Construction and projects in Indonesia: overview

A Q&A guide to construction and projects law in Indonesia.

The Q&A gives a high level overview of the main trends and significant deals; procurement arrangements; transaction structures and corporate vehicles; financing projects; security and contractual protections that funders require; standard forms of contracts; risk allocation; excluding liability, including caps and force majeure; contractual provisions covering material delays and variations; appointing and paying contractors; subcontractors; licences and consents; projects insurance; labour laws; health and safety; environmental issues; corrupt business practices and bribery; bankruptcy/insolvency; public private partnerships (PPPs); dispute resolution; tax and mitigating tax liability; and proposals for reform.

To compare answers across multiple jurisdictions, visit the construction and projects Country Q&A tool.

This Q&A is part of the global guide to construction and projects law. For a full list of jurisdictional Q&As visit www.practicallaw.com/construction-guide.

Contents

Overview of the construction and projects sector

1. What are the main trends in the local construction and projects market? What are the most significant deals?

Main trends

Indonesia's construction sector continues to grow at an impressive rate, supported by the government's focus on infrastructure as a way to drive economic growth and remove bottlenecks such as widespread traffic congestion.

Major investments tend to focus on power and transportation, with new projects largely involving government-related initiatives. Foreign investment in energy and natural resources has tapered off due to regulatory and political risks, although the low prices for coal and other commodities has not helped the situation. State-owned enterprises (SOEs) such as PT Wijaya Karya (Persero) Tbk and PT Pertamina (Persero), Indonesia's oil and gas company, have a central role in many projects.

Projects listed in the ambitious Master Plan for Acceleration and Expansion of Indonesia's Economic Development (MP3EI) may be funded from the government infrastructure budget, by SOEs or under the Public Private Partnership (PPP) scheme. Most of the projects listed in MP3EI require private sector funding, and these projects are progressing rather slowly, with many citing project readiness and bankability as key issues.

Private sector projects may involve the development of office buildings, high-rise apartments or shopping malls. These projects are often financed and developed under local terms, with the pipeline of new projects depending on local supply and demand factors as well as lending rates from Indonesian banks and other financial institutions.

From a foreign investment standpoint, Indonesia continues to have a reputation for slow project execution, with key issues relating to land acquisition, government decentralisation, uncertainty regarding government support mechanisms and a lack of a well defined approach to risk allocation. Nevertheless, the outlook continues to remain bright, so long as Indonesia can successfully address key challenges and roadblocks.

Major projects

Current major projects include the:

  • Jakarta mass rapid transport system.

  • Kalibaru port (New Tanjung Priok).

  • 2 x 1,000MW Central Java power plant.

  • 3 x 600 MW Sumsel 9 and Sumsel 10 mine-mouth coal-fired power plants.

  • Soekarno-Hatta International Airport railway.

  • Trans-Java toll roads.

  • Trans-Sumatra toll roads.

 

Procurement arrangements

2. Which are the most common procurement arrangements if the main parties are local? Are these arrangements different if some or all of the main parties are international contractors or consultants?

At the centre of the project stands the employer, or project company, which is tasked with hiring a construction contractor to implement the project. The employer is often a special purpose vehicle (SPV) established in Indonesia for the sole purpose of developing the project. The employer may be managed by a sponsor who is an equity investor that oversees the bidding and project development.

The contractor may execute work such as planning, general contracting (actual construction work), supervision or a combination thereof (integrated services). Under Law No 18 of 1999 (Construction Services Law), a construction services provider must generally be appointed by way of a public or limited tender, or in limited cases by way of direct appointment. While the language appears to apply to any appointment (public or private), in practice its applicability has been limited to public sector appointments. For private projects, the employer or project company directly designates the construction service provider at its sole discretion. Government officials are of the general view that the authority to appoint the construction service provider for a private project lies with the employer, as it does not affect state interests.

Special rules apply if part or all of a project is financed from the state budget. This requirement is separately regulated under a presidential regulation and has been strictly implemented.

The Construction Services Law does not distinguish between local and international projects, although sector-specific regulations may apply under a separate legal regime. For example, the Electricity Law applies to electricity supporting services and the Oil and Gas Law applies to oil and gas supporting construction services. Under the Electricity Law and Oil & Gas Law, the licences required in that sector can only be obtained by a company established in Indonesia.

As well as the construction contract between the employer and the contractor, the employer generally enters into separate contracts to engage architects or design engineers to prepare design documents, and with specialist engineers to assess, for example, ground conditions.

The following procurement arrangements are also frequently used:

  • A single contract for design and construction.

