; hotels and tourism; power generation; plantations; motor vehicle production and real estate development. Many of these companies are long established and very successful. Currently the interest of UK companies in investing in Indonesia is as high as it has been since the mid 1990’s. BritCham’s latest Business Confidence Index Survey (BCIS) has confirmed that the business outlook of British companies in Indonesia is very positive. The launch this year of the UKASEAN Business Council is a reflection of the level of enthusiasm for investing in the region and especially in Indonesia.

Challenges as well as Opportunities Despite the success of long established British companies in Indonesia, others have found the market to be complex and ultimately too challenging. For many, Indonesia is not an easy country in which to do business. News of controversial legal disputes and other failures is widely and rapidly disseminated and drives negative perceptions. Red tape and excessive bureaucracy continue to undermine Indonesia’s attractiveness to foreign investors. Indonesia is perceived as especially challenging for small and medium size enterprises. SME’s have short time lines for success and limited administrative capacity to chart complex markets. The high

BritCham Business & Sector Positions 2012/2013

THE EASE OF DOING BUSINESS

The Ease of Doing Business – Creating a New Perception for Investors


THE EASE OF DOING BUSINESS

6

costs of doing business in Indonesia together with an uncertain legal environment are real barriers for new market entrants. The BKPM has been transformed to become a user friendly and efficient organisation, but regretfully such positive change is not mirrored in all areas of the bureaucracy. It is beyond the remit and the resources of the BKPM to initiate fundamental changes to the Indonesian business environment. Other agencies of government are tasked with the challenges of reducing corruption, reforming tax and legal administration and manpower law and tackling the infrastructure deficit. The importance of improvement in these areas cannot be understated and BritCham fully supports the government’s efforts. The nature and extent of these deep-seated and intractable problems however, inevitably means that significant changes will come only slowly and, in the short term, may not be readily apparent. The latest World Economic Forum’s Global Competitiveness Index indicates that Indonesia’s position is weakening. Other emerging market opportunities, both within the region and elsewhere, for some offer attractive alternatives. While Indonesia has undoubtedly been improving the business environment, it is being outpaced by some of its competitors. The time needed to accomplish tasks that may be relatively simple in other markets can still be exhausting and costly in Indonesia. They potentially divert the scarce and valuable time of senior decision-making executives from more important responsibilities. Respondents to BritCham’s BCIS survey highlighted as a key concern the enactment of the UK’s Anti Bribery Law, which creates new risks for British companies and UK nationals based in Indonesia. The new UK law is more onerous than the older US Foreign Corrupt Practices Act.

Changing Perceptions In order to maintain the high levels of investment that Indonesia needs, it is important to change perceptions to convince investors that the Indonesian government’s commitment to reform is real and unrelenting. Bona fide new foreign investors expect to be warmly welcomed and for their investments to be protected. BritCham thus wishes to advocate that the government identifies a series of ‘Quick Wins’; initiatives that are conceptually simple, relatively easy to implement and that will deliver immediate, real and measurable benefits at minimal cost. Strict timelines for the implementation of the ‘Quick Wins’ should be adhered to with the government engaging with its stakeholders transparently and in a spirit of partnership. Feedback should be encouraged and welcomed. BritCham recommends that no more than three ‘Wins’ should be selected at the outset. Once the first ‘Wins’ have been achieved, a further three may be selected and the process be adopted on an ongoing basis as a plank in the government’s reform initiatives.

Some Recommended ‘Quick Wins’ BritCham has identified the following initiatives that we believe would be much appreciated by investors. If adopted, they will also communicate an enhanced perception to a wide range of stakeholders that the government cares about and is responsive to the genuine concerns of investors. A) Streamline the issuance of permits and visas required by foreign nationals working in Indonesia

BritCham Business & Sector Positions 2012/2013


7

B) Improve procedures concerning the issuance of routine government permits and licenses as follows: • Official fees for routine permits and licenses are prominently and clearly displayed to the public in all government offices. • All routine permits and licenses must be issued according to publicly stated time limits. Failure to issue within the time limits must be based on transparent regulations and be notified to the applicant within the stated time period. A failure by a government office to issue a permit or license within defined time limits will result in the automatic issuance of the permit or license. An independent and timely appeal procedure be introduced for license and permit applications that are rejected. • The implementation of the above recommendations will provide transparency and certainty and reduce opportunities for the demanding of bribes and facilitating payments. Foreign investors’ exposure to risk of contravening domestic and foreign anti bribery laws will be much reduced. C) Introduction of e-service delivery as widely as possible in government departments as follows: • The government has to date failed to widely implement electronic service delivery. It has thus been unable to maximise the benefits from e-service delivery that includes speed, accuracy, enhanced transparency and the elimination of direct contact between the bureaucracy and citizenry. Most businesses and an ever-increasing number of individuals now have enjoyed access to the Internet. • All standard forms should be available in electronic formats.

BritCham Business & Sector Positions 2012/2013

THE EASE OF DOING BUSINESS

as follows: • The current system that requires expatriates to hold multiple permits including semi permanent resident visa (KITAS), work permit (IMTA), STM, VTT, TA.01, SKTT, SKPPS etc. is now outmoded and should be replaced by a single multi-purpose working visa issued by a one stop agency. • The total time to process such a new visa should be no more than 30 days from the submission of a complete application. • The requirement that expatriates hold a current exit/re-entry permit be discontinued as it was for Indonesian citizens several years ago. The maintaining of this requirement is discriminatory and creates a feeling of insecurity among foreign residents. It is unclear how this permit aids the control and supervision of foreigners in Indonesia. It seemingly only serves to create a costly and unnecessary administrative burden. • Driving licenses (SIM) be issued for 5 (five) years to expatriates instead of for a single year as at present. This would be in line with the rules for Indonesian citizens and mark a return to the position of several years ago. Seemingly the single year validity of a SIM provides for conformity with other documents applicable to foreigners. The single year SIM creates an unnecessary administrative burden for both the government and expatriates. A five-year SIM will generate more revenue for government at less cost. Should an expatriate exit Indonesia finally before the expiration of 5 years, there is no risk of abuse.


THE EASE OF DOING BUSINESS

8

• The processing of e-form based applications and submissions can be better controlled. Response times can be reduced and readily monitored. Target response times should be published. The monitoring of actual response times should be published on a periodic basis to convince the public of service capability improvement. • All government officials who interface with the public should have email addresses based on a uniform domain name e.g. XYX@bkpm.go.id . It is surprisingly common to see even senior government officials presenting name cards that show yahoo, gmail and other similar domains.

BritCham Business & Sector Positions 2012/2013


The UK Anti Bribery Act


THE UK ANTI BRIBERY ACT

10

The UK Anti Bribery Act Introduction The British Chamber of Commerce in Indonesia (BritCham) is supportive of the UK government’s principled stance on anti-bribery and firmly believes that corrupt business practices are not in the interests of either Britain or Indonesia. This paper sets out a number of key points: • • • • • •

General commentary relating to the new UK legislation The environment in Indonesia for BritCham members Further action to be taken by BritCham Recommended reading Disclaimer Annex A: Comparative study of the UK Bribery Act with the US Foreign Corrupt Practices Act (FCPA) • Annex B: Suggestions for Best Practice on Risk Management This Position Paper does not focus on the separate but still critically important aspect of Indonesia’s laws and regulations which combat bribery, in particular Indonesia’s Anti-Corruption Law (Law No. 31 of 1999, as amended), which all BritCham members must comply with. Rather, it focuses on the implications and effects of the UK Bribery Act 2010 (the “Act”) on British companies and individuals undertaking business in and with Indonesia as well as setting out recommendations on compliance with the Act and any possible approaches to relevant Governments that may be applicable. This Paper further takes into account the Serious Fraud Office’s (“SFO”) revised statements of policy, published on 9th October, 2012 (the “SFO Revisions”).

The UK Bribery Act On 30 March 2011 the UK Government, through the Ministry of Justice (“MOJ”), issued the guidance (the “Guidance”) for certain sections of the Act. The Act received its Royal Assent on 8 April 2010 but only came into force on 1stJuly 2011. The Guidance details, among others, procedures that relevant commercial organisations can put into place to prevent persons associated with them from engaging in acts illegal under the new legislation. What is the UK Bribery Act? The Act replaced the UK’s old and much criticised laws on bribery with a new comprehensive bribery statute. It applies to all companies, partnerships and individuals based in England, Scotland, Wales and Northern Ireland, as well as foreign companies and individuals doing business in the UK. That means that the Act applies to all UK companies and most likely, all of their subsidiaries and associated companies doing business abroad. The Act, therefore, has global reach applying to acts or omissions taking place anywhere in the world. The UK courts hold jurisdiction if an alleged offence occurs in the UK, or takes place outside the UK but is committed by a person with a “close connection” with the UK.

BritCham Business & Sector Positions 2012/2013


11

What does “failure to prevent a bribe” mean? If an employee or third party acting on a company’s behalf commits bribery with the intent to gain a business advantage, the company itself may be subject to prosecution (not just the individual(s) who committed the bribe). What are the major risk areas? Although applicable to all UK entities, the Act will be particularly relevant to commercial organisations operating in higher risk countries. Some of the typical business transactions and dealings that create these risks are: • • • • • • • • • • • • • •

Sales transactions, especially those involving government or quasi-government entities Movement of goods and associated taxes / duties Obtaining licenses, permits, regulatory clearances, and expediting bureaucracy Other dealings with government, including government concessions Gifts, entertainment and travel expenses Sponsorship and certain other marketing activities Legal fees Outsourced accounting or tax services Charitable or political donations Certain kinds of Corporate Social Responsibility (CSR) activity Lobbying Use of intermediaries including sales agents, consultants and distributors Related parties & joint ventures Mergers and acquisitions

Is there a defence and who can be protected? The Act does provide a defence if the company can prove that it has implemented “adequate procedures” to prevent bribery. This defence can protect a company from criminal liability under the Act, however the individual employee(s) who commit bribery are still subject to criminal prosecution on a personal basis. There are no other defences available and which are outlined under the Act.

BritCham Business & Sector Positions 2012/2013

THE UK ANTI BRIBERY ACT

What’s new? The Act establishes offences for offering or receiving a bribe, bribery of foreign public officials and failure to prevent a bribe being paid on a commercial organisation’s behalf. The new corporate offence of a commercial organisation failing to prevent a bribe has received the most attention.


THE UK ANTI BRIBERY ACT

12

What do the “adequate procedures” mean in practice? The Guidance revised the initial draft guidance on “adequate procedures” as part of the government’s overall efforts to appropriately reduce regulatory burdens on UK businesses. The new Guidance did follow the structure of the previously issued draft guidance, elaborating on six ‘best practice’ principles of adequate procedures:  • Proportionate procedures • Top-level commitment • Risk assessment • Due diligence • Communication (including training) • Monitoring and review The overarching precept of the Act is that a commercial organisation must understand and document the risks it faces and take appropriate steps to address them. Any bribery prevention procedures should be proportionate to those risks.

Penalties under the Act A company convicted of failing to prevent bribery is subject to unlimited fines. The Act also increased the maximum jail term for bribery by an individual from 7 to 10 years.

Corporate hospitality, gifts and facilitation payments Reasonable, bona fide and proportionate corporate hospitality is allowed. However, there should be no intention for a financial or other advantage to influence the recipient in discharging their role, and the event should not be ‘lavish’. Unfortunately, ‘lavish’ is not defined and will, therefore, be open to interpretation and is a serious concern. It is also clear from the Act that facilitation payments (small payments made to expedite routine actions which are not illegal) will be considered bribes for the purposes of the Act. The new SFO Guidance does appear to address some of these concerns, stating that corporate entertainment, promotional and “other legitimate business expenditure” is “recognised as an established and important part of doing business”, however this general statement does little to define issues of materiality and proportionality. In addition, as regards facilitation payments, the SFO Guidance further states that “it would be wrong to say there is no flexibility.” However, whilst recognising to some, the realities of doing business and providing an encouraging indication that facilitation payments are on occasion difficult to avoid, these statements do little to improve the definition of the Act and simply imply the SFO may have some leeway. Much is still up to the discretion of the Director of the SFO and Attorney General, by which time a great deal of damage can be done to a business’s reputation as well as huge amounts of stress placed on its management.

The Environment in Indonesia for BritCham Members

BritCham Business & Sector Positions 2012/2013


13

The Indonesian government is urged to continue its strong support of the KPK and to expand its resources. BritCham notes that Hong Kong’s ICAC has nearly 1,500 staff for a population of 7 million. Thus the KPK’s less than 800 staff might be considered inadequate for a country of the scale of Indonesia. However, BritCham is equally aware that the fight against corruption in Indonesia is ongoing and that many instances still exist where foreign businesses with operations in Indonesia can and do encounter requests for bribes or illegal payments, both in the private and public sectors. More so than in many other jurisdictions, companies here may be asked for facilitation payments and the fact that there are very few official fees (such as for accelerated processing) will necessarily mean that requests for unofficial fees are more common. Numerous examples exist where unofficial or at least unregulated payments may be requested and where non-payment is difficult to avoid. In the natural resources sector, the provision of per diems to oil rig inspectors without official receipts or providing payments to the police for escorting hazardous materials and police protection, may result in potential risks of prosecution under the Act but, in some cases, not under the FCPA. There are a number of further concerns that BritCham members will have in respect of the Indonesian environment. For example: • For language, cultural and other reasons, many expatriate corporate officers may not have full information or knowledge on the exact workings of certain parts of their businesses which makes it more difficult for them to discover or monitor certain potentially illegal actions and activities. • In the local context, there may be a greater role played in Indonesia by agents, brokers, subcontractors, consultants and other third parties over whom the BritCham member may not have complete or even substantive control or influence, thereby making it difficult again to discover or monitor actions or activities which may be illegal. • Regional autonomy has led to a natural increase in the power of local governments which, especially in the area of natural resources, has led to further problems with respect to demands for illegal payments, taxes or dues, some of which may not even be within the regional or local government’s authority to charge or levy. • Many BritCham members have local joint venture partners who may take the leading role in government procurement, government liaison and marketing issues, thereby leading to a less than full knowledge of what may be occurring in those activities. • There are many businesses here who have significant procurement and supply functions, both

BritCham Business & Sector Positions 2012/2013

THE UK ANTI BRIBERY ACT

BritCham recognises the outstanding work of the Indonesian government over the past 10 years in recognising and controlling corruption. In particular, we commend the work of the Corruption Eradication Commission (Komisi Pemberantasan Korupsi - KPK) to combat corruption which, in addition to the success of the Anti-Corruption Court, has had a marked effect on proving that the corruptor can in fact be punished under the rule of law for their transgressions. Both are supported by Indonesia’s vibrantly free press.


UK ANTI BRIBERY ACT

14

areas of which are very commonly affected by corruption and bribery. • In areas where bribery or corruption is discovered, the problem is often made worse by the difficulties and risks in attempting to terminate the employment of offenders. It is not uncommon for further payments to be made to employees who are suspected or proven of having committed serious fraudulent conduct in order for them to leave their employment with the minimum of damage and disruption. • It is sometimes the case that cultural aspects will be important in respect of maintaining relationships and these can also lead to requests or expectations of certain gifts, payments or other advantages. • The number of secondees from regional or corporate head offices to their Indonesian subsidiaries is often limited, or in some cases, completely absent. This will serve to restrict the practical day-to-day oversight and control over certain corporate governance issues. Another area where potential problems can and often do occur is in the field of mergers and acquisitions, corporate restructurings and, in particular, corporate governance and corporate compliance. The problems are exacerbated for a number of reasons, including: • The lack of a system or structure which enables or allows accurate due diligence enquiries to be undertaken, including among others, an opaque and difficult (if not impossible) to publicly access company registry. • A lack or paucity of adequate corporate compliance and governance within local companies (often due to the historic family associations of the company and its affiliates) makes it difficult to obtain accurate information on any illegal activities. • A lack of enforcement by the relevant authorities in respect of failings by companies of their filing or registration requirements, particularly under Law No.3 of 1982 on Company Registration. • Inherent vagaries and uncertainties in the legal system generally and the judicial system in particular; the (openly acknowledged and reported) corruption in Indonesia’s parliamentary and judicial systems has made it more difficult for foreign investors to undertake business in Indonesia and, very importantly, to enforce their contractual agreements. With the above environment in mind, it is hardly surprising that certain British businesses operating in Indonesia have significant concerns in respect of the proposed enforcement of the Act.

