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Indonesian government revokes regulation on foreign construction businesses

Indonesia's June 2019 issuance of Regulation No. 09/PRT/M/2019 (2019 Regulation)sought to provide additional guidance for foreign stakeholders in the Indonesian construction industry, further to 2017’s Construction Law No. 22.

The 2019 Regulation was criticised by some stakeholders for potentially discouraging foreign investment in Indonesia's construction sector.

In a surprise move, on 12 November 2019, the Minister of Public Works and Public Housing (the Minister) revoked the Regulation in the Minister Regulation No. 17/PRT/M/2019. On 19 November 2019, the Minister issued a Circular Letter No. 22/SE/M/2019 providing guidance on licensing for foreign construction companies (the Circular Letter).

This article explores the changes that the Circular Letter brings about.

Construction licences

The 2019 Regulation introduced a system whereby foreign construction businesses were required to register for an interim construction licence by way of an Online Single Submission (OSS).

An interim construction licence was valid for 30 working days and was converted into an effective construction licence if the foreign business fulfilled certain commitments.

An effective construction licence lasted for three years if the foreign construction business had been established as a representative office in cooperation with an Indonesian construction company, or indefinitely if the foreign business had incorporated a legal entity in a joint venture ( JV) with an Indonesian construction company, provided the JV undertook at least one project every three years.

The foreign construction business was required to submit regular reports to the Minister on its construction projects in Indonesia (amongst other matters) or face sanctions, including the prospect of being "blacklisted" from providing construction services for three years.

The Minister confirmed in the Circular Letter that the revocation of the 2019 Regulation will not change the process for applying for interim construction licences and effective construction licences.

However, there is no mention in the Circular Letter of the previous requirement for the licensee to submit regular reports on their construction projects in Indonesia. There is also no mention at all of the severe sanctions in the 2019 Regulation for non-compliance with its requirements, including its reporting requirements.

Therefore, it is assumed that the previous reporting requirements no longer apply and the foreign business will not be sanctioned for failing to file such reports with the Minister.

The position is nonetheless unclear and so we advise foreign businesses to seek independent legal advice on this issue.

Employment

One of the more controversial elements of 2017's Construction Law No. 2 is the requirement for foreign construction businesses to employ only Indonesian nationals in management positions, including – in the case of a representative office – the head of that office.

The 2019 Regulation appeared to allow representative offices to employ foreigners as heads of the offices, provided that Indonesians are employed as Technical Persons in Charge.

It was unclear, however, how this would work in practice given that the Construction Law requires, without exception, that the head of the office is an Indonesian national.

The Circular Letter makes no mention of the requirement to employ only Indonesian nationals in management positions or the apparent concession introduced by the 2019 Regulation in relation to heads of offices.

Therefore, it is assumed that the concession no longer applies (if, indeed, it ever could have applied). Foreign construction businesses should continue to employ only Indonesian nationals in management positions, including as heads of offices.

Key takeaways

The sudden revocation of the 2019 Regulation generates some uncertainty as to how in the stipulations of Construction Law No. 2 will be regulated.

While some information is provided in the Circular Letter in relation to construction licences, the guidance does not comprehensively address all matters previously covered by the 2019 Regulation.

Foreign construction businesses will therefore need to proceed cautiously in the current environment and seek advice where needed.

For further information on this issue or to receive an unofficial translation of the Circular Letter for reference purposes only, please contact the authors of this briefing or your regular HFW contact.

Ben Bury
Partner
Holman Fenwick Willan
D +852 3983 7688
M +852 9016 9800
E ben.bury@hfw.com

Herbert Stayer
Associate
Rahayu & Partners in association with HFW
D +6221 5080 4409
M +62 815 9798 969
E herbert.stayer@hfw.com


  1. See our prior article at https://www.hfw.com/Indonesias-2019-Regulation-fo...
  2. See our prior article on p1-3 of http://www.hfw.com/downloads/00864-HFW-Indonesia-...

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