08 Mar 2021
New Omnibus Law Regulation to Increase Supervision of Indonesias Manufacturing Sector
February 2021 saw the issuance of a raft of new Government Regulations to give effect to the reformist Job Creation Law (colloquially known as the Omnibus Law), which entered into force on 2 November 2020. In this ABNR legal update, we discuss Government Regulation No. 28 of 2021 on the Industry Sector.
Despite decades of concerted promotion of industrial development, Indonesia’s manufacturing sector still accounts for less than 20% of GDP, compared with almost 13% for agriculture. By contrast, manufacturing accounted for almost 40% of China’s GDP in 2019, while the contribution of agriculture stood at just 7.1%.
These figures suggest that the government’s industrial development policies have failed to fully achieve their objective of turning Indonesia into an industrialized economy. With a burgeoning population and high youth unemployment rate, one of the key focuses of the government’s economic reform program, as reflected in the enactment of the Omnibus Law, is to make the country a more attractive and favorable place for labor-intensive manufacturing industry.
With this in mind, the Omnibus Law amended a number of provisions of the Industry Law of 2014. To give effect to these amendments, Government Regulation No. 28 of 2021 on the Industrial Sector (the “Regulation”) was issued and came into force on 2 February 2021.
The Regulation arms the Ministry of Industry (the “Ministry”) with significant new powers and authority to supervise and enforce compliance with legal standards and requirements in the industrial sector. Compared to the situation that prevailed previously, the types and technicalities of the supervision that will be conducted are described in considerable detail in the Regulation, which also envisages the establishment of a number of new agencies to conduct supervision on the ground. Perhaps as an indicator of the government’s seriousness about supervision, the Regulation rather unusually stipulates that the new supervision mechanisms are to be funded directly by the state budget or local-government budget, as the case may be.
Overall, the following key areas are addressed by the Regulation: (a) supervision of industrial undertakings and industrial estate operators; (b) access to and utilization of raw materials; (c) application of the Indonesian National Standards (SNI), technical specifications and procedural guidelines; and (d) strategic industries. We will now discuss each of these in turn.
A. Supervision of Industrial Undertakings and Industrial Estate Operators
Section VI of the Regulation sets out detailed standards and requirements that should be complied with by industrial undertakings / industrial estate operators (as relevant) in the following sectors: (i) manpower; (ii) use of natural resources; (iii) energy management; (iv) water management; (v) SNI, technical specifications and/or procedural guidelines; (vi) reporting by industrial undertakings and industrial estate operators; (vii) green industry standards; (viii) industrial-estate operating standards; (ix) business licenses; and (x) safety and security of equipment, processes, output, warehousing and transportation.
In most of the above sectors, undertakings will be expected to fully comply with all of their commitments to government and the recommendations made to them by government. Such compliance will be monitored by dedicated supervision bodies to be established by the Ministry for each sector. Undertakings that fail to comply will be liable to sanctions.
We will now briefly describe each of the sectors in turn.
The Ministry will require the application of national job competency standards for certain occupations in the industrial sector. These standards apply to high-risk jobs and cover matters such as safety, protection and health and environmental issues.
(ii) Use of Natural Resources
Industrial undertakings and industrial estate operators must use natural resources efficiently, in an environmentally friendly manner, and sustainably. These requirements must be taken into consideration during the product development, production, production optimization and waste management processes. An undertaking is required to submit a natural resources utilization plan to the government. If no plan is submitted or a submitted plan is not property implemented, the undertaking will be subject to administrative sanctions.
(iii) Energy Management
Industrial undertakings are expected to conduct energy management in accordance with the prevailing laws and regulations. The government will limit energy consumption, and monitor energy conservation and efficiency.
(iv) Water Management
Industrial undertakings that use water as a basic or principal raw material in their production processes must comply with the water management rules prescribed by the prevailing laws and regulations. Water management covers water use policies, water balance, and utilization, including conservation, reuse, recycling and recovery. The government has authority to assess whether or not water management is carried out properly. A failure to do so will leave the undertaking liable to administrative sanctions.