Recommendations for Chamber Members • BritCham will endeavour, on a reasonably regular basis, to keep members informed and advised of latest developments in the enforcement and understanding of the Act as well as further guidelines, etc. and official pronouncements and initiatives (for example, self-reporting). This will be carried out through updates and briefings during the year. • BritCham members are encouraged to assess or re-assess the adequacy of their own anti-bribery and compliance programmes and specifically to ensure the recommended ‘top down’ approach to anti-bribery.

BritCham Business & Sector Positions 2012/2013


15

• BritCham members are encouraged to formally or informally exchange and share information and knowledge obtained internally (particularly from members who may have legal counsel in the GC100, a group of general counsel from prominent UK companies) in respect of such issues as risk assessment, compliance programmes, whistleblower procedures, internal audits, anticorruption training tools, Anti-Bribery Management Systems (ABMS), etc, as well as sharing practical problems and experiences actually encountered in Indonesia. • Review and where possible implement the Best Practice note in Annex B. • Monitor the SFO and Ministry of Justice’s websites for updates and guidance (see Recommended Reading). The British Chamber of Commerce in Indonesia reiterates that it fully supports the UK Government’s efforts in combating corruption. Furthermore, BritCham members are reminded there are no short-cuts and are encouraged to ensure compliance with the UK Bribery Act, as well as Indonesian Laws at all levels.

Recommended Reading In addition to this Position Paper, BritCham recommends its members to review the below sources and commentary: • UK Serious Fraud Office, Bribery & Corruption, found at: www.sfo.gov.uk • UK Ministry of Justice, Bribery Act 2010 Guidance, found at: www.justice.gov.uk • Commentary available online from: i. Allen & Overy at www.allenovery.com (search “UK Bribery Act”) ii. PwC at www.pwc.co.uk (search “UK Bribery Act”) Disclaimer BritCham has prepared the foregoing comments on the UK Anti Bribery Act to provide general guidance only to BritCham members. BritCham accepts no responsibility to its members or to any other parties for the completeness or accuracy of these comments. BritCham members and others who have significant concerns regarding the Act are recommended to consult with appropriate legal experts or responsible UK government officers.

BritCham Business & Sector Positions 2012/2013

UK ANTI BRIBERY ACT

• BritCham members should obtain knowledge from qualified third parties on such matters as “Adequate Procedures”, best practices in anti-bribery programmes, forms of employment contracts/Company Regulations/Collective Bargaining Agreements that cover issues of corruption in the employment context, adequate due diligence techniques, supplier and other third party screening processes, establishing governance structures, internal audits and gaining board and owner commitment, as well as being informed of external organisations that can assist in these matters (e.g. TRACE).


UK ANTI BRIBER ACT : COMPARATIVE STUDY

16

UK Anti Bribery Act - Comparative Study Annex A Brief Comparison of UK Bribery Act Provisions with Foreign Corrupt Practices Act (FCPA) and Indonesian Anti Corruption Laws It can be seen from the below comparative study that the Act is different in a number of key areas from the FCPA. For example, under the FCPA vicarious liability must be established in order to impute the actions of the company’s agent or employee. The Act imposes strict criminal liability (ie. no knowledge of the offence by the corporate through its officers or employees needs to be proven) when someone associated with a company bribes someone else with the intent of obtaining an advantage.

Provision

UK Bribery Act

Bribery of foreign public officials

Yes (Section 6)

Commercial bribery

Yes – the Act also applies to “private to private” bribery.

Receipt of a bribe

Yes (Section 2)

Intent

Mixed: some of the “general offences” (Sections 1 and 2) require an intention for a relevant function or activity to be performed improperly; the “FPO offence” (Section 6) requires an intent to influence the FPO and to obtain/retain a business or a business advantage; and the “corporate offence” (Section 7) requires no intent.

Facilitation payments exception

No - facilitation payments are not excluded under the Act.

BritCham Business & Sector Positions 2012/2013


17

Commentators have argued that British businesses (who of course have to also deal with European anti-money laundering laws) are now at a distinct competitive disadvantage when compared to their counterparts from other jurisdictions with regard to both the costs and the risks of doing business overseas generally and doing business in emerging markets in particular. This may have the wholly undesirable effect of discouraging British business to expand abroad. Note: “yes” confirms that the relevant provision is covered in the respective national legislation.

FCPA Yes – the FCPA’s anti-bribery provisions only apply to bribery of foreign officials (including political parties, party officials and candidates for office)

Indonesian Anti Corruption Laws

No

No

Only if the commercial bribery may inflict financial loss to the Republic of Indonesia

No

Yes

Yes – the anti-bribery provisions of the FCPA require that the defendant act “corruptly,” “wilfully,” and “knowingly.” Knowledge is expressly defined to include wilful blindness.

Yes – the anti corruption laws requires a briber to have a certain degree of intent to benefit from or influence a public official’s authority.

Yes – in limited circumstances, small facilitation payments are permitted when made to expedite or secure the performance of ‘routine governmental action’.

No exception if such facilitation payment is made in consideration of a certain public official’s authority.

BritCham Business & Sector Positions 2012/2013

UK ANTI BRIBERY ACT : COMPARATIVE STUDY

In addition, the Act covers private to private commercial bribery whilst the FCPA and (in general) Indonesian Law only deals with bribery of government officials. Of course, the prohibition of facilitation payments under the Act and the absence of any exceptions therefore is a critical difference so far as companies operating in more high risk jurisdictions are concerned.


UK ANTI BRIBERY ACT : COMPARATIVE STUDY

18

Failure to keep accurate books and records

No specific offence but failure to keep accurate books and records may constitute a failure to have “adequate procedures” in place.

Promotional expenses exception

“Reasonable and proportionate” corporate hospitality will not be prosecuted, but ‘lavish’ is not defined.

Extra-territorial application

Yes-individuals and corporate entities may be liable for “general offences” and the “FPO offence”, if committed outside the U.K. and if they have a “close connection” with the U.K. (i.e. if they are U.K. citizens, ordinarily resident or incorporated in the U.K.) (Section 12 (4)). The “corporate offence” applies to U.K. entities and any corporate (wherever formed) which carries on part of its business in the U.K. (Section 7(5)).

Liability for actions of third parties

Yes – liability for “general offences” and the “FPO offence” can accrue for bribery conducted through third party intermediaries, and liability under the “corporate offence” can arise if the bribery is conducted by an “associated person” (a person performing services on behalf of the commercial organisation – Section 8).

Penalties

Individuals: up ten years’ imprisonment and/or an unlimited fine. Corporations: an unlimited fine.

Statute of limitations

BritCham Business & Sector Positions 2012/2013

None


19

Yes – for U.S and foreign companies required to file periodic reports with the SEC.

Yes – the FCPA provides an affirmative defence for payments that are reasonable and bona fide business expenses that are directly related to the promotion, demonstration or explanation of products or services, or in connection with the execution or performance of a contract.

No exception if such promotional expenses are made in consideration of a certain public official’s authority.

Yes – the FCPA applies to acts by U.S. issuers, domestic concerns and their agents and employees that occur wholly outside the U.S, and to acts by U.S citizens or residents wherever they occur.

No.

Yes – there is a prohibition on corrupt payments through intermediaries. It is unlawful to make a payment to a third party, while knowing (including conscious disregard and deliberate ignorance) that any portion of the payment will go directly or indirectly to a foreign official.

Yes if it can be established that the relevant person/organisation order the third party to bribe or make corrupt payments.

Corporations: an unlimited fine. Individuals: up to 5 years imprisonment and/or Individuals: a criminal fine of up to $250,000 per a fine of up to Rp.250,000,000. If the bribery violation and imprisonment for up to five years. act may inflict financial loss to the Republic of Corporations: a criminal fine of up to $2,000,000 Indonesia, up to 20 years imprisonment and a per violation. fine of up to Rp. 1,000,000,000. Civil remedies include civil penalties and disCorporations: a criminal fine of up to 133% of gorgement of profits. the maximum standard amount. 5 years (subject to tolling by court)

6-18 years, subject to the type of violations and the maximum length of imprisonment.

BritCham Business & Sector Positions 2012/2013

UK ANTI BRIBERY ACT : COMPARATIVE STUDY

Yes – for U.S and foreign companies required to file periodic reports with the SEC.


UK ANTI BRIBERY ACT : BEST PRACTICE

20

Best Practice for Managing Risk Related to Bribery and Associate Issues As part of managing anti-bribery corruption compliance, many British companies from among the BritCham membership have put in place stringent, mandatory procedures, systems and processes to ensure compliance with all applicable laws and regulations. The following is a suggested list of best practice as applied by many of these companies:

Corporate Code of Conduct A clear, unambiguous code of conduct must be in place with detailed guidelines and instructions on how the company requires their employees and business partners to behave, including consequent actions that will be applied for non-compliance.

Gifts and Hospitality • Registration and approval systems should be in place to record all gifts and hospitality given to or received from government officials and private individuals. • Guidelines are given on the amounts/values of the gifts or hospitality that one can give or receive with or without obtaining prior internal approval. For example, any gifts or hospitality given to a government official exceeding USD20 must be recorded and approved by a manager or director; any amount exceeding USD150 must obtain higher level approval etc. • Clear guidelines on what form of gifts and hospitality are permissible and not permissible. For example, some companies have implemented regulations forbidding per diems to government officials or private individuals unless required by contract or local government regulations. Cash or cash equivalent such as vouchers would also be forbidden.

Contracting Process and Contract Implementation • All contractors and suppliers are made aware of the companies’ Code of Conduct and AntiBribery and Corruption (ABC) policies and all contracts must include specific ABC compliance clauses. • For certain contract amounts and for government intermediaries, it is required for such third parties to sign a Certificate of ABC Compliance and that they are aware of the companies’ Code of Conduct and ABC policies. Such Certificate should be renewed and re-signed periodically, for example every one to two years. • When appointing Government Intermediaries or other contractors with contracts amounting to a certain value, proper due diligence must be carried out to check whether these companies have: i. A history of making facilitation payments or possible other illegal acts. ii. Anti-Bribery and Corruption compliance policies and processes in place. iii. Government officials working for the company, in which case further assessment must be taken. iv. Offered reasonable fees under their bid.

BritCham Business & Sector Positions 2012/2013


21

A visible Internal Audit function is essential. Periodic audits should be carried out to ensure that all businesses and functions have all processes and systems in place, including: • Financial books and statement entries. • All contracts in place have gone through the contracting process in regard of ABC compliance. • Review contracts including payment schemes to be reasonable and does not suggest excess/inflated cost for facilitation payments or bribes to occur. All payments made by the contractors to other parties are appropriately justified and made with supporting documents of clear receipts.

Training Mandatory ABC training must be given to all employees, with special training for those having more intensive engagements with government officials in their everyday work. Refresher training on a periodic basis is also recommended. Such training should also be given to contractors and suppliers.

Compliance and Ethics Department A department or function must be in place to coordinate and manage compliance matters and roll out new initiatives and programmes for continuous improvement on procedures and systems. Such a function also serves to provide advice to management and employees on compliance matters. It is highly recommended that all managers sign an integrity/ethics declaration every one to two years.

Reporting System on Compliance Violation A system is set up for reporting any potential violation of the company polices or the law. As a company policy, it is required for an employee to report any request for an improper payment, or any indication that a person might be making corrupt payments or that a person has an inclination or plan to violate Anti-Bribery Laws.

Helpline A special Helpline is made available for employees, as well as third parties doing business with the company, to submit a non-compliance report, which can also be reported on an anonymous basis if preferred. All reports must be immediately followed up by a business integrity team and if deemed necessary an investigation is carried out.

BritCham Business & Sector Positions 2012/2013

UK ANTI BRIBERY ACT : BEST PRACTICE

Audits


UK ANTI BRIBERY ACT : BEST PRACTICES

22

Challenges and Examples For companies subject to the UK Anti-bribery Act and FCPA, the company’s obligation extends to ensuring and monitoring that its contractors and government intermediaries do not make facilitation payments, bribes or engage in other illegal acts whilst doing business on behalf of the company. The following examples are illustrative: 1. Land Matters Scenario When acquiring land outright or as a long term land lease, as part of its due diligence a company must obtain land clearances from the courts, to ensure the land as well as the owner(s) of the land are not involved in disputes. Clearance and checking with the BPN (National Land Office) was also conducted. The contractor carrying out the work made payments to the courts and BPN to obtain the relevant clearance statements, but no receipts were obtained. Audit Findings An internal audit considered the above as facilitation payments, despite the amount not being material. This resulted in termination of the relevant contractor’s contracts. 2. Licensing Scenario When acquiring licenses and permits as part of company’s operational activities, contractors’ quotes can be quite high. Audit Findings Without clear justification or breakdown of such price, red flags were raised and after investigation, the internal audit considered that such high costs indicated that payments were allocated for facilitation payments or bribes.

Conclusion Controlling, monitoring and understanding the process of the payment component of the contract is an essential part of overall ABC controls. In other words, a company should as far as reasonably possible ensure there is no room for illegal payments to be made. Whist the above information is not exhaustive, it is hoped that this can provide UK businesses some useful guidance. Members are encouraged to approach the Chamber should they have any specific queries.

BritCham Business & Sector Positions 2012/2013


Sector Group Reports


FFFA : SECTOR GROUP

24

Food, Forestry, Fisheries & Agriculture Sector Group Introduction This position paper reviews the anticipated challenges facing Indonesia in 2013 and beyond and identifies some of the areas in which efforts by the Food, Forestry, Fisheries and Agriculture sector committee can facilitate information gathering and dissemination, support development and help manage change.

Summary The effects of the acute food crisis coupled with the economic downturn that struck the world in 2008 continues today and 1 billion people still suffer from chronic hunger due to the high world prices for all the basic food crops including corn, wheat, soybeans, rice and cooking oils. The factors that led to soaring food prices remain: • Growing crops that can be used for bio-fuels, e.g. corn to make ethanol or soybean and palm oil to make diesel fuel, is in direct competition with the use of these crops and/or land for food. • The increase in prices of corn and soybeans and soy cooking oil is driven by the increasing demand for meat and dairy among the growing middle classes in Asia, especially China and the use of maize and soy to feed cattle, pigs and poultry has risen sharply to satisfy this demand. The world’s total meat supply has doubled in the last twenty years alone and in Indonesia 5 million people are moving up into the middle class each year. • Some major countries that were self-sufficient are now importing large quantities of food. If India and China are both turning into bigger importers, shifting from food self-sufficiency as recently we have seen in India, then global prices are definitely going to rise still further, which will mean the era of cheaper food is now definitely over. • Loss of farmland to industrialisation and urbanisation • Over-fishing and poor marine conservation creating higher prices for seafood and an added burden for the poor on other protein sources. There are relatively few regions in the world that can expand their land area for agriculture and any land expansion will not only threaten ecosystems but also incur a carbon cost. It has been predicted that the available land per person in 2050 will be less than a third of that in 2010. As the Government’s Agricultural Senior advisor rightly states; food is a basic need of every human being, food is culture, the result of adaptation between human beings and the environment, food is a basic component to create qualified human resources and the main pillar of national development essential in maintaining economic, social and political stability. It is thus evident that there has to be a greater emphasis on productivity improvements and increasing yields from existing farmland. At the same time efforts must be made to improve the supply chain management, ensuring food is delivered at its nutritious best, with minimal carbon footprint and impact on biodiversity.