  • Construction contracts on a turnkey basis at a fixed price, including engineering, procurement and construction (EPC).

  • Construction management contracts, including EPC management (EPCM).

These arrangements are generally the same if some or all of the main parties are international contractors or consultants.

 

Transaction structures

3. What transaction structures and corporate vehicles are most commonly used in both local and international projects?

Local projects

Local construction companies typically conduct business through an Indonesian corporation with liability limited by shares (Perseroan Terbatas (PT), commonly translated as "limited liability company"). Transaction structures tend to be straightforward, with direct engagement between the employer and its contractors under a variety of construction contracts. Local banks may provide corporate debt at the parent company level in order to fund the project.

International projects

International projects involve a more sophisticated array of corporate vehicles and transaction structures. Vertical or horizontal corporate structures consisting of several SPVs are sometimes used to comply with statutory limits on foreign ownership, or for tax or financing reasons.

A foreign construction company can provide construction services in Indonesia by either:

  • Establishing a joint venture company incorporated in Indonesia and applying for a construction service business licence (Izin Usaha Jasa Konstruksi).

  • Establishing a foreign construction service representative office, which acts more like a branch operating office (rather than a typical representative office).

Due to the difficulty of obtaining a construction service business licence, as well as the applicable foreign ownership limitation, foreign construction companies overwhelmingly prefer to establish a foreign construction services representative office. Regulations require a foreign construction representative office to enter into a joint operation arrangement on a project-by-project basis with a local construction company. There is also a minimum portion of work required to be shared with the local construction company.

 

Finance

4. How are projects financed? How do arrangements differ for major international projects?

Major construction projects are typically funded on an international project finance basis using a combination of debt and equity. Bridging and mezzanine finance can also be used. Where various lenders, multilateral institutions or export credit agencies are involved, financing arrangements can be complex, particularly in order to deal with construction risks and other risks that lenders may be reluctant to bear. This is in contrast to local projects using corporate debt from local banks, often advanced under standard short form local loan documents.

While many Indonesian companies have small tranches of shares publicly listed on the Indonesian Stock Exchange, using the capital markets as a way to raise significant funds continues to be a rarity (although this is slowly changing). Bond markets are very underdeveloped despite efforts from multilateral institutions.

 

Security and contractual protections

5. What forms of security and contractual protections do funders typically require to protect their investments?

Security

Lenders typically require one or more of the following forms of security to secure a loan:

  • Mortgage (Hak Tanggungan). This is a mortgage of title to the plot of land on which the construction is carried out.

  • Pledge. This is a pledge of shares in the company constructing the facility and owning the land, or in that company's parent.

  • Fiducia. A type of security over tangible movable property, such as machinery, inventory and vehicles.

  • Other forms of security. These include a pledge of assets, pledge of bank accounts and fiducia of receivables and parent company guarantees.

Contractual

Lenders generally require warranties, step-in rights and assignment of contractual rights. Contracts that can be assigned include various project contracts, such as construction contracts, concession agreements and offtake agreements and insurance. As part of lender step-in rights, the borrower is often required to provide to a lender certain irrevocable powers of attorney by way of security so that the lender can step into the shoes of the borrower if there is a default.

Lenders also frequently require the establishment of offshore bank accounts and cash collection and distribution arrangements to help monitor and control the borrower's cash flows.

 

Standard forms of contracts

6. What standard forms of contracts are used for both local and international projects? Which organisations publish them?

Local projects

In Indonesia there are no widely used standard forms of construction contract, even though major SOEs may have their own in-house forms of general conditions for use on a case-by-case basis, typically for smaller projects.

Under the Construction Services Law, a construction contract must comply with certain requirements, such as being written in Indonesian (although there may also be an English version which can prevail in the event of an inconsistency) and covering certain matters, such as workers' safety and protection of the environment. The construction contract must be governed by Indonesian law.

As well as using engineering, procurement and construction (EPC) Contracts (see below, International projects) for domestic projects, it is also common for the employer to enter into a series of "island" contracts for separate aspects of the work, potentially with a project manager appointed under an EPC management (EPCM) contract.

International projects

In the private power sector, EPC work is usually undertaken under a lump-sum fixed price and date-certain contract (EPC Contract) by a consortium of domestic and foreign contractors or equipment suppliers, particularly if the project involves limited-recourse financing.

To benefit from certain Indonesian tax exemptions, an EPC Contract is often split between an offshore equipment supply and services contract and an onshore construction contract with different parties. To achieve a turnkey basis with a split structure, the employer often requires the EPC contractor to enter into a bridging agreement to wrap its liabilities for both the onshore and offshore portions of the work.

