11 Nov 2020
Omnibus Law Should Boost Ease of Doing Business in Construction Sector

This is the sixth in our series of ABNR Legal Updates on the Job Creation Law, which entered into force on 2 November 2020. This time we look at the changes the Job Creation Law makes in the construction sector.

The Job Creation Law (“JCL”, or Omnibus Law, as it is familiarly known), amends a number of laws that directly affect the construction sector. These include the following:

1. 2017 Construction Services Law (“CSL”);[1]
2. 2011 Apartments Law;[2]
3. 2011 Housing and Residential Areas Law;[3]
4. 2019 Water Resources Law.[4]

From the business licensing and regulatory perspectives, the most significant changes are those to the 2017 Construction Services Law (“CSL”).[5] However, the full purport of many of these will only become apparent after the necessary implementing / ancillary regulations have been issued to put them into effect.

In this ABNR Legal Update, we focus our attention on the following aspects of the amendments made to CSL:

1. Changes to Public Procurement Requirements
2. Abolition of Mandatory Performance-bond Requirement
3. Licensing and Regulatory Changes
4. Employment of Expatriates.

A. Changes to Public Procurement Requirements

JCL repeals Article 42 CSL, which requires contractors for state-funded projects to be selected by means of a “tender or selection, electronic procurement, direct appointment or direct procurement.” At first sight, anything that might smack of reduced competitiveness or diminished protection for taxpayer funds would appear to be a retrograde step. However, it also needs to be remembered that time is often of the essence in state-funded infrastructure projects. Further, public procurements of all kinds (including construction services) continue to be governed by Presidential Regulation No. 16 of 2018 on Public Procurements of Goods and Services,[6] which remains in effect and sets out strict rules on how contractors should be selected with a view to ensuring healthy competition and reducing corruption. Given the repeal of Article 42 CSL, as mentioned above, it may well be that the government plans to also amend Presidential Regulation No. 16 of 2018 so as to provide for greater flexibility in the public procurement rules. However, it is too early to say if this is actually the case.

JCL also retains Article 44 CSL in slightly amended form, which article stipulates that a user of construction services is prohibited from employing an affiliate on a public interest project without first going through a tender, selection or e-catalogue process.

B. Abolition of Mandatory Performance-bond Requirement

For state-funded projects, CSL required the contractor to post an unconditional surety bond under which the surety (usually a bank) indemnifies the employer in the event of contractor's default. This requirement has now been repealed by JCL. While this is certainly good news for contractors, it seems to be a risky move that runs contrary to normal practice.

C. Licensing and Regulatory Changes

1. Licensing Regime under CSL

In addition to the need for a contractor to obtain a Business Registration Number (Nomor Induk Berusaha) before commencing business, the following sectoral licenses are also required for the provision of commercial construction services under CSL:

1. A domestic construction company requires a Construction Services Business License (Izin Usaha Jasa Konstruksi / “IUJK”), which is issued by the OSS system[7] on behalf of the county / municipality where the company is domiciled;
2. A foreign-invested construction company requires an IUJK PMA[8] issued by the Investment Coordinating Board / BKPM[9] through the OSS system, and
3. An RO of a foreign construction company requires an RO License (Izin Perwakilan Badan Usaha Jasa Konstruksi Asing) issued by the BKPM through the OSS system.

By contrast, JCL makes no mention of specific sectoral licenses for domestic and foreign-invested construction companies but rather simply states that they must comply with “business licensing” (Perizinan Berusaha) requirements, the details of which are to be subsequently provided by Government Regulation.

However, CSL’s detailed rules on the operation of ROs are maintained, including the requirement to obtain an RO License.

As regards licensing authority, it seems that this will remain vested in local government in the case of domestic contractors. However, JCL imposes a new requirement on local administrations to adhere to the relevant “norms, standards, procedures and criteria” established by the central government. Hopefully, this will be enough to stop local administrations from imposing additional licensing obligations.