BritCham Business & Sector Positions 2012/2013


25

In its 2009-14 Road Map on food development, the government highlighted the promotion of 10 key commodities: the four “strategic commodities” of rice, corn, soybean and sugar, and the six export-potential commodities of palm oil, tea, coffee, cacao, shrimp and tuna. Further points of note: • Pak Hidayat said the road map was the first step for the government to achieve the target of making Indonesia a top food-producing nation by 2030. • Indonesia is currently the world’s biggest producer of crude palm oil (CPO), accounting for 47 % of global production. The road map allows domestic CPO producers to expand their plantations to 9.7 million hectares in 2015. The expansion is expected to help boost output to 36.6 million tons. • Similarly coffee exports are expected to increase by 4.69 % annually until 2020, when 636,000 tons of the total production of 973,000 tons is expected to be exported. The Government has presented its four main targets of agricultural development as 1) the achievement of self-sufficiency in soybean, sugar and beef and sustainable and self-sufficiency in paddy/ rice and corn; 2) improvement in food diversification; 3) enhancement of added value, competitiveness and export and 4) improvement of farmers’ welfare. • Self-sufficiency means targeted growth of key crops as listed above. • Food diversification includes the decline in rice consumption by at least 1.5 % per year. accompanied by an increasing tuber, animal-based food, fruits and vegetables consumption; The Score of Expected Food Pattern is to increase from 86.4 (2010) to 93.3 (2014) and Food Security Improvement. • Enhancement of added value, competiveness and export includes:  All certified palm oil products (ISPO/RSPO) and all organic agricultural products, fermented cocoa and processed rubber with obligatory certificates.  Increasing traded processed products from 20% in 2010 to 50% by 2014.  Development of flour products to substitute 20% of imported wheat/wheat flower in 2014.  Provision of all facilities for fermented cocoa processing to support the domestic chocolate industry by 2014.  An increased balance of trade from US$ 24 billion in 2010 to US$ 123 billion by 2014. • The average growth of per capita income in the farming sector is expected to be 11% per year with an increase in employment of about 1% per year.

BritCham Business & Sector Positions 2012/2013

FFFA : SECTOR GROUP

Access to new technologies coupled with more direct market access (fewer middlemen) is vital if farmers are to maximise the yield potential of their crops. Without technology that can improve yields, but also enable higher returns to farmers, existing farmland cannot meet the needs of the growing world population – this will lessen incentive for people to stay on the land.


FFFA : SECTOR GROUP

26

As part of the agricultural development grand strategy, in order to achieve the four targets of success, 7 areas require revitalisation of agricultural development: 1. 2. 3. 4. 5. 6. 7.

Land Seed Infrastructures and facilities Human resources Farmers’ budgets Farmer institutions Technology and downstream industry

The Ministry of Agriculture mandates six economic corridors to be developed: a) b) c) d) e) f)

Sumatra Economy Corridor as “Production Centre of Palm oil and Rubber” Java Economy Corridor: “Centre of Food Industry Development” Kalimantan Economy Corridor: Production Centre of Palm Oil and Rubber” Sulawesi Economy Corridor: “Production Centre of rice, Corn and Cocoa” Bali-NTB-NTT Economy Corridor “Production Centre of Corn, Livestock and Soybean” Papua Economy Corridor: “Production Centre of Food crops, Estate Crops and Livestock”

The Government has committed Rp. 209 trillion of investment up to 2014, Rp. 165 trillion of which is earmarked for “quick win investment projects”, which comprises 23 projects across all corridors except the Java Corridor. The stakeholders include the Government (Ministries of Agriculture and Public Works) for 3 investment projects, private consortia for 3 investment projects and 12 private companies and state-owned enterprises Government Own Enterprises to support the remaining 17 projects. Issues of national food supply remain: • High population growth means there are 5 million more mouths to feed each year. • High and uncontrolled land conversion. • Inadequate agriculture and rural infrastructure. • Increasing competition of utilisation and degradation of water resources. • High consumption dependency on rice in food consumption pattern. (Rice consumption is 139.15 kg/capita/annum). • Inadequate transport infrastructure and facilities which raise logistic costs and wastage between the grower and the consumer. • Food is produced unevenly, both inter-time and inter-region.

BritCham Business & Sector Positions 2012/2013


27

Pak Prabowo has also said that agriculture is the supporting face of a big development model but currently it cannot compete with other Indonesian industries like energy and IT. The tropical zone, which has the potential for three harvests a year, occupies 27% of the earth’s surface. As Indonesia occupies 11% of this zone, it makes perfect sense to develop a strategy that supplies the world’s food demands but it needs a bold Government with a strong vision to make it happen. Despite this opportunity, Indonesian consumers have seen rice prices rise by 35% and maize by 2025% in the last three years. The Government can spend too much time planning and not enough implementing. Despite its bullish strategy, the Indonesian Total State Budget (APBN) in 2011 was Rp. 1.202 trillion but the budget for the Agricultural sector from the Ministry of Agriculture was a pitiful Rp 16 trillion and for farm subsidies (fertilizer, seeds, pesticides) Rp.18 trillion - Rp. 34 trillion in total, only 2.8 % of APBN! The Government’s strategy is focused solely on the conversion of ‘new’ land to agricultural production and not the improvement in crop production from current land use which could achieve the same goals. While the price of rice has increased significantly over the last three years, the farmer has seen none of this rise in his pocket. With better infrastructure (storage facilities, cooperative farming models etc.) the opportunity to increase current yields on land already farmed is vast and would negate the conversion of more forest. At the same time this would meet one of the Government’s stated objectives of bettering farmer welfare. Guaranteeing food quality will remain a key agenda item for the Indonesian Government and it continues to regulate standards of quality and safety through BPOM. The continued implementation of internationally accepted standards will support the development of the food industry in Indonesia to meet the requirements of the global environment. The Government’s continued development of SME’s will strengthen the existence of the Indonesian food industry on the world stage and will also improve the welfare and poverty of millions of people. Intensive R&D in the agricultural sector is required to support the development of Indonesian SME’s. In response to global changes in agricultural practices and the food chain, the Ministry of Agriculture will focus on Agricultural Reform. The implementation of agricultural reform needs to focus and achieve a targeted level of food security, commodity competitiveness as well as improving farmers’ welfare. BritCham will facilitate, at every opportunity, the development of activities that will encourage community participation. Together with the European Chamber and KADIN, BritCham will inter-

BritCham Business & Sector Positions 2012/2013

FFFA : SECTOR GROUP

Pak Prabowo, Chairman of the Indonesian Farmers Association heaped praise on the Government for its direction in becoming a net provider of food to the world from its current position of a net importer. However, he stated that he was still not satisfied with the extent of the Government emphasis on this sector and Pak Prabowo proposed a paradigm change to “Food Producing Agriculture as the Main Thrust for Economic Development”, with the conversion of 6 million ha of new Food Estates to produce rice, maize, cassava, sorghum - providing employment for 36 million people within 5 years. Indonesia has at present around 6.7 million ha of rice-producing fields but its potential is an additional 20-30 Million Ha.


FFFA : SECTOR GROUP

28

face with the government to develop improved actions and activities that will provide capacity building and empowerment of the community.

Food Security and National Policy Food security is the fulfilment of sufficient food for all people, available and accessible at all times, safely consumed and affordable. Food security has five components i.e. food availability, food consumption and distribution, community acceptability, food diversification, and food safety. BritCham advocates the enhancement of food security by the assurance for communities to have sufficient food at any time, and which is safe and halal. Food security for households is affected by the ability of the household to buy food. Therefore, income improvement runs in tandem with the ability to purchase food. This becomes a key factor to the improvement [enhancement] of food security for all household members. The strategies are offered as the first step of the new government for economic development in Indonesia. From the point of view of agricultural revival, food security is unarguably the first priority of the government in achieving the objectives of the strategy. Performance of agriculture is one important way to stimulate the sector while managemnt of the agricultural sector is another. BritCham will continue to work systematically to strengthen their influence with other stakeholders in their endeavour to approach a food security balance. BritCham recognises that regional and local governments will play significant roles in agricultural development as a logical outcome of decentralisation. Local governments, in participation with local communities, are a pre-requisite to create a harmonious environment from which rural and regional economic development can grow. BritCham will continue its mission to facilitate, stimulate, and promote a rise of sustainable agricultural development. The local governments’ role needs to be focused on the development of local specific commodities, managing a bottom up approach that encourages people’s participation instead of top down through fragmented centralised policies. BritCham considers that Indonesia’s agricultural programme planning and implementation needs to be conducted at local authority level with decision-making processes that are taken together with the community’s participation. BritCham considers that this approach will automatically shift the role of the community to a total reform and a reconstruction of local institutions based on good governing principles (credibility, accountability, and transparency). The central government must focus its attention on agricultural development programmes that are not efficiently and effectively implemented by local governments. The importance of training and its role in improving technology transfer is an area where BritCham members can assist. The development and innovation of new technology, such as biotechnology - the success of responsible genetic engineering - has the ability to transform and regenerate many organisms. This has opened opportunities to develop a bio-resource-based industry, a field where Britain is seen as a pioneer.

BritCham Business & Sector Positions 2012/2013


29

Whereas a decade ago imported fresh fruit and vegetables were a luxury few could afford, today we are spoilt for choice, with our diets diversifying thanks to a greater variety of quality fresh produce. In 2006 Indonesia imported US$600 million worth of horticulture (fruit & vegetables) products, rising to $1.7 billion in 2011. In an effort to protect domestic producers of fruit and vegetables as well as the potential dangers of un-safe food for consumers, the Indonesian government is taking steps to tighten control on several types of goods being imported into the country. Deddy Saleh, Director General of Foreign Trade at the Trade Ministry, said the Ministry was working closely with the Food and Drug Monitoring Agency (BPOM), the Quarantine Agency and other institutions, to closely monitor imported products, particularly fresh fruit and vegetables, canned food, meats and processed foods and beverages. “There is no policy to restrict imported goods, but we have to tighten import regulations related to the entry of certain products to prevent any negative impact on health, as well as to protect local products,” Mr. Saleh said. However, it is presumed that the aim of all this new regulation is to protect the market and encourage local production of fresh fruit and vegetables. However, it is not enough merely to limit the import of fruit and vegetables; there must be more support for farmers, specifically in the following areas: • Education • Marketing and logistics • Availability of capital • Improved access to better raw materials, including fertiliser, pesticides, seed varieties etc. Notwithstanding the fact that the government seemingly wishes to protect the raw material industries, Britcham believes that it would be more beneficial in the short term to OPEN the market to imported raw materials. This would generate employment and encourage businesses to invest in production and value adding throughout the horticultural supply chain. The plethora of new Government policies and regulations has led to overseas exporters and importers confused with regards to the licences they now require and procedures they must follow. BritCham endeavours to keep abreast of these changes and help the understanding of the food industry players. BritCham is striving to ensure the quality and safety of products that are key to the competitiveness of the food industry. Consumer concern covers a whole range of issues contiguous to food and drink, the spectrum covers the raw materials and the conditions in which they are grown or raise to the reliability of the technologies used during manufacturing and processing, system from storage and transport and the organoleptic and nutritional properties of the final product.

BritCham Business & Sector Positions 2012/2013

FFFA : SECTOR GROUP

Food Safety


FFFA :SECTOR GROUP

30

The management of risk has become a central requirement for those operating along the entire food supply chain. The implementation and verification of a robust and consistent national management and safety system standards such as GlobalGAP (International Standard for Good Agricultural Practices), GMP (Good Manufacture Practices) or HACCP (Hazard Analysis and Critical Control Point) at every stage of the supply chain has now become essential. Simultaneously, attention has to be paid to the efficiency of production which, in turn, will determine the return to the producer. Consequently, innovations in technology are becoming crucial to succeed in business and provide to the market.

Protecting Environmental & Social Values & Enhancing Production from Forest Lands Extensions to the agricultural estate area will inevitably reduce Indonesia’s forest cover further. To counter this forest reduction, local communities, large agricultural enterprises and farmers should be encouraged to plant trees, conserve natural vegetation - especially in coastal areas and along waterways. Old agricultural practices involving burning are no longer viable, especially given the population density and the need to enhance sustainability and keep the impact on climate changes in check. Many local communities already recognise the need for conservation and tree planting, but lack the resources to effectively implement these practices on a systematic and sustainable basis. BritCham supports agricultural initiatives that promote the sustainable use of existing cleared land rather than felling more forest areas. The Community, government and industry together with support from agencies, such as BritCham, can help to ensure the right balance is struck between sustainable development and wise land- and technology- use. Some potential forestry and agricultural synergies that could be developed are suggested below. The Indonesian forest policy to date has largely focused on large players such as ply producers and latterly the pulp and paper industries. This has resulted in the needs of community forestry being largely overlooked. In some provinces there is a real possibility that wood (e.g. for housing, construction and so on), together with traditional non wood forest products (e.g. food and medicines rattans etc.) will be severely depleted. Accompanying industrial forestry development (and agricultural plantation development too) often results in a reduction in biodiversity and a diminution in water and soil quality. There is scope to mitigate some of these effects by BritCham assisting local governments in their spatial planning as well as working with local communities on specific sustainable agricultural or agro-forestry projects. This could involve technical support to evaluate existing land use in relation to soils and landform, then ensuring land use which is compatible with the intrinsic sustainable capacity. From a forestry perspective, this could involve capacity building for enhanced community agricultural and forestry sustainability. In particular, BritCham could facilitate: • Integrated agro-forestry land management to enhance soil quality and ‘farm greening’; • Planning and organising (site surveys) for the planting of shade , timber or oil producing trees around kebun areas; • Expanding plantations of premium timber species (Teak, Mahogany and so on);

BritCham Business & Sector Positions 2012/2013


31

• Cooperative and other market support mechanisms Provided sufficient community forestry areas materialise, a cooperative approach to management ensures community benefits are realised (possibly in future Carbon credits) on a sustainable basis - this is being done with Teak in Sulawesi Tenggara now. Protection and enhancement of environmental values BritCham can facilitate: • Identification and protection of high conservation value forests - this generally involves not only biodiversity but also safeguarding areas that the local communities regard as important both from a resource and cultural standpoint • Non-timber and non-destructive forest products enhancing sustainability and improving quality – such products are often an integral part of community life – herbs and traditional medicines as well as more valuable items such as Gaharu (agar) Many of these forestry services can be scaled to fit around existing land use and conservation areas. The services require only basic site and soil surveys in conjunction with existing land–use planning. By such work and raising awareness of these forestry issues, BritCham and its collaborators would be contributing to a more holistic and sustainable approach to land use thereby enhancing food and shelter - to say nothing of water and soil quality, community greening and aesthetics.

The Huge Potential of Marine & Fisheries The potential of marine and ocean resources surrounding Indonesia is huge. However, maximising this potential faces many challenges including the need for the right policy, regulation and action to harness the potential and to produce marine/fisheries products with added value, competitiveness and sustainability together with improving knowledge-based productivity through strengthening human resources and expanding domestic and international market access. A major effort to increase fishery production includes the procurement of larger and more modern vessels to replace old and inefficient vessels used by the smaller and marginalised fishermen. Aquaculture production of added value refined products by improving the capacity and capability of ambitious SME’s and reforming industrial processing with higher food safety standards along with industry development support (financially supporting the industry). Illegal fishing, quality control, production chain certification and import tariffs are all factors that need to be addressed for an increase in Indonesian fish exports. Indonesia has engaged in positive dialogue with the EU, the world’s third largest market at 11.5% of fisheries value (after USA at 31.1% and Japan at 23.5%), in strengthening cooperation in fisheries, especially in tackling issues on illegal, unreported and unregulated fishing. In relation to seafood safety, the EU has declared zero tolerance and issued a comprehensive strategy to combat illegal fishing all over the world. In order to comply compliance with this strategy , the Indonesian Department of Marine and Fisheries has established its own Community system. The Quality Assurance and Production Chain Certification requirement is not yet harmonised to

BritCham Business & Sector Positions 2012/2013

FFFA : SECTOR GROUP

• Investment in downstream processing adding value to existing community wood resources


FFFA : SECTOR GROUP

32

one single standard which means time, energy and cash are heavily consumed in the individual certification process. Reducing tariffs will greatly benefit the Indonesian fisheries export industry. The EU currently accepts fisheries product from Bangladesh at a 0% tariff but Indonesia has to pay 4.2% for raw shrimp, 7% for cooked shrimp, 7.9% for fish and 14.5% for tuna. Improved consistency and commitment to comply with the certification process by stakeholders will lead to better practice within the Indonesian Fisheries which will all lead to reduced tariffs and consequently significantly bigger exports. BritCham continues to encourage the Indonesian Government to maintain its positive response to the opportunity the EU alone presents by adhering to its strict certification process.