 

Contractual issues

Contractors' risks

7. What risks are typically allocated to the contractor? How are these risks offset or managed?

In any project, the general rule is that risks should be allocated to the party best placed to bear them in the absence of particular industry convention or other special circumstances. Most contracts typically allocate the following risks to contractors:

  • Increases in material and labour costs. Some contractors choose to assign the risk to sub-contractors or consultants, or negotiate cost increases to be shared with the employer beyond an agreed level of increase.

  • Ground conditions. Employers generally try to pass on both foreseeable and unforeseeable risks relating to ground conditions to the contractor, although sometimes parties may agree that this be limited to foreseeable risks only. Contractors can seek to manage this risk by undertaking a thorough due diligence of the project, including a site investigation, before the contract is concluded.

  • Defects in design and construction. Contractors may purchase professional indemnity insurance to limit risk exposure.

  • Change in law. As the law continues to develop in Indonesia, contractors are required to keep up with any changes in the regulatory environment. The contractor often bears the risk of additional unforeseen costs as well as any delay in project completion. However, this also depends on negotiation between the parties (see Question 11).

 

Excluding liability

8. How can liability be excluded or restricted under local law?

Either party can limit its liability by carving out indirect and consequential loss and imposing liability caps (see Question 9).

Parties are advised to use carefully worded indemnities, warranties and termination provisions to allocate, and limit or exclude, project risks.

Although Indonesian law recognises the principle of freedom of contract, and this principle is codified in Article 1338 of the Civil Code, the enforceability of such restrictions may be subject to principles of fairness (keadilan), customary practice (kebiasaan) and laws and regulations, as provided for under Article 1339 of the Civil Code.

 

Caps on liability

9. Do the parties usually agree a cap on liability? If yes, how is this usually fixed? What liabilities, if any, are typically not capped?

Contractors often negotiate caps by reference to the contract price for liabilities, with a separate cap for delay damages (for example, 10% of the contract price).

Often, a party's liability for wilful misconduct, fraud and gross negligence is excluded from any cap. Parties will also need to bear in mind any liabilities covered under an insurance indemnity. Parties may agree on other exclusions, depending on the relevant project and circumstances.

 

Force majeure

10. Are force majeure exclusions available and enforceable?

The concept of force majeure (FM) is prescribed under Indonesian law and is therefore applicable even if the parties do not set out an FM provision in the contract. However, FM provisions are commonly included in contracts governed by Indonesian law, and parties are allowed to some extent to agree between themselves on what constitutes an FM event. However, it is important that the parties consider the relevant regulatory requirements (some of which may be industry-specific) when drafting the FM provision to ensure it complies with the applicable law. The contract usually sets out the procedures to determine the existence of an FM and the rights of an affected party. During an FM event, the affected party generally has its contractual obligations suspended without payment of liquidated damages. The contract may also stipulate that the construction period is extended for the same duration as an FM event.

If the FM event continues for an extended period of time, parties are generally given the right to terminate the agreement. The contract usually determines the rights and obligations of the parties once the agreement is terminated following an FM event. Compensation and obligations for each party vary depending on the specific project and time until completion.

 

Material delays

11. What contractual provisions are typically negotiated to cover material delays to the project?

Material delays can be divided into three categories:

  • Delays caused by employer. The contractor is generally entitled to an extension of time and, in some cases, additional costs in connection with the delay. The entitlement to additional costs depends on negotiation between the parties.

  • Delays caused by contractor. The contractor is usually not entitled to any extension of time (unless caused by the employer or variations to the work) and is typically liable for liquidated damages.

  • Delays caused by external events. These are delays outside both the employer's and the contractor's control, such as those caused by unusually adverse weather conditions. The contractor is typically entitled to an extension of time to the construction period but not costs, which lie where they fall. Another event that may cause delay is a change of law that triggers an increase in costs for the contractors to perform the construction work. The risk allocation depends on market practice, whether the risk is insurable, and on the bargaining power of the parties. The definition of force majeure needs to be drafted to prevent either party from being entitled to declare force majeure if they fail to perform their obligations so as to cause delay, as well as contain obligations to mitigate loss, among other things.

 

Material variations

12. What contractual provisions are typically negotiated to cover variations to the works?

The work should be carried out in accordance with the design and technical documents (that is, the employer's specification). This should be accompanied by a calculation of the cost of work. The employer typically has the right to vary the design and technical documents on the condition that the cost of any additional work caused by the variation does not either:

  • Exceed certain percentages of the total costs listed in the calculation.