As for foreign-invested construction companies and ROs, these will continue to be licensed at the central level.

Overall, we believe that JCL’s vagueness as regards licensing is intended to afford the Government the flexibility it needs to shift from the current permit-based system of licensing to a risk-based one, under which only particularly risky business activities will need to be licensed. However, we will have to await the issuance of the necessary ancillary / implementing regulation before we can be sure that this is actually the case.

2. Business Undertaking Certificate (SBU)

Under CSL, a construction company must obtain a Business Undertaking Certificate (Sertifikat Badan Usaha / “SBU”) as evidence of its business classification and experience. This requirement is expressly maintained by JCL. However, whereas CSL assigned the responsibility for the process to certification bodies established by industry associations, JCL suggests that the process will now be carried out by the central government itself. However, the details of what the government has in mind will not become clear until the necessary ancillary regulation has been issued.

3. Experience Registration Certificate (TDP)

CSL obligated all medium- and large-scale construction companies to obtain an Experience Registration Certificate (Tanda Daftar Pengalaman / “TDP”) from the Minister of Public Works and Housing. This requirement has now been abolished by JCL.

D. Employment of Expatriates

In line with the amendments made by JCL to the 2003 Manpower Law, JCL also repeals Article 74 CSL so as to afford employers in the construction sector greater flexibility to hire expatriates.

Under Manpower Law, obtaining permission to employ an expatriate was a complex process that involved (1) submission by the would-be employer of an expatriate employment plan (rencana penggunaan tenaga kerja asing/ “RPTKA”) to the Ministry of Manpower (“MOM”) for approval; and (2) upon approval of the RPTKA, submission of an application for an expatriate employment permit (izin menggunakan tenaga kerja asing/ “IMTA”).

JCL completely abolishes the IMTA requirement and, according to the letter of the legislation, all that an employer should need to do to employ an expatriate is to have an RPTKA approved by MOM. However, we will not know precisely what form the new expat employment regime will take until such time as the necessary ancillary regulations for JCL have been issued.

For more information on the changes made to Indonesian employment law by JCL, click here.

Contact us

Should you have any queries on the above or require legal advice as to how you can best protect your interests during this time of uncertainty, please contact the persons below, call us on +6221-2505125 or email us at info@abnrlaw.com.

Mr. Emir Nurmansyah (enurmansyah@abnrlaw.com)

Mr. Nafis Adwani (nadwani@abnrlaw.com)

Mr. Agus Ahadi Deradjat (aderadjat@abnrlaw.com)

[1] Law No. 2 of 2017 on Construction Services (Undang-Undang Nomor 2 Tahun 20l7 tentang Jasa Konstruksi)

[2] Undang-Undang Nomor 20 Tahun 2011, tentang Rumah Susun.

[3] Undang-Undang Nomor 1 Tahun 2011 tentang Perumahan dan Kawasan Permukiman.

[4] Undang-Undang Nomor 17 Tahun 2Ol9 tentang Sumber Daya Air

[5] Law No. 2 of 2017 on Construction Services (Undang-Undang Nomor 2 Tahun 20l7 tentang Jasa Konstruksi)

[6] Peraturan Presiden Nomor 16 Tahun 2018 Tentang Pengadaan Barang/Jasa Pemerintah.

[7] The OSS (“Online Single Submission”) system is a centralized business licensing portal operated by the Investment Coordinating Board (BKPM).

[8] Izin Usaha Jasa Konstruksi Penanaman Modal Asing

[9] Badan Koordinasi Penanaman Modal Asing

This edition of ABNR News and the contents hereof are intended solely to provide a general overview, for informational purposes, of selected recent developments in Indonesian law. They do not constitute legal advice and should not be relied upon as such. Accordingly, ABNR accepts no liability of any kind in respect of any statement, opinion, view, error, or omission that may be contained herein. In all circumstances, you are strongly advised to consult a licensed Indonesian legal practitioner before taking any action that could adversely affect your rights and obligations under Indonesian law.