Small and Medium Size Enterprises [SME’s] The leading food processing companies are tending to concentrate their activities on a greater number of processed products and convenience foods. BritCham is focusing on the real opportunities for small and medium enterprises (SME’s) and local companies to take a part in less sophisticated phases of supply chain activities. BritCham has identified a trend for the leading food processing companies to outsource many activities such as transportation, distribution and even 3rd party manufacturing, as they concentrate their activities on brand promotion and competitive strategies. BritCham is encouraging SME’s in the form of small grower co-operatives, local manufacturers and service providers to take advantage of these opportunities to create partnerships with the leading industries and in this way gain market access for their products. BritCham has, through their work with the EU and KADIN food and agricultural committees highlighted a growing challenge for the Indonesian Government to support the growth of SME’s as a strategic tool to both strengthen food industries and improve public welfare. To meet some of these challenges, BritCham is facilitating the development of SME’s by providing technical, commercial, and managerial assistance and financial support. In addition, BritCham is currently developing a small SME’s group of growers based on their local potential resources, which promotes the production of tropical and exotic fruit products. BritCham’s position is that during 2013 it will continue the development of SME’s and support one of the more successful strategies introduced by the Indonesian government. There is a further role for BritCham in 2013 - that of R&D [varietal selection, crop protection and management, cold chain and distribution] in the food and agricultural sector. The policy advanced by the government in this area will with the support of BritCham, support the growth of SME’s that will determine the future development of the food industry in Indonesia.

Trade BritCham’s participation within the EU Market Access Committee has raised awareness to the benefit offered by international trade activities for community welfare. Many of Indonesia’s neighbouring countries have participated in regional economic development organisations with one purpose: to develop strong economic alliances. Among the leading economic cooperation agreements include the North American Free Trade Area (NAFTA), European Union (EU), ASEAN Free Trade Area (AFTA), and the wider coverage of the Asia and Pacific Economic Cooperation (APEC).

BritCham Business & Sector Positions 2012/2013


33

Indonesia has ratified the General Agreement on Tariff and Trade (GATT) and World Trade Organisation (WTO). BritCham is urging Indonesia to follow the agreed rules and regulations. During the economic crisis (1998), Indonesia reduced all tariff barriers of agricultural products, although some of the countries broke their promise to eliminate similar barriers in their economic and trade policies (tariff protection, direct and indirect subsidy, etc.). BritCham continues to encourage Indonesia to respond to this situation, by applying agreed and selected protection for certain strategic staple commodities, for example rice, sugar, corn, and soybean.

Halal In Indonesia, as the world’s biggest Moslem country, consumers need to know that what they eat or drink is not only safe and of high quality, but also it is produced from lawful halal materials and in a lawful manner according to Islamic laws. Halal certification is another important criterion that BritCham considers as determining additional product attributes. In this relation, BritCham and the EU have engaged with the Indonesian government, and will continue to co-operate with the Indonesian Moslem Scholar Council (MUI) to establish clarity on halal certification.

Roger Pinder Chairman

BRITCHAM Food, Forestry, Fisheries and Agriculture Sector Group General Manager of PT. AGSPEC Indonesia EMAIL rogerpinder@agspec.net

BritCham Business & Sector Positions 2012/2013

FFFA : SECTOR GROUP

BritCham has encouraged economic integration blended with cooperation, such as trade barriers (tariff and non-tariff barriers) that would reduce or even eliminate risk and trade disputes and promote the success of trade and services mobility in the development of greater demand of intercountry investment that would be borderless. There is no doubt that the establishment of regional economic cooperation could initially create new economic disparities, not only for participating countries but also between economic blocs. The EU is considered one of the stronger economic regions and their weight could, to some extent, influence and enhance performance of economic cooperation in other regions.


HUMAN RESOURCES : SECTOR GROUP

34

Human Resources - Sector Group Introduction Although Indonesia has a population of over 240 million people, the supply of skilled and qualified people to industry and organisations is still outweighed by demand. The need to upgrade the Education system continues, but the reversal of a well-developed plan to assess teachers more effectively, and a current proposal to cut out English learning in Primary Schools are not encouraging. At the senior end of the process, there is still far too little focus on educating for initiative, insight and hands-on professional skills. As we write, APINDO (the Employers Association) is fuelling media attention to the potential negative impact of union intransigence, rigidity and labour intimidation, at the same time as major consumer players like L’Oreal and Nestle launch heavily invested new production facilities, for both export and domestic consumption. For businesses in Indonesia, HR issues often fall into two clusters: (1) issues arising from manpower laws and regulations, and their implementation, and (2) challenges arising in the area of ‘workforce management’.

Manpower Legislation Background Kepmen 150 (Ministerial Decision No. 150) was introduced after the radical changes to government in 1998. Kepmen 150 significantly increased certain employee rights to severance and service pay, and increased rights for unionisation. Among other issues, objections from employers to Kepmen 150 led to the introduction of Law No 13 of 2003 on Manpower. Our previous Position Paper of February 2008 laid out the political legacy from this law but also pointed out that compliance rarely led to difficulties if prudent corporate policies were laid down and followed, and positive (ethical) relationships with the regulating authorities (the Manpower Office) were maintained. More recent hot issues under recent or proposed legislation include the issues of Outsourcing, and Minimum Wages.

Outsourcing The negative impact of ‘outsourcing’ from the perspectives of Indonesian workers and employers has been widely debated in the last decade. It is an important issue because it is related to the wealth and future of workers, which was clearly the message of the recent mass rallies against outsourcing staged in a number of industrial regions across the country. Indonesia has 16 million outsourced workers, or roughly 40 percent of the country’s formal labour force of 41 million. The rejection of the outsourcing system in Indonesia stemmed from unclear and inconsistent laws and regulations that prompted interpretation of the law based on specific interests. The climax of this were nationwide labour strikes on May 1st and October 3rd 2012, involving some 2.8 million workers in 16 provinces, who claimed that years of unfair practice and exploitation demanded the elimination of outsourcing systems. Workers and their representatives asked the

BritCham Business & Sector Positions 2012/2013


35

In addition to encouraging tripartite dialogues, the Ministry of Manpower and Transmigration is now preparing a new decree that will make it more difficult for companies to conduct outsourcing practices — a move that will affect 14 million workers – which is facing challenges from the private sector. A number of companies are considering closing their businesses in Indonesia and relocating to other countries unless the government settles several labour issues that they claim hamper the investment climate. Such moves will hamper government growth plans and adversely affect employment and development plans. The outcome in the end is still uncertain, and history suggests that in many cases businesses will manage to accommodate the changes although perhaps at some cost.

Development of the Minimum Wage issue ‘Cheap Labour’ is one of the attractions that the Indonesian Government has used to promote incoming investment. A look at the numbers shows this is increasingly not true in comparison to neighbouring countries. If we compare Indonesia’s wage per labour per hour of USD 1.03 (IDR 9.888) to China’s USD 0.91 (IDR 8.736), Vietnam’s USD 0.46 (IDR 4.416) and Cambodia’s USD 0.29 (IDR 2.784), we see that from a production perspective, China’s workers could produce 2 times more than Indonesia’s workers. As a result, in one industrial zone, Batam (near Singapore) has stopped using this as a campaign slogan as 2013 will see an increase in the minimum wage by 28% in that area. The calculation for minimum wage for 2013 will be based on increased ‘Appropriate Living Needs’ (KHL) list, from 40 to 60 items. The Employers Association says this will increase the minimum wage by 10-15%. The actual figure will be published at the end of November 2012 and will need to be approved by the National Wage Commission in Jakarta before being implemented in every city.

Managing the Indonesian Workforce Indonesian management and the professional workforce in urban areas are developing rapidly. Pre-employment education and in-company management education is frequently influenced by western principles and respect for employee rights. There is recognition among many younger Indonesian managers and professionals that a more participative and empowered workforce produces more consistent results and reduces employee turnover in the longer term. Foreign companies setting up in Indonesia are advised to recognise this trend, and provide continuing management development and education. They should structure their companies in a professional manner, managing in styles that would be acceptable in international companies anywhere in the world. Indonesians who have been educated overseas will expect equal authority, expectations and a style in tune with the modern business schools of the western world. The fight for talent and for retaining talented employees is fierce, and those companies that manage these aspects effectively will sustain a distinct competitive advantage.

BritCham Business & Sector Positions 2012/2013

HUMAN RESOURCES : SECTOR GROUP

government to grant their demands: ending outsourcing practices and cheap labour policies, and providing greater access to health care. Meanwhile, the strikes caused considerable losses.


HUMAN RESOURCES : SECTOR GROUP

36

Expatriates and the Labour Law The legal status of expatriates remains uncertain. As stated above, by policy, the Ministry of Manpower excludes expatriates from some of the rights provided to permanent Indonesian employees under the Labour legislation, on the grounds that an expatriate’s very existence in Indonesia is temporary and therefore by definition non-permanent. On the other hand, a very few cases can be found where expatriates have successfully claimed severance amounts entitled to by permanent Indonesian employees. One argument used was that ILO (International Labour Office) Treaty 110 – to which Indonesia is a signatory – bans discrimination. Despite these rare cases, the courts and Ministry of Manpower have established and appear to be implementing the unwritten policy that while foreigners are under Indonesian Law, they are excluded from certain provisions of the law designed to protect the Indonesian labour force – specifically the provisions concerning severance pay. Employer organisations that have a parent company overseas are advised to have expatriate employees sign a primary contract with the overseas parent company stipulating the secondment of the employee to Indonesia, and the right at any time to repatriate the employee first. Termination of employment of the expatriate would occur in his home country or the country of the parent company assuming of course that the severance entitlements are less generous than in Indonesia.

BritCham Position and Advice Regulation of Labour at the National Level In line with Indonesia’s increasingly influential position in global business and trade, and in recognition of emerging Indonesian enterprises that are beginning to compete on the world stage, the regulation of labour within Indonesia should move away from being politically dominated towards a professional evaluation of regulatory requirements. Such professional evaluation would encourage laws and regulations to be built around the balance of compliance to the ILO, Human Rights and other labour related global agreements, while responding to the needs of industry in terms of skill provision, fair and balanced contracts for work, respecting employer and employee rights, and legal certainty. Termination for Serious Misconduct There has been no significant progress in achieving certainty of legal ruling where a company wishing to terminate an employee for serious misconduct has to (at least in theory) obtain a final court ruling confirming the employee’s guilt. While some of the variances in rulings may still be due to corruption and to under-trained judges, it is encouraging that there have been rulings where the Labour Court has upheld companies’ termination of employees for serious misconduct without having to first go through the criminal process. However, as precedent is not relevant in Indonesian law, this provides little assurance for future rulings.

BritCham Business & Sector Positions 2012/2013


37

Our advice remains that companies ensure that they create employment documentation (codes of conduct, company regulations, employment contracts etc.) that clearly specify the company’s ability to terminate employment for serious misconduct actions which are much wider in scope than those provided for in the Labour Law. While not providing assurance under the law, it will help to provide clear evidence of a professional and responsible approach to employment. In addition, having up to date employment contracts, etc. can be very advantageous in other areas. However, please see the note on National Language below. National Language A new law passed in February 2009 stipulates that documents that imply agreement or regulate relationships with entities that are Indonesian should be in Bahasa Indonesia, the national language. The law, Law No. 24 of 2009 on the National Flag, Language, Emblem and Anthem is not retroactive. At present, the consensus is that an agreement in English only would not be held invalid. However, there is strong motivation and clear arguments to have documents with or between Indonesian parties translated and to be in dual language. BritCham’s position is that the parties responsible for developing the implementing regulations must address the need for clarity of content and validity regardless of language, or in keeping with stipulations for ‘ruling interpretations’ within the body of the agreement or contract. Our advice is that unless future implementing regulations suggest otherwise, all employment related documentation (which would include management policies and procedures where they regulate actions, permissions and relationships) both inside and outside the organisation should now be in the languages of both parties. Minimum Wages BritCham’s position is that however unadvised, the minimum wage is a political and legal reality and is here to stay. Regulatory Environment BritCham’s position is that the move towards a more structured and regulated set of relationships and obligations between employer and workforce is a positive development, but advises and/or promotes and recommends: • •

Enactment of laws that supports the legitimate rights and needs of the workforce, but that do not lay ever-increasing burdens on the employers. Application of employment legislation that encourages flexible employment arrangements, thus increasing the prospect of absorbing larger numbers of employed people, but on variable conditions to spread the potential benefits of continued economic development across a wider span of the population.

BritCham Business & Sector Positions 2012/2013

HUMAN RESOURCES : SECTOR GROUP

BritCham’s position is that the appropriate institutions representing employers (KADIN, APINDO) should be pushing for clarity and consistency that defines what actions the employer can lawfully take when there is sufficient evidence to make charges of ‘serious misconduct’.


HUMAN RESOURCES : SECTOR GROUP

38

Application of laws and regulations on a nationwide basis, with equal treatment being provided throughout all regions.

Clarifying the rights of companies to terminate employment for serious misconduct, based on Article 158 of the Labour Law, given that this right has been severely curtailed by the decision of the Constitutional Court.

Negotiating terms and conditions for the labour force in return for acceptance of productivity initiatives.

The continuing education of both management (via Kadin and the business schools) and labour via training programmes and unions (that need to be better equipped to handle the demands of the 21st century).

Clarification of the introduction of the SJSN (National Social Security System) and recognition of the significant financial effect that, if introduced, this will have on employers.

Further refining of the termination of employment process such that employers are not ‘held to ransom’ by employees in respect of termination procedures and are not involved in lengthy and expensive, not to mention uncertain, court proceedings which further prolong the termination process and, in a larger context, discourage employment and investment.

Clarification of the rights of non-resident directors of Indonesian companies to enter Indonesia for temporary periods to undertake certain business-related activities. There have even been calls for non-resident directors to hold Indonesian work permits.