  • Change the nature of the work under the contract.

Other revisions trigger the variation procedure in the contract, which is often prescribed in great detail.

 

Other negotiated provisions

13. What other contractual provisions are usually heavily negotiated by the parties?

The following provisions are usually the most heavily negotiated:

  • Costs and payment schedule in relation to the work (for example, milestone payments throughout the construction cycle).

  • Timing of work performance and liability for failure to meet intermediate deadlines.

  • Risk allocation in the event of a change in laws and regulations.

  • The allocation of responsibility between the contractor and employer to obtain the licences needed for the building or facilities to be constructed.

  • The parties' liability for failure to meet the contractual terms and conditions.

  • The procedure for conveyance of risks and work acceptance (that is, whether the employer accepts the work and relevant risk phase by phase or accepts all the works and risk only on completion).

  • Performance security such as a bid bond, performance bond, guarantees and retention amount, and the circumstances in which the employer can call on the performance security.

 

Architects, engineers and construction professionals

14. How are construction professionals usually selected? Following selection, how are they then formally appointed?

If the employer is a commercial organisation, contractors and other construction professionals are usually selected by either:

  • Binding tender. The employer and the winning bidder must conclude a contract.

  • Non-binding tender (request for proposals). The employer accepts proposals from potential contractors and retains the right to refuse to enter into a contract with the winning bidder.

In the public sector, selection of a contractor is usually made on the basis of a binding bidding procedure, which is usually very formal and strictly regulated. This competitive process is mandatory under the regulations. There are many cases where public officials allegedly receive bribes as a result of a non-competitive process conducted in the selection of a contractor.

 
15. What provisions of construction professionals' appointments are most heavily negotiated? Are liabilities routinely limited or capped in construction professionals' appointments?

The provisions that are most heavily negotiated for construction professionals appointments do not greatly differ from those of the construction contract negotiations (see Questions 9, 12 and 13).

 

Payment for construction work

16. What are the usual methods of payment for construction work? Are there ways for the contractor and consultants to secure payment or mitigate risks of non-payment under local law?

Methods of payment

The procedure for paying for construction work is based purely on contractual provisions. It is similar in most construction projects and consists of the following:

  • An advance payment (or several advance payment instalments, usually used for site preparation and the purchase of materials and so on). The advance payment does not usually exceed 10% to 15% of the total cost of the work and is usually secured by a bank guarantee. These advances are usually set off proportionately during subsequent payments.

  • Interim payments for interim works carried out as construction progresses. These payments can be made periodically (for example, on a monthly basis, on acceptance or inspection of completed work at the main stages of construction, or according to a schedule). The interim payments are reduced by proportionate amounts of the advance payment and retentions.

  • Retention payable on completion and the employer's final acceptance of the facility. The size of this retention is usually 5% to 10% of the total cost of the work.

  • Retention payable on expiry of the guaranteed operating period (usually amounting to no more than 5% to 10% of the total cost of the work). This retention is generally replaceable with a bank guarantee in the same amount.

Securing payment

Contractors can secure payment on a construction project by obtaining a letter of credit, payment bond or bank (or parent company) guarantee from the employer.

If the employer is unwilling to provide such forms of security, the contractor may negotiate for a more substantial advance payment.

 

Subcontractors

17. How do the parties typically manage their relationships with subcontractors?

It is common for the contractor to subcontract its work under the relevant services contract to one or more subcontractors with a specific skill set. No prior written consent is generally required from the employer to subcontract, but parties can agree otherwise or agree on a list of potential subcontractors in advance. For example, information on approved subcontractors can be specified in the general contractor's offer for participation in the tender.

In most cases, the general contractor continues to be liable to the employer for work performed by subcontractors as if it had performed the work itself.

Indonesian regulations do not impose any restrictions on the portion of work allocated to the subcontractor in private sector projects, although such restrictions exist for government projects. However, the regulations require that the allocating of work to the subcontractor be made in accordance with the subcontractor's expertise.

 

Licensing

18. What licences and other consents must contractors and construction professionals have to carry out local construction work? Are there any specific licensing requirements for international contractors and construction professionals?

The main licence requirements are:

  • A Construction Services Business Licence (Izin Usaha Jasa Konstruksi) (IUJK) and a Business Entity Certificate (Sertifikat Badan Usaha) (SBU) for contractors.

  • A Foreign Construction Services Representative Office Licence (FRO Licence) to open a Foreign Construction Services Representative Office (FRO) in Indonesia for a foreign construction service business entity.

  • Professional certificates issued by the Construction Services Development Board (Lembaga Pengembangan Jasa Konstruksi) (LPJK) to a construction professional. This is also a prerequisite for a company to obtain an IUJK.

  • Construction work involving high risk, high technology and high cost must be carried out by a business entity in the form of a limited liability company or foreign business company with the same status (for example, a FRO). Under the Construction Services Law, construction service providers can be individuals or business entities. Individuals can only perform construction work categorised as low risk, simple technology and low cost.

  • An SBU in the field of construction services and construction business licence for a construction planner, contractor and construction supervisor in the form of a business entity. The SBU is divided into certain classification levels, and each classification allows a construction company to engage in certain construction services in various service areas. After obtaining an SBU, the construction company must obtain an IUJK from the regional government where it is located. For a construction company formed by foreign capital investment, the issuer of the construction business licence will be the Indonesian Investment Co-ordinating Board (Badan Koordinasi Penanaman Modal) (BKPM).

  • A foreign construction company that wishes to open a FRO must obtain a FRO Licence issued by the Ministry of Public Works. (Unlike a conventional construction company, a foreign construction service business entity can conduct construction services without incorporating itself as an Indonesian legal entity, through an FRO.) A foreign construction service business entity can, however, only provide construction services through a joint operation scheme on a project-by-project basis with a local construction service company.

 
19. What licences and other consents must a project obtain?

Planning

Required prior consents include:

  • Regional spatial utilisation (zoning). An individual or business entity that carries out construction of a building must ensure that the facilities or building to be constructed conform to the relevant regional spatial planning provisions.

  • Building construction permit (Izin Mendirikan Bangunan) (IMB). Under Law No 28 of 2002, regarding Building Construction, the construction of a building can only be implemented after the technical plan of the building has obtained an approval from the regional government in the form of a building construction permit.

  • Environmental permit. Under Law No 32 of 2009 on Environmental Protection and Management, an Environmental Permit must be obtained before the company can conduct its business activities. An Environmental Impact Assessment is also required for certain business activities (see Question 25).

Development

Generally, the IMB issuing agency monitors and inspects the building or facility as to compliance with the terms of IMB. Other authorities also undertake inspection of the building or facility to ensure compliance with the environmental assessment approval.

Completion

In certain regional areas (for instance, Jakarta) regional regulations require employers to obtain a building utilisation permit for the building or facility.

 

Projects insurance

20. What types of insurance must be maintained by law? Are other non-compulsory types of insurance maintained under contract?

Compulsory insurance

Indonesian construction laws do not impose any obligation on contractors to procure or maintain insurance. However, labour laws provide that a company must ensure that its employees are registered under the social security programme, which must cover health benefits and benefits in case of certain events such as work accidents and the death of an employee.

Non-compulsory insurance

Employers usually procure certain types of insurance that are not required by law depending on the scale and type of project (for example, third party insurance and earthquake insurance).

The key difference between local and international projects is that international lenders involved in international projects usually require a borrower project company to maintain insurance on and in relation to its business and assets, even if it is not required by law.

 

Labour laws

21. Are there any labour law requirements for hiring (local and foreign) workers?

Local workers

A company can hire local workers under an indefinite work period scheme or a definite work period scheme. Regulations limit the type of work and period for a company to hire workers under the definite work period scheme. There is no additional licence requirement to hire local workers. However, the company needs to comply with various requirements under the regulations, such as minimum regional wage and worker social security.

Under Indonesian law, a company is allowed to hire outsourced workers from an outsourcing company. Regulations limit the type of work that can be carried out by outsourced workers. Violation of these terms can trigger the transfer of the employment relation from the outsourcing company to the hiring company.

Construction companies must hire certified technical professionals in order for them to conduct construction work. The regulation provides for a minimum experience in years as well as the number of technical professionals, depending on the scale of the construction work that the company is allowed to conduct.

Foreign workers

In general, any company that intends to hire foreign workers needs to obtain a Foreign Worker Employment Permit (Izin Mempekerjakan Tenaga Asing) (IMTA). Before applying for the IMTA, the company first needs to obtain an approval for the Foreign Worker Employment Plan (Rencana Penggunaan Tenaga Kerja Asing) (RPTKA). Both RPTKAs and IMTAs are issued by the Minister of Manpower and Transmigration (MoMT).

A company hiring foreign workers acts as the sponsor of the foreign workers. Accordingly, for immigration purposes, a company hiring foreign workers also needs to arrange the visa recommendation, limited stay visa, limited stay permit card and multiple exit re-entry permit (as applicable).