David Knowels Chairman

BRITCHAM human resources Sector Group Managing Partner of OPUS Management EMAIL david@opusmanagement.com

BritCham Business & Sector Positions 2012/2013


39

Introduction Indonesia has long recognised the need for investment in its infrastructure and the wish list extends to hundreds of worthy projects and many billions of dollars to finance them. The challenge of legal certainty for foreign investors and the priority issue of land acquisition, particularly for much needed toll roads, still hinders development and without road connectivity the upgrades to airports and seaports becomes somewhat academic if there is no functional network back to the hinterland. In this reporting period, however, progress has been made on the latter issue of land acquisition, as discussed more fully below. Power requirements are being addressed, albeit slowly, and the state electricity utility, PLN, has made some progress towards improving the investment climate, although additional transmission capacity needs a more efficient distribution system and that is still far from complete. There is some increasing recognition that in order to attract investment for renewable types of energy, such as geothermal, improvements in the terms and conditions and returns for investors are required. President Yudhoyono signed the government’s draft Bill on Land Acquisition in December 2010 and this was submitted to parliament in early 2011, the 2010 deadline having been missed. While it was hoped to pass the Bill by mid-2011, continuing debate in parliament pushed agreement back to mid-December 2011 with the Law (No 2/2012) being effected in January 2012. The necessary following presidential decree to activate implementation was passed in August 2012 and it is expected that by 2013 the law and regulations will receive their first tests. The importance of the law is that it sets out a clear procedure and time limits for objection against a given land purchase for a proposed infrastructure project, the unlimited timetable for objection that has previously particularly held back the build out of toll roads. Each year, these papers continue to reflect on the ongoing deterioration of the existing infrastructure, particularly in terms of the road network, and the massive impact it is having on industry’s cost of doing business in Indonesia. There are significant delays in sea, rail and road transportation, with road transport now the most costly in Asia, while seaport operations compare unfavourably with those of neighbouring countries. A number of factors have contributed to this continuing condition: the ratio of infrastructure spending to GDP continues to fall; the funds that do exist are often poorly allocated to peripheral services rather than physical infrastructure; disbursement of funds through the likes of the Public Works Department is slow in any budgetary year, and the regulations that control the quality of infrastructure built are not always enforced. All these areas must continue to be addressed assiduously by the relevant government departments, although the budget allocation for infrastructure spending for 2013 has fallen well short of requirement, this situation being compounded by the reluctance to remove, if not certainly reduce, the distorting influence of energy subsidies. Budgetary savings from these subsidies would make a noticeable difference if applied to infrastructure investment. Earlier, in recognition of budgetary shortfalls and the continuing difficulty to attract private sector funding and in order to bolster flagging growth in the many industries that have evolved on the back of heavy Japanese investment over a number of years, particularly in western Java, the Japanese government signed a USD24 billion loan agreement with the Indonesian government to fund targeted infrastructure. The prime focus of this is on the Greater Jakarta/ western Java area, with sea and land transportation and power being particularly indicated. This loan makes a good contribution towards the amount that the government has calculated as being required from

BritCham Business & Sector Positions 2012/2013

INFRASTRUCTURE : SECTOR GROUP

Infrastructure - Sector Group


INFRASTRUCTURE : SECTOR GROUP

40

non-budgetary sources for the current and ensuing 5 year period, estimated to be in the order of USD150 billion or more. Japanese funding is now being applied to the feasibility stage of both seaport and airport projects in west Java. The Chinese, Korean and Russian governments have also signalled interest in providing funding support for infrastructure projects. This may take some pressure off the amount of funding that the government is still hoping to realise from private sources through various mechanisms, with PublicPrivate Partnership (PPP) arrangements being particularly emphasised, although there is increasing recognition that the PPP approach cannot be applied carte blanche and a number of required projects would be better delivered by normal, well-tried methods. Nevertheless, the government must not forget that short-cut financing solutions do not build a nation; its neighbours continue to prioritise and invest in infrastructure assets and Indonesia cannot afford to slip further behind, especially since Indonesia’s transport logistical costs remain the highest in Asia. Over the past few years the government has introduced some special organisations or arrangements to ease the facilitation of specific infrastructure projects. These are: Indonesia Infrastructure Finance (IIF), which has equity/funding from multilateral and private sources along with government inputs and which has been involved in large toll road, water and power projects; Sarana Multi Infrastruktur (SMI) which concentrates on funding in domestic currency and advising at the preparatory stage of PPP projects; and the relatively new Indonesia Infrastructure Guarantee Fund (IIGF), which has been supporting the development of some power and main water projects (the latter to be awarded in a few months’ time). Earlier, a Revolving Fund, under Pusat Investasi Pemerintah (PIP), was set up to ease the acquisition of land for toll road concessions and this has been used for some ongoing developments. The new Land Acquisition law, once at implementable stage, should see the gradual withdrawal of the need for this support. The Ministry of Finance has also announced that it will consider providing grants for a portion of the costs for those projects that would not otherwise be able to provide private equity investors with a sufficiently attractive return. This Viability Gap Funding (VGF) programme is being developed for PPP’s and would apply particularly to water projects and more rural toll road projects, where end users are unable to pay the level of tariff that would be required to make a project viable. The details of this programme are expected to be announced in the next few months and several projects have already been designated as potential recipients of VGF assistance. In terms of the availability of long-term finance for infrastructure projects, it does appear that the domestic banks have sufficient liquidity and are able to provide longer tenors and grace periods than in the past. There have been 3 large-scale toll road financings closed in the domestic market in the last year: the W2 section of the Jakarta Outer Ring Road, the Nusa Dua – Ngurah Rai – Benoa elevated toll road in Bali and the Cikampek – Palimanan toll road, which is one of the key sections of the planned Trans-Java Toll Road network. In the latter project, loans of Rp. 8.8 trillion (just under USD1 billion) was provided by 21 banks over a 15-year period. Foreign banks generally continue to have a reasonably strong appetite for Indonesian infrastructure projects, although a number of the European players have either withdrawn from the market or reduced their funding capacity as a result of the global financial crisis and subsequent Euro crisis. Arguably the most important step that the government has taken has been the unveiling in mid2012 of its 6-corridor economic development plan, MP3EI, which has divided the archipelago into 6 main self-contained areas for economic expansion. Within the detailed plan 22 economic devel-

BritCham Business & Sector Positions 2012/2013


41

Priority Recommendations • Recognising that there will be very considerable shortfall required budget for infrastructure in the coming year, immediately take steps to address the distortion to the economy caused by the energy subsidy and start preparing to allocate 5% of GDP per annum for subsequent years and continue this for the 10 years thereafter. In addition, ensure that the funds are spent in a timely manner and properly on physical infrastructure, and not on peripheral consulting, planning, monitoring and supervising services; • Proceed with the implementation of the land acquisition bill as promptly as possible and ensure that execution brings about the necessary legal and physical power to execute compulsory purchase without delay; • Empower all government departments to complete all outstanding implementing regulations in all sectors (no exceptions) to allow a comprehensive investment in infrastructure as a whole; • Implement a sensible and straightforward VGF scheme to allow less viable projects to be undertaken by the private sector; • Consider rolling back the regionalisation that has taken place in the last two decades to provide more central control over key infrastructure projects, as many projects are currently stuck as a result of disagreements between central and regional authorities; • Reassess the PPP programme, which has clearly failed to deliver in its current form, giving consideration to the formation of a strong central PPP unit; • Reduce dominance of SOE’s in major infrastructure, particularly the Pelindos in ports and Angkasa Puras in airports, which deters the private sector (and particularly foreign investors) from participating in the process; • Strongly support the implementation of the 2011 6-Corridor Economic Development Plan (MP3EI), and ensure that the local governments in each corridor play their role in the realisation of the Plan’s objectives; and • In keeping with the MP3EI continue to actively pursue the programme for PPP projects, but without prejudicing other forms of private and unsolicited investment that are often more relevant to commercial enterprise.

BritCham Business & Sector Positions 2012/2013

INFRASTRUCTURE : SECTOR GROUP

opment targets have been highlighted, such as education with particular attention to science and technology, agriculture, tourism and very importantly infrastructure, without which many of the other goals could not be achieved. The plan recognises that Indonesia cannot optimise its potential without uplifting the economic development of the regions outside Java. It also will heavily rely on the political leadership of the regions to facilitate delivery. It is recommended that potential European investment interest take note of this, and the opportunities that could be expected to emerge during implementation of the plan.


INFRASTRUCTURE : SECTOR GROUP

42

Power Generation (Electricity) PLN crash programmes The first 10,000MW crash programme set out in 2006 and primarily based on coal-fired power has been far from a success story. Originally the whole 10,000MW was scheduled to be in commercial operation by the end of 2009 – in fact, by the end of 2009 only 600MW of the crash programme was in operation and further additions have been coming forward slowly. Projections are now showing that the first programme will not be completed until 2014. The proposed implementation to deliver the programme was heavily weighted towards Chinese inputs, but this approach was lost along the way and was an indictment of putting faith in one source only – almost exclusively these projects were originally being let on an Engineering, Procurement and Construction (EPC) basis to Chinese contractors, with no experience in Indonesia, and whose only interest appeared to be a short-term aim of supplying Chinese-made equipment. Early results were disappointing which led to a brake on continuing down this path. Notwithstanding the failure of the first crash programme, there were a couple of bright spots early in 2010, when both the Paiton Expansion (815MW supercritical) and Cirebon (660MW supercritical) projects closed financing. These projects are both Independent Power Producer (IPP) projects, and both began construction significantly before the financial close, with project sponsors in each case taking the construction financing risk during the pre-financial close period. Both projects are now in operation. Far from being discouraged by the dismal story of the first crash programme, PLN announced the second 10,000MW crash programme, with several differences that may be viewed as improvements from the first time round. Although most projects continue to be PLN-owned, a significant proportion are being designated as IPP-owned. There is also to be a greater proportion of power to come from renewable energy sources, mostly in the form of geothermal generation, with less than half of the new capacity to be coal-fired. The projects which are scheduled for development by IPP’s will be bid for under a transparent tendering process which had proved to be quite successful in recent IPP projects such as the Central Java 2 x 1000 MW coal-fired power plants. It is likely that the funding for the IPP projects will continue to be a combination of ECA debt and commercial debt. In 2011, PLN undertook pre-qualification exercises for a number of coal-fired IPP plants falling under the second 10,000 MW crash programme, in Kalimantan, Sumatra and Java, for which there was significant interest from international candidates. Under the aegis of the current Bappenas’ PPP programme, three power projects, for which pre-feasibility studies have been carried out, have been designated as priority. These are a 460MW hydro in West Sulawesi (est. cost USD1,335m), a 2x400mW coal-fired plant in Jambi (est. cost USD1,040m) and 1,800MW mine mouth-sourced coal fired plant in South Sumatra (est. cost USD2.5bn). The 2,000MW Central Java Power Project (CJPP) has been awarded as a PPP, but appears to be struggling to reach financial close due to ongoing environmental, social and land acquisition issues. Renewable energy Renewable energy projects have also made some progress in 2011, although not much additional has happened in the past year. Geothermal tenders for several concession areas in Java, Sumatra,

BritCham Business & Sector Positions 2012/2013


43

However, the weak link in the geothermal tendering process, in addition to the land acquisition issue, for which progress is now being made, and government support, as well as the expected development of power stations is that, intentionally or not, the government did not involve PLN in the tendering process. The result is that although the lowest responsible bidder may have tendered a tariff of 8.5 US cents/kWh, PLN has no obligation to pay such a price and to date PLN has indicated that it has no legal authority to accept such a tariff. The result is that the two big projects in Sumatra are still awaiting their PPA’s to allow progress to continue. While the government is in the process of issuing a regulation that will either require or allow PLN to accept such a tariff, the issue that remains is whether PLN will agree to any tariff before the developer has undertaken drilling activities to justify a fuel ‘price’ for its steam, akin to what a coal project would charge. Many developers are unwilling to undertake the significant costs of drilling until they know that PLN will indeed purchase their power at an affordable tariff. This has recently been addressed by the government, with the announcement in August of tariffs being linked to geographical location and ease of project development, starting at 10 US cents in Sumatra, 11 US cents in Java-Bali and increasing in more outlying areas. In addition, the PIP is to make available just under USD200m in funding for the exploration costs connected with geothermal projects, although the details of this programme are still to be published. As to other renewable energy projects, changes to the investment law seem to allow foreign entities to be involved in 10MW or smaller projects. This looks likely to breathe new life into the development of biomass projects, where a new tariff structure is in place. To date biomass use has largely been associated with waste from palm oil plantations. A number of privately driven solar power projects have been successfully undertaken in East Indonesia, which has a climate suitable for solar solutions. Further future developments will be aided by the lowering price for solar panels, but will also need the government to provide a viable Grid Feed-in Tariff, an issue which is under consideration and is expected to be effective from next year, although past procurement practices have to be resolved. This should also encourage the private sector to take the largely stalled 100 islands project more seriously and other planned projects that are earmarked to follow. A wind farm project is to be developed on the South Java coast at Samas. However, overall the general lack of wind in most places indicates that wind-generated power will have little more than a peripheral impact on Indonesia’s power needs, although a number of small to medium sized projects in identified wind pockets can be expected to proceed. PLN and the government have also indicated support for small-scale hydro projects, although these remain stalled on the starting grid given the lack of a realistic land acquisition law (now being addressed) and low tariffs. Micro-hydro projects (less than 1MW) are proceeding well, but are largely the domain of cooperatives and local governments. PLN also has a crash programme for hydro projects, with 3 PPP’s on an unsolicited basis and totalling 1,310MW at Merangin in Jambi, Batang Toru in North Sumatra and Karama in West Sulawesi. Future challenges

BritCham Business & Sector Positions 2012/2013

INFRASTRUCTURE : SECTOR GROUP

Sulawesi and Maluku were completed and the results were significantly better than the earlier tenders, which were largely granted to state-owned enterprises with little experience and even less available capital.


INFRASTRUCTURE : SECTOR GROUP

44

PLN payment default – there is still no specific government guarantee for the IPP projects falling under the second programme; the documents simply refer to PERPRES 4/2010 under which the government “ensures the business viability of PLN in accordance with stipulations in laws and regulations.” According to Indonesian counsel, this would not constitute a guarantee under Indonesian law and therefore would not satisfy international lenders. PPP projects, such as CJPP are intended to be covered under the new IIGF; however, the budget allocation to IIGF would seem to be insufficient to provide comfort to all power projects at this time, so the jury is still out on its general acceptability to international lenders. Land acquisition –The long-awaited new Land Acquisition (Law 2/2012) appeared in December 2011, was ratified in January 2012, and the Presidential Regulation towards implementation in August 2012. This is a welcome step forward; it is expected that the first testing of the terms and conditions to prevent indefinite delay in land acquisition for projects will surface in 2013. Although Bappenas and the government are promoting the concept of PPP’s for many infrastructure projects, this often remains more form than substance. Land provision needs to be the prerogative of the public sector and should become an essential part of their commitment to the PPP format. The government must also quickly recognise whether an economically important project would provide a sufficient return to the private sector under the usual terms of engagement for a PPP project or whether the project needs to be approached with some other workable, say hybrid, approach. Forestry permits – a number of hydro projects are stalled, especially in upper reaches of rivers, where the land is under the purview of the Forestry Ministry, and permits have not been forthcoming. Local content regulations: there is uncertainty as to whether these regulations apply to IPP’s, if they do, compliance for most IPP developers will be very challenging indeed. Recommendations • Provide a transparent government guarantee/support for PLN in the event of payment default; • Using progress from the Law and Regulations on Land Acquisition, resolve remaining land acquisition issues and use the law for timely execution of all future compulsory purchases; and • Resolve the tariff issue with PLN for geothermal power project development and ownership and tariff and forestry permit issues for other renewable energy projects to provide fair reward for the interested investors in this area.

Airports & Airlines Air travel in Indonesia continues to expand at double digit growth, with the domestic market now causing a severe strain on the capacity of the airport infrastructure. This has been recognised in the recently presented government budget for 2013, where the plan focuses on the building of 15 new airports and the upgrading of many others, highlighted in a government commitment for 2013 of USD20 billion for the transport sector as a whole, although this is recognised as still being below requirements. In 2011 the Airports Council International (ACI) ranked Jakarta’s Soekarno – Hatta Airport as the

BritCham Business & Sector Positions 2012/2013


45

Airlines – in 2009 the state carrier Garuda Indonesia unveiled its ambitious expansion programme known as “The Quantum Leap”. There has been a continuing witness to the airline’s impressive achievements following from that programme. In June 2010, daily flights to Amsterdam were resumed and more recently its daily operations from Jakarta to Sydney also resumed in 2011 following the aircraft additions to its fleet. A major airline survey organisation has continued to award Garuda with performance accolades. In 2011 Garuda announced that it would become part of the global airline alliance SkyTeam, joining both KLM and Air France. As part of the preparation for the inclusion of Garuda Indonesia, the airline established Terminal 2E at Soekarno-Hatta in Jakarta as a dedicated base for SkyTeam airlines, with facilities based on the high quality service standards that SkyTeam demands. Cargo – in 2010 the Indonesian government introduced a new regulation related to security on air cargo transportation, the so-called “Regulated Agent” policy. In essence, cargo handled by a cargo company certified as a Regulated Agent is deemed to be “safe & secure” and can be transported by any carrier without a further security check. While the initiative has been welcomed to enhance aviation security, the number of licensed Regulated Agents is limited, which may still cause delays in cargo transportation. It is considered that the introduction of the regulations should be done step-by-step with great care and thoughtful planning. The limited manpower availability of the officials within the Directorate General of Civil Aviation (DGCA) to certify cargo handling companies should also be taken into account. PPP Airports – In the Infrastructure Asia 2012 Conference held in Jakarta from 28-30th August 2012, the government indicated a number of potential airport projects to be offered to the private sector on a PPP basis, although key expansions at the major airports would be assigned to SOE’s. The projects offered to the private sector concern the development of green-field airports of medium and large size, while the remaining projects are small-scale airports in remote areas which will be undertaken through the DGCA. The concern for the projects being put forward for PPP relates to the viability of the financial return for attracting private sector interest. Future challenges Annual passenger traffic development continues to show double-digit growth. It is anticipated that total passenger movement at Soekarno-Hatta Jakarta Airport will reach 60 million passengers within a year or two. , which is well beyond the design capacity of the existing facilities. It already stands at 234% of design capacity. The traffic at Ngurah Rai Airport in Denpasar, Bali and Juanda Airport in Surabaya have also surpassed design capacity, now showing traffic levels of 12 million passengers per annum, so the immediate challenge is to ensure that the current expansion of their facilities will be sufficient to meet short to medium terms needs especially for increasing inter-island traffic demand, Garuda has made significant steps, but it is a commercial fact that the world’s successful airlines

BritCham Business & Sector Positions 2012/2013

INFRASTRUCTURE : SECTOR GROUP

12th Busiest Airport in the World (4th in Asia) for total passenger movement with 47.6m million passengers. Growth has been in double digits and this is likely to continue for the foreseeable future. It has now surpassed Singapore in passenger traffic carried and this has prompted the construction of a new terminal and further capacity to the road network servicing the airport.