There is also a regulation prohibiting foreign workers from being hired for particular jobs. The MoMT has issued a list of job titles that cannot be held by foreign workers.

 
22. Which labour laws are relevant to projects?

The principal labour law is Law No 13 of 2003 on Manpower (Manpower Law). The Manpower Law provides various requirements and limitations that are relevant to projects, such as limitations on working hours and outsourcing arrangement. MoMT has issued numerous regulations as implementing regulations of the Manpower Law. In addition, the regional government is also authorised to oversee certain aspects of employment, such as the minimum wage and certification for employment health and safety.

 
23. Must an employer pay statutory redundancy or other payments at the end of a project? Are all employees eligible?

There is no obligation on an employer to make a statutory redundancy payment at the end of a project to workers employed for a definite period that has ended. For a worker with an indefinite work period contract, the employment relationship with the employer continues even if the project is finished, and therefore such a worker is entitled to receive a statutory severance payment if terminated. For workers with a definite work period contract (which can be extended and renewed up to a total of five years under certain conditions), the employment relationship is terminated once the work period, as agreed between the company and the worker, has expired.

 

Health and safety

24. Which health and safety laws apply to projects?

In general, an employer must comply with the requirements with respect to employee social security, which not only cover medical services for the employees, but also compensation in case of certain events, for example, accidents or the death of an employee.

Various requirements with respect to occupational health and safety apply to projects. Most of the requirements relate to the safety of the tools and equipment to be used by the company as well as certification for employees. The employer must obtain certification or approval (as applicable) for the tools and equipment used for the project. Those requirements include:

  • Approval for the use of lifting and transportation devices and elevators to carry people and goods including mechanical jacks, passenger hoists, tower cranes, dump trucks, excavators and so on.

  • Certification for the operator of lifting and transportation devices.

  • Certification for lightning protection.

In addition, there are other health and safety procedures that apply to specific industries. For example, for the power industry, there is a requirement to obtain a certificate of worthiness for a power plant, while for the oil and gas industry there is a requirement for the certification scheme of pipelines, rigs, and so on.

 

Environmental issues

25. Which local laws regulate projects' effects on the environment?

Air

Government Regulation No 41 of 1999, regarding Air Pollution Control, obliges any persons or business entities carrying out activities that may produce air emissions to comply with ambient air quality standards, emission quality standards and standard levels of disturbance as determined by the regional government.

Water

Government Regulation No 82 of 2001, regarding Management of Water Quality and the Control of Water Pollution, sets out obligations for any persons or business entities that carry out activities that may produce water emissions.

Waste

Under Government Regulation No 101 of 2014, regarding the Management of Hazardous and Toxic Waste, any person engaged in business or other activities that generate hazardous and toxic waste is prohibited from disposing of such waste directly into the environment without it first being neutralised.

Environmental impact assessments (EIAs)

Under Minister of Environment Regulation No 5 of 2012 (Regulation 5/2012), regarding Types of Business Plans and/or Activity that Must Have Environmental Impact Assessments, any business or activity that has a significant impact on the environment must make an EIA. In general, the types of business plans and activities that are required to make an EIA are determined by whether they:

  • Have a potentially significant impact.

  • Create uncertainty in terms of the technological capabilities available to overcome any negative environmental impact.

Sustainable development

The government has issued Government Regulation No 79 of 2014 on National Energy Policy, which provides that the management of national energy must be in harmony with, among other things, the national sustainable development. There are also numerous regulations in the environmental regime that require sustainability in national development.

 
26. Do new buildings need to meet carbon emissions or climate change targets?

Indonesia has no legislation setting out specific requirements regulating carbon emissions or climate change targets. However, building developers can submit an application to obtain a green certificate if their building has fulfilled the environmental standards under Minister of Environment Regulation No 8 of 2010, regarding Criteria and Environmentally Friendly Building Certification.

 

Prohibiting corrupt practices

27. Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting the projects sector)? What are the applicable civil or criminal penalties?

Rules

Corruption and bribery are prohibited under Law No 31 of 1999, as amended by Law No 20 of 2001 on Eradication of the Criminal Act of Corruption. The regulation targets not only the person who receives the bribe but also the person giving the bribe.

Penalties

The penalties vary depending on the type of criminal acts committed. Under the Anti-Corruption Law regime, the penalties consist of:

  • Life imprisonment (maximum of 20 years).

  • Fines (maximum of IDR1 billion).