INFRASTRUCTURE : SECTOR GROUP

46

have been supported by a high quality airport facility at their home base and, through managed expansion of airport capacity, the ability to grow the airline network and its service distribution. The future position and sustainability of Garuda Indonesia in the global alliance will thus depend to a large extent on the quality of its home-base airports meeting the standard of services of the SkyTeam group. The government has also announced through the media, invitations for foreign airport operators to participate in the improvement of the main international airports in the country in order to improve the quality and capacity of airport services. This might be attractive for major players in the airport industry, but to date there has been no clear indication from the government or the stateowned airport operators, Angkasa Pura I & II. ,when such projects might be tabled. In Presidential Regulations PP 67/2005 and PP 13/2010, a provision was provided for investors presenting unsolicited proposals. The regulations make provision on how the government will compensate the investors if their unsolicited proposal is taken over by the government as a tender document/process. In recent media coverage, the government has refused to recognise PT Rail-Link as the initiator of the project for the light rail connection between the city of Jakarta and Soekarno-Hatta Airport; in fact their proposed route has been rejected and one largely using existing rights-of-way is to be used. Progress is expected later in 2012. As a consequence of the changes, there will be no compensation for the unsolicited works of PT Rail-Link in preparing the technical specification for their particular routing. Industry is observing this particular case very closely indeed, as it might set a difficult precedent for future unsolicited bids. Recommendations • Prioritise the development of the home base airports for Garuda Indonesia, specifically Jakarta, Surabaya and Bali, in terms of airport capacity, quality facilities and expanded services to allow future airline growth and sustainability; • The government should ensure that the introduction of the “regulated agent” policy does not create delays or ‘high cost’ processes in the cargo industry in Indonesia through a lack of certified companies; • The government should be encouraged to produce a clear PPP plan with realistic terms of engagement for projects, to be seen as a showcase for Indonesian Airport PPP projects in order to maintain confidence in the sector; and • The government needs to give a clear indication whether it is still committed to providing compensation to private sector companies that have submitted an unsolicited PPP proposal and need to protect their Intellectual Property Rights when such documents are being used for a public tender under government procurement guidelines.

Seaports & Shipping Some 95% of all domestic and international trade is carried by sea transportation, so capacity and connectivity development of the country’s seaports is crucial to growth and is a presidential priority. The port authorities have been aware of the issues and recognise that today the ports are not

BritCham Business & Sector Positions 2012/2013


47

The current applying shipping law (Law 17/2008) was introduced in mid-2008 with the government expecting it to be gradually effected over a subsequent three-year period. Industry commented however, that certain directives would take considerably longer to be implemented, e.g. with respect to cabotage for example (see below), in an attempt to increase the domestic shipping involvement for in-country cargos. In general, the law is viewed as a step in the right direction to encourage investment in the sector. Nevertheless, the main players in the shipping industry are working on finding alternative solutions for future operations. Future challenges International connectivity remains poor with high domestic transport costs and poor logistics as well as less than optimum operational efficiency, hampering Indonesia’s export competitiveness and raising import costs. The private sector is especially critical of border management, which includes customs procedures and the restriction on the number of functional gateways (which includes airports), which also raise the cost of external trade. To make matters worse, Tanjung Priok (the national gateway in Jakarta) has effectively reached full capacity and already handles 70% of Indonesia’s general cargo/container export and import traffic. In order to cater for the fast expanding container traffic Pelindo II has been appointed by government (thereby effectively scrapping the planned tender process) to oversee the construction of a major extension to the container handling facilities with a first phase of 3 berths to handle 4.5 million TEU’s, with this to be continued steadily in subsequent phases to handle a further 6 million TEU’s. It is expected that the first berth will be in operation by late 2014 / early 2015. In addition to the container handling, two berths are to be laid out as a significant tank farm for petroleum products. The location of the new facility is directly offshore of the existing port, and separate access to this is to be provided by a dedicated toll road coming off the east end of the new terminal. In parallel with the expansion at Tj Priok, designated New Priok, a study is under way for the next major port to serve western Java at Cilamaya, along the north Java coast, east of Tj Priok. It is recognised that the current expansion and the phases to follow will only satisfy market conditions for the next 8-10 years, which sets an important time frame for the next port. It is likely that the port opportunity provided by the deep water conditions at Bojonegara in Banten province will again be revisited. The financial condition of Pelindo II, and to a lesser extent the three other SOE port companies, Pelindos I, III and IV, have all been improving as, despite the global turn down in trade, Indonesia has overall been seeing steady growth in sea transport activities. Pelindo II, whose trading effectively is as large as the other three sister SOE’s put together, has recently been rebadged as Indonesia Port Corporation, and by taking on the expansion of Sorong Port in East Indonesia, is expanding its geographical reach beyond its given jurisdictional boundaries. Separately, several local governments perceive opportunities to establish regional ports outside the control of the Pelindos, and a few schemes are at various stages of the development cycle. This trend is likely to continue and should have value in sea trade, provided the local governments avoid directly competing with the long-established Pelindos.

BritCham Business & Sector Positions 2012/2013

INFRASTRUCTURE : SECTOR GROUP

serving the needs of the people or the economy; that users do not expect to pay more for port services than they do in neighbouring countries; and that everyone in the sector needs to accept that they are all part of the problem and need to change. This was stated by R.J. Lino, President Director, Pelabuhan Indonesia II, at the EIBD Conference, held in Jakarta in 2010.


INFRASTRUCTURE : SECTOR GROUP

48

Coal and other commodities – coal movement has seen tremendous growth in barging and shipping traffic. The demand forecast of 400 million tonnes of coal movement in 2010 is expected to reach 1.2 billion tonnes by 2030. This massive increase will seriously challenge the public and private port sector and the related traffic that it will bring as a result. There is currently no coordinated plan for the coal/port sector interface, but such traffic will need to be addressed immediately to avoid hampering export growth. These conditions are expected to hold despite the temporary turn down in coal orders, especially in East Asian countries as a result of the current world economic crisis. The current forecast is for orders to pick up in 2013. Expansion in production output in and shipping out of other commodities, e.g. CPO, are also expected to see steady growth in the future. Cabotage – the oil and gas industry has been extremely concerned with certain provisions of Law No. 17/2008 on Shipping, specifically related to the cabotage principle. Some accommodation was found to meet an imposed deadline of May 2011. In order to support oil and gas operations offshore, highly specialised vessels are needed for exploration and production activities and currently only a limited number of Indonesian-flagged vessels are able to meet such specific requirements. The Indonesian Petroleum Association (IPA) has been extremely proactive on this matter since the very inception of Law 17/2008 and, together with other bodies, has been successful in raising their concerns at ministerial level. The IPA has been working together with the government to find an acceptable amendment to Law 17/2008. Meanwhile the uncertainty regarding dispensations, which would affect the economy since there are no national vessels or drilling rigs to fulfil demand, leaves some parties willing to flag assets to the Indonesian flag-in-waiting position. Recommendations • Enormous effort is required in the renewal and maintenance of port infrastructure to handle the right size of ships, ensure that ships do not wait for berths, increase productivity levels to match international best practices and provide systems and services that give users confidence; • Under the cabotage issue, make the Indonesian flag an open register in order to attract rather than dictate to asset owners. This needs to be coupled with incentives for more training and education for seamen, officers and engineers, as well as technical positions in the offshore oil and gas sector. • Consider establishing a port sector team to manage the future growth of coal movements; • Continue supporting the capacity build out at Tanjung Priok and commit to upgrading and expanding new port facilities as identified across the archipelago; and • Continue to improve the efficiency of port operations and close the gap in output compared with that of other regional ports.

BritCham Business & Sector Positions 2012/2013


49

There has been continuous planning and early development activity for freight railways during 2011 and to date, but little tangible progress to record with commuter line development for passenger traffic, except to note that there is in hand a steady programme to double-track key routes in Java. Coal transportation has been driving the freight rail development programmes, particularly in both Kalimantan and Sumatra. However, progress in these across the board has been stymied by unfavourable cost-benefit appraisals towards private sector investment, even though projects are being addressed as PPP’s. In a recent presentation of the 2013 budget, the President indicated that this will include the development of 380 km of new rail line. Freight lines The key initiative in 2010 was that of Minerals, Energy & Commodities (MEC) with its efforts to build the first freight rail solution for East Kalimantan, from their mine concession at Muara Wahau in Kutai Timur, some 130km from the coast, north of Sangatta. The challenges for such a project are both commercial (coal quality & off-take) and technical (land acquisition & geotechnical stability). Despite MEC’s endeavours this pioneering effort is still mired in unresolved issues and, with the current downturn in coal price the returns on investment will have been affected. The MEC plan is not without its opponents, e.g. from other large mining companies who are trying to resolve similar access issues. The main companies in this have been Churchill Mining (overland conveyor) although this company’s plans are now embroiled in legal dispute with government, Ithaca Resources (alternative railway) and PT Bhakti Energi Persada (haulage road). Nevertheless, the logic of building multiple linear infrastructure corridors when only one is required has to be questioned. Bringing any of these projects to fruition is costly and yet, to date, coal concession owners have been driving this process separately even though the individual project economics are not robust enough to support a single user corridor of some 150km in length to the coast, let alone the need for a major new port loading facility as well. This predicament is not unique to East Kalimantan, however, since Central Kalimantan has its own plan for an initial freight railway solution from Puruk Cahu to Bangkuang to circumnavigate the unseasonal upper reaches of the Barito River, ultimately with an extension to the coast with branches all over the province. This project started life as a private sector initiative, but was then converted into a PPP project. As reported previously, without hands-on commercial practitioners the signs are already there that the impetus may have been lost, since this project has been in the pipeline for many years, and the lack of clarity in the initial tender process caused confusion and lacked direction, resulting in a further 12 months being lost in procurement dialogue. Russian Railways are also examining seriously a further rail project for coal in Central and East Kalimantan, although only the latter portion has the support of the relevant governor, with an MoU signed in 2012. Southern Sumatra presents another example with billions of tonnes of brown coal deposits that until recently were only worked by the State Coal Company (Bukit Asam or PTBA). Historically, they have been hampered by geographical constraints, with the topographical challenge of the Barisan Mountain range to the west, and 200-250km of flat-lying wetlands to the north and east. Present production barely reaches 12 million tonnes per annum, shipped mostly down a narrow gauge railway built originally by the Dutch over a century ago and nursed ever since by the State

BritCham Business & Sector Positions 2012/2013

INFRASTRUCTURE : SECTOR GROUP

Railways


INFRASTRUCTURE : SECTOR GROUP

50

Railway Company (PT Kereta Api). A new modern standard gauge line of 278 km is planned to be built from Bukit Asam to a new special purpose port on the south Lampung coast by an Indonesian conglomerate, Rajawali Corporation, with financial assistance and technical input offered from Chinese sources. Other groups have also shown interest in building rail links in Southern Sumatra, with some off-take from Bukit Asam and other mines but taking either easterly or north-westerly routes. While outline agreements have been drawn up and outline work carried out, no real progress can be reported at this stage. Sumatra is a major source of coal within the Indonesian archipelago but exploitation has been hindered by distance from suitable port transfer outlets. Apart from the projects discussed above, mining from other provinces in Sumatra is now receiving attention and, in some cases, may involve rail solutions. Commuter lines As stated above, apart from continuing double-tracking work on railway lines in Java, no other serious development has taken place over the past year and the sector remains one that requires very high levels of investment for upgrading some of the existing rail track, as well as for building new lines, as mentioned above, particularly to provide commuter access within large urban communities such as greater Jakarta. Some early work has been undertaken to reinstate the line between Lhoksameuwe and Banda Aceh in northern Sumatra, as a first step towards linking up to Medan, but progress has stalled and the service on the link that has been constructed is extremely limited. Plans have continued to progress albeit slowly for the MRT for the city of Jakarta, though the public perception is one of no action because there is no visible progress. There is an expectation that the project will show some activity now that the gubernatorial election for the city of Jakarta has been concluded, although at the time of writing the new governor, Joko Widodo, has called for a review of the project. A decision on reviving the moribund monorail projects also awaits a decision by the new governor. There are two separate projects for rail links between downtown Jakarta and Soekarno-Hatta Airport, one a commuter line under Kereta Api and the other an express link (with the latter to be procured on a PPP basis). A high speed rail passenger route between Jakarta and Surabaya, first raised in the 1990s, also receives some spasmodic attention. This may also benefit the almost non-existent freight market in Java. Recommendations • Ensure private enterprise is encouraged to continue its interest in the development of freight railway for coal in Kalimantan and Sumatra. The government should consider forming a task force to ensure these projects progress in a timely manner, with a form of PPP that is workable and provides the private sector sufficient comfort to invest. This may require separating out the land acquisition, which can shortly be assisted with implementation of the Land Acquisition Law, from track and operations, which themselves could be treated separately; and

BritCham Business & Sector Positions 2012/2013


51

National & Toll Roads One of the highest priorities in the infrastructure programme in the years ahead is completion of the Trans Java Toll Road network and key toll roads around and connecting off-Java large conurbations. On Java itself, construction is either underway or expected soon for a number of key links in the network where concessions are in place. The passing of the Land Acquisition Law in December 2011 is of particular significance towards breaking down what has been a major stumbling block on the roll out of the toll road programme, although it appears that the new regulations will not apply to most of the projects already in process including the Trans Java. The necessary next step through presentation of implementing regulations was taken in August 2012 through Keppres, and it is anticipated that the new law will be able to be tested from 2013 onwards, which should greatly facilitate the necessary build out of new toll road sections and the road network in general. The 2013 budget has highlighted the construction of some 3,800 km of new road, towards the very extensive programme needed right across the country in order to allow regional economies to prosper. Of the 25 priority projects listed in the most recent Bappenas PPP book, 12 are toll road projects, half on Java and half on Sumatra (4 projects), Kalimantan and Sulawesi. It is recognised that most of these projects will need a considerable level of public sector support, especially since, while the economic necessity for construction is sound, the poor financial rate of return on many projects would make it extremely difficult to bring in any private sector response, if even only from the inability to attract debt financing. These projects need further attention, such as separation of the different elements of a given project to allow the private input to show an acceptable return on investment. It is understood that such an approach is being considered in one case with land acquisition being separated from each of the construction and operational phases. The growth in sales of motor vehicles and motorcycles continues unabated and each year that expansion causes increasing stress on the existing road network, particularly in urban and periurban areas. This has now reached crisis point in the greater Jakarta area, now the second largest conurbation in the world. The local government in Jakarta has started several projects aimed at improving the traffic situation in the nation’s capital. Unfortunately, poor planning, lack of financing and confusing implementation has created a situation that is hurting confidence among both local and foreign businesses. The bus-way, whilst designed to aid passenger movement in/out of the city, has not really helped by robbing the city of 25% of its available road space and not being operated at efficient levels. The lack of progress on other connecting modes (such as the MRT and monorail, which are needed when the road space in the city is seriously below optimal levels) has not helped to alleviate the situation. Recent developments There have been some small advances on the toll road programme in terms of section completions and securing of rights-of-way and financing for other sections, although overall the programme has moved slowly and progress remains disappointing – heavy congestion is a daily occurrence on

BritCham Business & Sector Positions 2012/2013

INFRASTRUCTURE : SECTOR GROUP

• Accelerate commuter rail infrastructure programmes, especially those involving various requirements for Jakarta suburban rail, the MRT, and bring about the completion of the stalled Jakarta monorail project and other links that are being considered for the city of Jakarta and other main cities in the country.