 

Bankruptcy/insolvency

28. What rights do the client and funder have on the contractor's bankruptcy or insolvency?

The Bankruptcy Law (Law No 37 of 2004) does not regulate specific rights and obligations between the parties under the contract. In principle, bankruptcy of a contract party does not result in the termination or expiry of the contract. The rights and obligations of the parties remain as set out in the contract. However, the receiver (of the bankrupt contractor) has no obligations to perform, and the client and funder has the right to claim for damages as an unsecured creditor (unless they have separate security).

Article 36 of the Bankruptcy Law provides that in the event the bankrupt is party to an executory contract, the contract counterparty can ask the receiver to confirm that it will perform the contract. If the receiver declines or does not respond within the prescribed time period, the contract terminates by operation of law and the contract counterparty's remedy is to claim for damages. If the receiver states his willingness to perform, the counterparty can insist on security against performance by the receiver. The aim of this provision is to provide certainty for the counterparties on the continuance of executory contracts.

 

PPPs

29. Are public private partnerships (PPPs) common in local construction projects? If so, which sectors commonly use PPPs?

PPPs have long been considered by the Indonesian government to be the scheme of choice to implement much needed infrastructure projects, and in particular given the need to seek funding from the private sector. While there is a significant pipeline of planned and proposed PPP projects, actual deal execution has been poor.

As at March 2015, the PPP scheme is currently under review by the Indonesian government, including the role of relevant government bodies involved in the implementation, funding and securing of PPP projects. In general, a proposal to allocate certain risks to the public sector (for example, demand risk) has often been met with resistance.

PPP schemes are available for the following sectors:

  • Energy.

  • Telecommunications.

  • Toll roads.

  • Transportation.

  • Water drinking supply.

  • Irrigation.

  • Waste installation.

  • Oil and gas.

The PPP scheme is commonly used for energy, toll roads, waste installation and water drinking supply projects only.

 
30. What local laws apply to PPPs?

PPPs are mainly regulated under Presidential Regulation No 67 of 2005 on Co-operation between the Government and Business Entities in the Provision of Infrastructure as last amended by Presidential Regulation No 66 of 2014. There are other PPP-related regulations issued by the relevant Minister depending on its task and role, including regulations related to government guarantees and viability gap funding, as well as the implementation procedures for a PPP project.

The government recently issued Presidential Regulation No 38 of 2015 on Co-operation between the Government and Business Entities in the Provision of Infrastructure (PR 38/2015) which replaces the previous Presidential Regulation. The implementing regulation of PR 38/2015 has yet to be issued. However, it should be issued in the near future as PR 38/2015 mandates the relevant Minister to issue the implementing regulations not later than 30 days from the issuance of PR 38/2015.

 
31. What is the typical procurement/tender process in a PPP transaction? Does the government or another body publish standard forms of PPP project agreement and related contracts?

The procurement or tender procedure is mainly regulated under the Presidential Regulations and its amendments. The Minister of National Development Planning or the Head of National Development Planning Agency also issued a regulation which set out the details of the tender process as well as project implementation for PPP projects. The Presidential Regulation provides for two types of PPP:

  • Co-operation agreement. The conclusion of a co-operation agreement is based on a tender with pre-qualification. PPP regulations provide minimum elements that must be contained in the co-operation agreement. The government does not publish standard forms of PPP project agreements. The Indonesia Infrastructure Guarantee Fund (PT Penjaminan Infrastruktur Indonesia) (IIGF), a state-owned enterprise, is assigned to provide a guarantee for the performance of a government entity's financial obligation. IIGF has published the guidelines for risk allocation which varies depending on the project sector.

  • Business licence. A business licence can be issued by way of a competitive process (tender). This scheme is rarely used for PPP projects.

 

Dispute resolution

32. Which are the most common formal dispute resolution methods used? Which courts and arbitration organisations deal with construction disputes?

Formal dispute resolution methods

Arbitration is the preferred option for formal dispute resolution in Indonesia. In international projects or large construction contracts, arbitration is generally made under the arbitration rules of the International Chamber of Commerce or the Singapore International Arbitration Centre. For local projects, the parties typically choose the Indonesian National Board of Arbitration. The District Court is rarely used. The Indonesian Construction Alternative Dispute Resolution and Arbitration Board was recently established. The implementation of this new board remains to be seen.

Courts and arbitration organisations

The main arbitration organisations used to deal with construction disputes are:

  • Indonesian National Board of Arbitration (Badan Arbitrase Nasional Indonesia) (BANI) (www.bani-arb.org/bani_main_eng.html).