INFRASTRUCTURE : SECTOR GROUP

52

city-based sections. However, the government has completed toll road links that would connect to Jakarta ports to improve hinterland access, although additional capacity will be required in a short time especially with the large expansion programme for container handling facilities about to enter the construction phase. Within the next 2 years, the 7 km missing link of the Jakarta Outer Ring Road, section W2, is due to be completed, which will certainly improve traffic flow on the west side of the city, and progress is due on some key sections of the Trans Java Toll Road, especially on the 116km Cikampek to Palemanan link. Within the city of Jakarta, some new effort is being made to pursue a proposed plan for six defined inner-city toll roads, using as far as possible, existing rights-of-way. The city has presented the plan as a whole and with a price tag in excess of USD4 billion, this has made it difficult for many companies investing in toll roads to come forward with serious development plans. The plan is very much in the hands of the city government with SOE linkages, and therefore of little interest to the private sector. Future challenges While most focus continues on the development of the toll road programme, there is an enormous backlog of national and sub-national road development requiring serious attention, estimated to be in the order of 500,000 kilometres. Pushing ahead with this programme is essential if the untapped growth potential of much of the country is to be realised. While building national road links can be supported by aid financing, and there is multi-national agency support for areas of east and west Indonesia, most of the sub-national road development and routine maintenance is normally financed through the country budget. Sub-national roads account for 90% of the total road network so they cannot be ignored. There is recognition that government investment has to be made on both national and sub-national roads, and the recently unveiled budget for 2013 shows the intention of adding a further 4,431 km to the network financed from government sources. The cost of land continues to escalate and, with the significant rises in world oil prices during 2008, it has had an inevitable impact on the costs of construction materials which have also increased, adversely affecting forecast returns on investment. Nevertheless, completion of the Trans-Java toll road remains a government priority and there has been early implementation of a revolving fund to facilitate the acquisition of land, a key bottleneck in toll road development. Funding for this activity is expected to increase, although it remains inadequate to address the enormity of the challenge ahead. However, the progress on provision of a better legal framework for land acquisition, as reported above, is expected to have a significant impact on speeding up the build out of the toll road programme and infrastructure generally. Recommendations • Resolve outstanding issues affecting delays in completing the Trans-Java Toll Road links; • Create and implement a long-term plan for road development, and update existing integrated transportation plans for greater Jakarta; • Reactivate the extension of road networks in provinces/districts to improve access to markets, and deal with the contractual and capacity issues that cause significant continuing under-performance; and

BritCham Business & Sector Positions 2012/2013


53

Water & Sanitation Overall, Indonesia is well-blessed with water resources although their location does not always match with demand or with environmental needs. Of the 3,000 m3 per year of rainfall, less than one percent is harnessed for use, mostly for rice irrigation but also to meet domestic, municipal or industrial (DMI) demand where surface water is collected. There are 141 river basins across the archipelago, but more than 70% are in stress mode due to a lack of balance between extraction and replenishment, especially in drier seasons. Water supply to the population in general, where this is formally handled, is provided very largely through local government owned water utilities - PDAM’s. There are more than 400 of these, but unfortunately only about one-third of these are functioning reasonably well with a further third needing to be upgraded. The balance of companies is in a very poor condition both technically, administratively and operationally. While nationally the Millennium Development Goals (MDGs) may be deemed close to the 2015 target, there remain significant anomalies across the provinces. There is a handful of private sector concessions, most notably the two 25-year contracts for the city of Jakarta which have been in operation since 1998, but with greater Jakarta now gaining the mantle of the second largest conurbation worldwide, more attention will have to be paid to the future requirements as the city grows and adds wealth. Systems of storage, particularly for the northern section of the city, and recycling will have to be taken more seriously from now on. With regard to sanitation, the country languishes far behind MDG’s, and much has to be done to improve city conditions with wastewater as well as solid waste treatment facilities. Much also has to be done for rural communities, although solutions and systems could be simpler and tailor-made to a given situation. Help is being provided on a project by project basis through USAID, the Dutch government and privately-driven initiatives. Despite the notable exception of ongoing multilateral or bilateral aid projects, insufficient progress overall has been made towards investment in this sector, while the projected investment requirement of USD20 billion by 2015 remains largely unrealised. Of this target, approximately 50% has been expected to come from the state budget, 18% from multilateral or bilateral aid programmes, and the balance through private sector financing. The government is attempting to promote PPP programmes in this and other infrastructure sectors, but work is still required by the bureaucracy to present attractive implementation regulations or formats for execution. Following regionalisation in 1999, unlike other areas of infrastructure, the responsibility for the management and development of the water sector was divested to the regions, except for crossboundary jurisdictions that sometimes affect sources of supply for a given project. Regional developments vary from very good to none, and apart from the aid-based projects, referred to above, progress much depends on the quality and vision of the local government head and his or her relationship with local government politics and legislature. Very many relatively low investment projects in this field remain to be done. Recent developments and Future Challenges

BritCham Business & Sector Positions 2012/2013

INFRASTRUCTURE : SECTOR GROUP

• Activate use of the new Land Acquisition Law when current steps towards setting up the implementing regulations are complete.


INFRASTRUCTURE : SECTOR GROUP

54

Three major projects are receiving attention from the government: the Umbulan Spring major water supply project in East Java, the feasibility of which was first studied more than 20 years ago. While there was little progress to record over the past year, there is some anticipation that an award will be made before the end of 2012; the Umbulan project and water supply improvement projects for Lampung and West Semarang are being supported by IIGF. A new initiative to bring Jakarta’s main water supply from the Jatiluhur reservoir, some 70km to the east, by pipeline to avoid the considerable contamination that occurs through the open-channel system currently in use, is also expected to proceed along with further water supply projects based at Karian in Banten province and Jatigede in the east of West Java, this latter also to provide hydro power. All these projects are recognised as appropriate to PPP arrangements, depending on sources of funding and local government appetite and understanding. These and a few other water supply projects have been listed as priority projects by Bappenas, along with three solid waste projects, along with a long list of projects itemised in the potential category. In the longer term plan for the city of Jakarta, it is intended that a major seawall defence structure will be installed to protect the city from flooding, the north of the city having sunk significantly largely as a result of unrestrained groundwater extraction. The plan also shows the establishment of flood control and freshwater lakes behind the seawall, which can be used as a basis of water supply for development of the north part of the city. The necessary implementation of the dyke, to be located at the 50m depth mark, well offshore, will have a profound influence over the development of the north part of the city. Recommendations • Accelerate the programme for water conservation and set in motion the macro-changes required for the changing demand on Java, e g from rapid urbanisation; • Address the necessary investment needed in irrigation for upgrading neglected paddy infrastructure, and required increased agricultural production outside Java; • The skills base in the water sector is weak and, while some programmes in training and development are taking place, many more are needed; and • Support government initiatives, through special financing and support mechanisms, to upgrade the quality of regional water companies and consider possible local government to private sector business arrangements, which should include opportunities to upgrade the skills base, as referred to above.

Dr. Scott Younger OBE Chairman

BRITCHAM Infrastructure Sector Group President Comissioner of Glendale Partners EMAIL scott.younger@glendalepartners.com

BritCham Business & Sector Positions 2012/2013


55

Despite the fact that Indonesia has an abundance of mineral resources, in recent years it has failed to attract any significant amount of new mining investment. This has been due to a variety of factors, most significantly the increased level of regulatory uncertainty that has emerged since the passing of the new Mining Law in 2009 and the subsequent issuing of implementing regulations. Some of these concerns are detailed below.

New Mining Law and Implementing Regulations Contracts of Work (CoWs) The new mining law states that Mining Licences called IUP’S (Izin Usaha Pertambangan) will replace Contracts of Work (CoWs) and Coal Contracts of Work (CCoWs). Since the law has been passed, the Government of Indonesia (GOI) has now stated that the maximum permitted mining concession area for an IUP issued to the holder of a former CoW / CCoW will be only 25,000 ha for metals minerals and 15,000 ha for coal. This is far less than the size of most CoW / CCoW contract areas. Also, whilst existing CoWs / CCoWs can continue there is some concern that the GOI may seek amendments to these CoWs / CCoWs to bring them into line with the new mining law. Tenders The new mining law states that these new mining licences (IUP’s) and Exploration IUP’s will only be awarded on the basis of a public tender. Many investors question whether local regencies have adequate and sufficiently-skilled resources to organise and manage a public tender and put together the mining area data packages that need to be made available for tender participants. Of even greater concern is the uncertainty about when the GOI will allow new tenders to be held for Exploration IUP’s given that the MoEMR (Ministry of Energy and Mineral Resources) were recently quoted as saying that the GOI did not see the need for any new Exploration IUP’s to be issued in the next 5 to 10 years. IUP Transferability There is some confusion about the ability to transfer IUP’s, with the approval of the regent. The new mining law indicates these are not transferable except in very special circumstances, while the MoEMR has indicated these are transferable. This is a key issue for investors, as they will be obliged to acquire the shares of IUP holders (and hence potential undisclosed liabilities) if IUP’s cannot be transferred in most cases. Conversion of IUP Holding Companies into PMA companies Many foreign investors wish to acquire shares in companies which hold IUP’s once these companies have been converted into Foreign Direct Investment/Perusahaan Modal Asin (PMA) companies. BKPM is currently refusing to accept applications for this conversion into PMA companies although the new mining law states that PMA companies may hold IUPs. Core Mining Activities Under the new mining law, IUP holders are expected to conduct a number of key activities themselves including production, which they cannot outsource. This will severely limit the participation of small mine

BritCham Business & Sector Positions 2012/2013

MINING : ENERGY SECTOR GROUP

Mining - Energy Sector


MINING : ENERGY SECTOR GROUP

56 owners who will probably lack sufficient financial and other resources to conduct this work themselves. Local Processing and Refining One of the recently issued implementing regulations states that metals minerals which can be processed and refined into more highly valued-added products should be processed and refined in Indonesia and the same applies to coal. The deadline for this is 2014. This deadline is seen by many as being unrealistic and unachievable given the constraints posed by (a) insufficient electricity supply (b) inadequate infrastructure (c) the time required to build processing and refining facilities and (d) the general lack of local competitive advantage in selling processed and refined mineral products as opposed to raw mineral products. Other developments Forested Areas: There is concern about the continuing delays in, and administrative hurdles to, obtaining the all important Rent Use Permits for exploration as well as exploitation mining activities. Divestiture: The divestiture requirement has been increased from 20% after 5 years of commercial production to 51% on an instalment basis starting after 5 years of commercial production and ending in the 10th year of commercial production. The critical issue is the divestiture price. Recently, the GOI has been saying that if it exercises its priority right, it will only pay 51% of the accumulated capital and operating expenses to date and not 51% of the fair market value of the underlying resource. Issuance of IUP’s to PMA Companies: The GOI is now saying that only MoEMR may issue IUP’s to PMA companies and this includes all renewals and extensions of IUP’s previously issued to PMA companies by Regents/Governors. The critical issue here is the practicality of MoEMR issuing all IUP’s to PMA companies if the Regents/Governors refuse to cooperate in providing the supporting recommendation which MoEMR has said is to be an essential supporting document which must be submitted by all PMA companies seeking IUP’s from MoEMR. Export Requirements & Export Tax: The GOI has imposed onerous new export requirements and a 20% export tax for all exports of 65 specified unprocessed mineral products. The critical issue is the cost and delay to exporters of complying with these new export requirements and paying the new export tax. Will these materially undermine the competitiveness of the local mineral export industry? Clean & Clear List: The GOI wants to cancel all IUP’s that are not included on DGoMC’s Clean & Clear List, by as early as 31 December 2012. Is this fair in the case of those holders of IUP’s who acquired their mining concessions in good faith and where the reason for the IUP’s not being on the Clean & Clear List has nothing to do with fraud or wrongdoing by the IUP holders concerned? Recommendations There are many developments mentioned above which are creating a great deal of uncertainty for those who are already active in the Indonesian mining sector, as well as for those who may be contemplating investing in the mining sector. It is hoped that the GOI will take account of these concerns, and take steps to ensure that a conducive investment environment is maintained in the mining sector, generating long term benefits both for the government and people of Indonesia, and for investors.

BritCham Business & Sector Positions 2012/2013


57

A key objective for the Indonesia government (GOI) is to maintain a high rate of economic growth. For this to be achieved domestic energy production must in turn continue to grow rapidly to keep pace with the increasing demand for energy. To support this growth, billions of dollars of finance will be needed, most of which will have to be sourced from the private sector. Oil and gas will continue to play a central role in the Indonesian energy mix. However, there are a number of uncertainties facing investors in the oil and gas sector which may well constrain them from meeting this challenge and providing the energy needed to underpin these planned levels of high economic growth. The key uncertainties are as follows:

Cost Recovery Cost recovery is the mechanism in the Production Sharing Contract (PSC) regime by which all PSC Contractors are able to recover their investment in exploration, development and production, once oil and gas has been produced. The exploration costs in areas where no oil and gas is produced are borne entirely by the PSC contractors, and cannot be recovered. In December 2010, the Government introduced GR No. 79/2010 on Cost Recovery and Income Tax within the Upstream Business Sector (referred to as GR 79). It is the view of BritCham members (and the Indonesian Petroleum Association “IPA”) that GR 79 contradicts several superior laws and regulations, such as the Oil and Gas Law, the Income Tax Law, the Indonesian Civil Code and the Law on Formation of Laws and Regulations. It is seen as being contradictory, because this GR 79 could potentially be applied retroactively and therefore changes the principle of the existing PSC unilaterally. The PSC is protected under the Indonesian Civil Code, and the Oil and Gas Law, and the maintenance of this legal certain is critical to investor confidence (this is mainly referring to Art. 38 (b). This GR 79 also creates uncertainties for future PSC’s since it potentially allows the Government to change the PSC terms from time to time after a PSC has been signed. In June 2011, the IPA filed a Judicial Review on GR 79 to the Supreme Court as a last resort in obtaining the clarity and certainty that is required for existing PSC’s as well as for future PSC’s. The IPA requested that the GR 79 be revoked, since it is likely to have a negative impact on the oil and gas investment climate in Indonesia, reducing investment by as much as 20% and a generating a production decline of 150,000 BOEPD (billions of oil equivalents per day). In October 2011, IPA’s petition for Judicial Review on GR 79 was denied by the Supreme Court, but until today (November 2012) the reason for this denial is still not yet known. Recommendation As the Cost Recovery mechanism is only triggered in the event that the exploration/development work carried out by a PSC contractor produces a profitable, revenue-producing oil or gas well, it should be seen as the GOI providing its share of investment rather than a subsidy to a contractor. It is therefore recommended that GR 79 be revoked, and that Cost Recovery should be taken out from the State Budget Law.