  • Indonesian Construction Alternative Dispute Resolution and Arbitration Board (Badan Arbitrase dan Alternatif Penyelesaian Sengketa Konstruksi Indonesia) (BADAPSKI).

  • International Chamber of Commerce (ICC) (www.iccwbo.org).

  • Singapore International Arbitration Centre (SIAC) (www.siac.org.sg).

 
33. What are the most commonly used alternative dispute resolution (ADR) methods?

In Indonesia, the most commonly used ADR method for construction disputes is arbitration, although many contracts provide for a phased approach involving escalation of the dispute to senior management or mediation before resolution through arbitration.

Occasionally, expert determination may be included as an additional step in the process or as an alternative to arbitration, in particular where technical matters are concerned.

 

Tax

34. What are the main tax issues arising on projects?

The main taxes applicable to projects are income tax, value added tax (VAT), stamp duty and import duty.

An FRO that enters into a joint operation with a local construction company must arrange a joint tax identification registration for the purpose of VAT.

If a large amount of tools and equipment are needed in the construction phase, the import duty can be significant. Regulations provide import duty exemptions for certain industry sectors. There may be an issue in the importing process as, while the project owner may be entitled to the exemption, the importing process is typically conducted by the contractor.

 
35. Are any methods commonly used to mitigate tax liability on projects? Are there any tax incentives to carry out regeneration projects?

The mitigation of tax liability on construction services is broadly effected by the distribution of works to be conducted offshore and the remaining portion onshore.

 

Other requirements for international contractors

36. Are there any specific requirements that international contractors or construction professionals must comply with?

See Questions 3 and 18.

 

Reform and trends

37. Are there any proposals to reform construction and projects law? Are there any new legal or regulatory trends affecting projects?

Reform proposals

Legislation in Indonesia is constantly evolving, particularly since the reform era in 1998. The new government, which took office from October 2014, has shown a significant desire to push the development of infrastructure. The Minister of Energy and Minerals recently issued regulations simplifying the process for development of power plants in Indonesia. Regulations in other strategic areas are likely to be amended to bolster infrastructure development, including those relating to land acquisition, although this continues to be largely a private sector risk.

The government is preparing the amendment of the Presidential Regulation on PPP, which is intended to expand the sectors covered under the PPP scheme, as well as to simplify the implementation of PPP projects.

Trends

As the new government of Indonesia seems eager to push the development of infrastructure within the country, it is likely that there will be significant legal developments in coming years.

 

Main construction organisations

National Construction Services Development Board (Lembaga Pengembangan Jasa Konstruksi) (LPJK)

Main activities. Gives accreditation to entity-based associations on the classification and qualification of businesses, professional-based associations, educational and training institutions on the provision of professional skills certification. Imposes sanctions on associations and construction services providers. Registers domestic and foreign entities as well as domestic and foreign construction workers.

W www.lpjk.net



Online resources

W www.pu.go.id

Description. The Ministry of Public Works and Housing of the Republic of Indonesia (Kementerian Pekerjaan Umum dan Perumahan Rakyat Republik Indonesia) contains regulations (in Indonesian).

W www.bappenas.go.id/data-dan-informasi-utama

Description. The development data and information on the Indonesian Ministry of National Development Planning (in Indonesian).

W http://ditjenpp.kemenkumham.go.id/database-peraturan.html

Description. The regulations database page (in Indonesian) of the Indonesian Ministry of Law and Human Rights.



Contributor profiles

Ferdinand Jullaga, Associate

Mochtar Karuwin Komar

T +62 21 571 1130
E ferdinand.jullaga@mkklaw.net
W www.mkklaw.net

Areas of practice. Projects, mining, general corporate, investment.

Richard L Weiss, Foreign Legal Advisor

Mochtar Karuwin Komar

T +62 21 571 1130
E richard.weiss@mkklaw.net
W www.mkklaw.net

Areas of practice. Project finance, power, foreign investment.

Marius Toime, Partner

Berwin Leighton Paisner LLP

T +65 6571 6603
E marius.toime@blplaw.com
W www.blplaw.com

Professional qualifications. England and Wales, Solicitor; New Zealand, Barrister and Solicitor.

Areas of practice. Projects, infrastructure, mining and power.

Jeanette Lui, Associate

Berwin Leighton Paisner LLP

T +65 6571 6607
E jeanette.lui@blplaw.com
W www.blplaw.com

Professional qualifications. England and Wales, Solicitor; CPA

Areas of practice. Projects, infrastructure, mining and power.


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