Competitive Gas Pricing

BritCham Business & Sector Positions 2012/2013

OIL & GAS : ENERGY SECTOR GROUP

Oil & Gas - Energy Sector


OIL & GAS : ENERGY SECTOR GROUP

58

Indonesia has extensive reserves of gas and there is great potential for proving up further reserves, even though most of these potential gas reserves are located in more remote areas. In order for investors to be attracted to explore for gas in remote areas, they need to know that if they are successful and are able to produce gas, they can obtain a regionally competitive price for this gas regardless of whether it is sold into the domestic or export market. At present, gas sold into the domestic market for power generation is subject to a price cap which is driven by the price at which electricity is sold to end users, though it is recognised that recently higher gas prices are being paid by some domestic buyers including PLN. However, government statements about the increasing percentage of the gas DMO and the about possibility of the imposition of export bans are also creating increased concern for investors. Recommendation: It is recommended that in order to encourage investment, the price of gas supplied under all PSC’s is based upon international market pricing. However, if deemed necessary by GOI, appropriate subsidies could be applied to protect the domestic market. Without this protection, investors in gas production are unlikely to commit the required level of investment into more remote, high risk areas, where future gas supplies may be found and brought to market.

Regulatory Environment There has been much new legislation passed recently, some of which has negatively affected the investment environment and threatened contract sanctity. For example new laws and regulations regarding the environment, cabotage and local content have all added to investor uncertainty. In addition, it has been announced that the DPR (Lower House of Parliament) has agreed to revise the Oil and Gas Law of 2001. It is the view of BritCham members (and the IPA), that the existing Oil and Gas Law has been relatively successful and any substantive amendment to this Law at this time will cause further uncertainty for those considering investments in Indonesia. BritCham members (and the IPA) support the importance of amending the Oil and Gas Law to conform with the decision of the Constitutional Court. However, the view is that any changes should be limited to amending those articles that have been deemed unconstitutional by the Constitutional Court. This is because current issues surrounding the oil and gas industry can be addressed without changing the existing Oil and Gas Law. Indonesia’s economic growth relies heavily on the petroleum industry. Legal certainty is a key principle in assuring the sustained long term investment that needs to be maintained to keep the investment climate competitive. Exploration investment took a downturn after the current Oil and Gas Law was introduced and only started to recover after the effects of its implementation became clearer. The same downturn in investment is expected to occur if the Oil and Gas Law is amended again. Investors will reconsider their investment plans if they see new uncertainties arising from the legal amendments. This is particularly the case given that much of the new acreage being offered in bid rounds is located in unexplored, frontier, deepwater areas, where projects will typically need a 30 year period for the development of the field and recovery of the development costs. In addition, the regulatory environment for monitoring PSC’s is seen as having become excessive and counter-productive and is resulting in unnecessary delays in the overall exploration and production process. Recommendation Any changes made to the existing Oil and Gas Law of 2001 should be limited to changing those

BritCham Business & Sector Positions 2012/2013


59

Fiscal Certainty There is continued uncertainty about the fiscal environment for oil and gas. Recommendation: There needs to be harmonisation of fiscal policy and confirmation that sanctity of the Production Sharing Contract will be preserved. In addition, assurance should be given that tax deductibility will equal cost recovery, and the level of income tax will be set for the life of the contract, irrespective of subsequent rate changes. It is also proposed there should be no tax on the transfer of interests, particularly those in the exploration phase, where the ability to farm-in and farm-out is often a key component in maintaining exploration activity. The annual exemptions from import duties for certain equipment used in exploration activity should be removed and replaced by a permanent exemption.

Contract Duration: PSC Extensions At present applications for PSC contract extensions can only be submitted within 10 years of the expiry date of a contract. There is also no clear and transparent process governing this application. Increasingly, the level of capital commitment and planning for major projects require a longer recovery time frame than 10 years. The current system leads to a slowdown of investment in the final years of the PSC contract duration and hence a decline in production. Recommendation It is proposed that the GOI provide a clear and transparent process for the extension of PSC contracts.

Exploration Investment Exploration investment is the key precursor to future oil and gas production and must be maintained at a high level. Recent tender licence rounds have seen a very disappointing response. Much of the acreage recently offered in bid rounds is located in unexplored, frontier, deepwater areas where the lack of infrastructure and little or no geological or geophysical data, and difficult logistics means that exploration costs, and hence the risks, are high. Exploration Activity should be encouraged, incentivised and accelerated. To compete for exploration capital in a global marketplace, the government must recognise that deepwater exploration is a high-cost, high technology and time consuming process that is more or less limited to a small number of multi-national companies. Exploration investment is the key to future production.

BritCham Business & Sector Positions 2012/2013

OIL & GAS : ENERGY SECTOR GROUP

articles that have been deemed unconstitutional by the Constitutional Court. The Government should simplify the management processes for PSC’s


OIL & GAS : ENERGY SECTOR GROUP

60

Recommendations: The government needs to consider the following: •

Providing incentives to encourage exploration in remote, deepwater offshore areas

Improving data access, and reviewing minimum signature bonuses, relinquishment rules, size of commitments, size of licence areas, frequency of tender rounds, transparency in the awards system, fiscal splits, and introducing improved terms for deepwater exploration

Simplifying the management processes for PSC’s which are in the exploration phase, so the drilling of much needed exploration wells can be accelerated, which will significantly reduce costs.

Bank Indonesia Regulation No. 13/20 of 2011 on Foreign Exchange Proceeds from Export BritCham members (and the IPA) believe that Production Sharing Contractors should not be subject to the provisions of the Bank of Indonesia regulation No. 13/20/PBI/2011 as they are Contractors to BPMIGAS and not Exporters. Contractors are responsible for the execution and conduct of all aspects of Petroleum Operations under the terms of the Production Sharing Contract and the PSC provides the right for the Contractors to freely lift, dispose of and export their share of petroleum and retain abroad the resulting proceeds. In addition, the Contractor’s right to dispose of and export their share of Petroleum should be distinguished from the Governments’ share. It is the government’s share that contributes to the Indonesian economy as foreign exchange. The Contractors’ share of Petroleum does not constitute foreign exchange revenue deriving from export. The explicit nature of the Contractors’ rights under the PSC to freely lift, dispose of and export their share has always been recognised and honoured since the inception of the first generation of the PSC under Law No. 44 of 1960, then under the Pertamina Law No. 8 of 1971 and presently under the Oil and Gas Law No. 22 of 2001. The clear intention of the existing PSC agreements allow the Contractors to retain proceeds abroad and is an important fiscal incentive upon which the original investment was made. Recommendation: Allow Production Sharing Contractors to continue to freely lift, dispose of and export their share of petroleum, and retain abroad the resulting proceeds.

Oil Product and LPG Downstream Sector Despite the enactment of the Oil and Gas Law in 2001, and the subsequent passing of the Downstream Oil and Gas regulation in 2004, both of which were designed to open up the downstream oil and gas sector to competition, today more than 70% of oil the products market and 97% of the LPG market is still supplied by one just company, namely Pertamina. This failure to achieve open competition is a result of both regulatory barriers and informal barri-

BritCham Business & Sector Positions 2012/2013


61

A significant lack of investment in new infrastructure, which undermines the country’s ability to increase product stock holdings and mitigate the impact of domestic or overseas supply crisis situations when they occur. The country’s s energy security is being weakened as energy demand grows.

Many new job creation opportunities continue to be lost.

Consumers are paying higher fuel prices than they would otherwise do so if open competition was promoted and enforced (setting aside the application of fuel subsidies by the government). For instance supply chain costs are higher than they should be as a consequence of onerous and conflicting regulations covering the import, export, storage and transhipment and sale of petroleum fuel products.

Disincentives which are preventing the establishment of fuel product trading hubs in the country, which can successfully compete with neighbouring countries such as Singapore and Malaysia.

In excess of 43% of oil product demand and 47% of LPG demand is supplied by imports and this proportion is increasing annually.

Declining working stock levels at a national level and no strategic stocks to call on.

Recommendation: •

Open up all activities in the downstream oil and gas sector to open competition and to create a level playing field for all participants.

Review all existing regulations applicable to the downstream oil and gas sector including those which are issued by related ministries (such as Ministries of Trade, Finance and Transport) with the objective of eliminating any conflict in these regulations and, if necessary, amend existing regulations which may be preventing the creation of open competition.

David Braithwaite MBE Chairman

BritCham Energy and Mining Sector Group President Director of Q Energy South East Asia EMAIL davidjb@cbn.net.id

BritCham Business & Sector Positions 2012/2013

OIL & GAS : ENERGY SECTOR GROUP

ers, and Indonesia is losing out in many ways as a result of this, examples being as follows:


ENVIRONMENTAL ISSUES : CROSS SECTOR

62

Environmental Issues – Cross Sector In line with Indonesia’s economic growth, there is a growing awareness of the need for environmental management of major energy and infrastructure projects. A well established system of environmental impact assessment (EIA) already exists within Indonesia, known as Analisa Mengenai Dampak Lingkungan (AMDAL), and is a legal prerequisite for all large scale energy and infrastructure projects. AMDAL is a comprehensive system designed to assess the environmental and social (biological, geo-physical/chemical, socio-economic-cultural, and public health) impacts of a project. The AMDAL process is the means by which the Indonesian environmental authorities evaluate the environmental feasibility of a project and award the necessary permits for project approval. The AMDAL was first introduced over 20 years ago, and as the original AMDAL regulations were drafted with the assistance of the World Bank, at least in structure and content they are comparable with international standards. Whilst AMDAL was poorly understood and applied at first, it has been improved progressively through revisions to the laws and regulations up to the current Environmental Protection and Management Law No. 32, October 2009, which replaced the Environmental Law No. 23, September 1997. The Ministry of Environment (MoE) Regulation No 08 of 2006 also provides guidance on the AMDAL process. The most recent Government regulation 27, 2012 on Environmental Permitting is the latest step towards ensuring better application and compliance with AMDAL and environmental regulations. Projects requiring AMDAL are detailed in the Minister of Environment Regulation No. 11 Year 2006 (recently updated in the MoE Regulation No. 5, 2012 with the same title) ‘Positive List’. Requirement is based upon project size, location, and type. Any project located in or near a protected area requires an AMDAL. Sectors covered under the regulation include: (1) defense, (2) agriculture, (3) fisheries, (4) forestry, (5) transportation, (6) satellite technology, (7) industry, (8) public works, (9) energy and mineral resources, (10) tourism, (11) nuclear development, (12) hazardous waste processing, and (13) genetic engineering. Projects not on the list or representing a ‘minor’ extension to an existing project will require a UKL/UPL environmental monitoring and management plan. Increasingly, in addition to AMDAL, compliance with international Equator Principles (EP) is becoming more prevalent particularly where projects require backing from Equator Principle Finance Institutions (EPFIs). EP compliance is not a legal requirement for projects in Indonesia, and none of the ‘big four’ Indonesian banks have yet signed up to the Equator Principles. Immediately this puts projects backed by EPFI’s at a disadvantage to local competitors. Whilst many Indonesian companies and government authorities have expressed an interest in EP, they generally feel they cannot afford to take on board the additional responsibility and expenses require to meet EP standards. AMDAL and EP studies, even when executed in parallel, will take a minimum of 6-8 months to complete, thus representing a significant component of any project lead time. Project permits will not be issued without a completed AMDAL. Whilst there are a lot of similarities and synergies between AMDAL and EP, EP studies are generally recognised as being more stringent, broader reaching, and cover the entire life cycle of the project. EP also puts greater emphasis on the community, working environment, and public health conditions. In its most basic form, the AMDAL has been perceived to be a ‘tick box’ exercise required to gain project permits and approvals. Although EP compliance requires greater effort and expense than AMDAL, EPFI’s argue that the application of EP Performance Standards is good business practice, ensuring thorough the identification of risks and application of mitigation measures that will

BritCham Business & Sector Positions 2012/2013


63

Recommendations Potential project investors need to be aware that whilst the Ministry of Environment lacks the finance and resources to comprehensively monitor and enforce the requirements of the AMDAL, the application of AMDAL is backed by heavy penalties including revocation of business licenses, fines and even jail terms, which can be applied to projects which breach environmental laws. With increasing public awareness of environmental issues, and examples of pressure groups and politically backed interest groups pursuing environmental offenders through the courts, international investors cannot afford to pay lip service only to Indonesian environmental regulations. To ensure there is proper and fair application of environmental laws and regulations across all business sectors, the government does need to devote more resources into supporting the application, monitoring, and enforcement of these current laws and regulations. In addition, the government needs to involve community and stakeholder groups - more than we do at present - in the project consultation and monitoring process in order to avoid misconceptions, identify potential risk areas, and ensure fair application of environmental standards.

Nigel J Landon Country Director PT. EnviroSolutions & Consulting EMAIL nigel@envirosc.com

BritCham Business & Sector Positions 2012/2013

ENVIRONMENTAL ISSUES : CROSS SECTOR

ultimately benefit the project, environment, and affected communities.


AKNOWLEDGEMENTS

64

Acknowledgements BritCham would like to express its sincere thanks to the following members who maintain sectors groups and have contributed to our sector positions.

Infrastructure Sector Group:

Chairman: Dr. Scott Younger OBE President Commissioner of Glendale Partners Email: Scott.younger@glendalepartners.com Contributors: Richard Michaels

Human Resources Sector Group:

Chairman: David Knowles Managing Partner of OPUS Management Email: david@opusmanagement.com Contributors: David Tampubolon & Richard Cornwallis

Food, Forestry, Fisheries and Agriculture Sector Group

Chairman: Roger Pinder General Manager of PT. AGSPEC Indonesia Email: rogerpinder@agspec.net Contributors: Scott Martin, Paul Kanwar, Jim Lietch, Colin Harvey , Wiewien Winarsih

Energy Sector Group

Chairman: David J Braithwaite MBE President Director of Q Energy South East Asia Email: davidjb@cbn.net.id Contributors: Nigel Landon, James Booker

Position Paper Corporate Support:

BP | Shell | Premier Oil | Synergy Downstream Solutions | Indonesian Petroleum Association | ChristianTeo Purwono and Partners | Rolls Royce | Indika Energy | EnviroSolutions & Consulting

BritCham Business & Sector Positions 2012/2013


About BritCham The British Chamber of Commerce in Indonesia (BritCham), is now in its second decade of establishment building on a British business presence that extends more than hundred years. Over those years, we have had the pleasure of welcoming the most influential politicians, business leaders, world news commentators, renowned experts in various fields and academicians as guests to our various forums. By the end of 2012, we will have hosted more than one hundred events that will have provided broad platforms for business development amongst our members. Working cooperatively with the British Embassy (UKTI) and the British Council, whose senior representatives sit on our Board of Management, BritCham is committed to developing a services infrastructure that supports all stages of business development right from their inception in Indonesia. To our members and a much broader data network, we represent an independent and reliable source of information on issues. This covers politics, current affairs, security, health, inside-track analysis from our business sector groups, advocacy, and social development. Our dynamics are strong and exemplified by our leading role in the development of BiSEA (Britain In South East Asia), the rapid growth of our community portfolio – ‘Giving Kids A Sporting Chance’, and the establishment of both the Professional Women and Young Professionals groups. We are one of three SEA British Chambers pioneering a ‘touchdown’ service for British SME’s taking a look at the opportunities in Indonesia. Although British in name, our BritCham community is far from exclusively British. The integrity of the BritCham brand attracts members, sponsors and advertisers with roots from all over the globe – most pleasingly, from our host country, Indonesia. We look forward to many more decades of serving the interest of our members from British, domestic and international business communities in Indonesia.


WE OFFER MORE • Opportunities to network and interact with leading members of the international business community. • Access to reliable, up-to-date strategic business information. • Opportunities to position and enhance your brand. • Business development assistance, including mentoring and office space. • Links and special reciprocal benefits with Chambers in the region. Our Patron:

proudly sustained by:

airline sponsor of the year

britcham office is kindly sponsored by:

Executive Office

Phone: 62 21 522 9453

Wisma Metropolitan 1

Fax: 62 21 527 9135

15th Floor, JL. Jend Sudirman Kav. 29 - 31

Email: bisnis @britcham.or.id

Jakarta 12920

www.britcham.or.id


Positionpapers20122013 britchamindonesia