(v) SNI, Technical Specifications and/or Procedural Guidelines
The Ministry will monitor compliance as regards the application of SNI, technical specifications and/or procedural guidelines so as to minimize the production and marketing of substandard products.
(vi) Reporting by Industrial Undertakings and Industrial Estate Operators
Industrial undertakings and industrial estate operators are required to regularly submit accurate data on their operations to the Ministry, relevant state bodies, governors, mayors and regents, as the case may be. The data should be submitted online through the existing National Industrial Information System (SIINas) operated by the Ministry. The data must cover both the development and production stages. A failure to submit complete, accurate and timely data could result in administrative sanction.
(vii) Green Industry Standards
The Ministry is required to formulate and adopt green industry standards that must be complied with by industrial undertakings. The standards should, at a minimum, cover the following aspects: raw materials, energy, manufactured products, company management, and waste management. A failure to comply with standards, commitments or recommendations will leave the undertaking liable to administrative sanctions.
(viii) Industrial Estate Standards
Industrial estate operators must comply with prescribed standards covering infrastructure, environmental management, and services and management. A failure to comply with standards, commitments and/or recommendations will leave the undertaking liable to administrative sanctions.
(ix) Business licenses
Every industrial undertaking and industrial estate operator must comply with the business license issued to it by the Ministry. The specific license and commitments required will depend on which of one of three statutory categories the business fits into: (i) small undertaking, (ii) medium undertaking, or (iii) large undertaking. Industrial undertakings have an obligation to fulfill all technical commitments attached to a business license while operating or expanding their business in a high-risk sector.
The Ministry will conduct supervision on the basis of criteria set out in Article 146, which relate to satisfaction of technical commitments, sustainability of commitments related to land, and the master plan for industrial-zone development.
Each undertaking must comply with technical commitments in the business license, which concern submission of industrial data, the development and construction of industrial infrastructure and facilities, KBLI, production capacity, and business scale. The shareholding structure of a company, capital investment requirements pursuant to the applicable laws, location or environmental permits, other requirement stipulated in related regulations, etc., also apply. Failure to fulfill these requirements will leave the undertaking liable to administrative sanctions.
(x) Safety and Security of Equipment, Processes, Output, Warehousing and Transportation
An industrial undertaking engaged in medium and high-risk activities must guarantee the security and safety of its equipment, processes, output, warehousing and transportation facilities. This requires compliance with documentation processes and/or standard operating procedures, and periodic calibration checks. A failure to comply with these requirements carries the risk of administrative sanctions.
B. Raw Materials
The Regulation requires industrial undertakings to use raw, ancillary and incidental materials (“Raw Materials”) during the production process in a way that is efficient, environmentally friendly, and sustainable (a comprehensive list of Raw Materials is also provided in a schedule to the Regulation). Companies must prioritize the use of domestic Raw Materials, access to which will controlled by central government, which will also have the authority to restrict the export of Raw Materials and to provide assistance for their importation. This assistance could take the form of fiscal or non-fiscal facilities, and/or special permission to import required volumes of raw materials.
Importing Raw Materials
Raw Materials may only be imported by an industrial undertaking that has a Business Identification Number (“NIB”) that doubles up as a Producer-Importer Identification Number (“API-P”). If a small or medium enterprise (SME) is involved, raw materials may be imported via a supplier that holds an NIB that doubles up as a General-Importer Identification Number (“API-U”). An industrial undertaking is prohibited from transferring or selling imported materials to third parties, and any violation of this prohibition is liable to administrative sanctions. If an undertaking fails to comply with a sanction, it is liable to an administrative fine of up to 1% of its investment value.
C. Industrial Standards
The Regulation requires the government to promote industrial product standardization through the application of the Indonesian National Standards (SNI), and the sectoral technical specifications and procedural guidelines applicable to the production of industrial goods and services listed in the Indonesian Standard Industrial Classifications (Klasifikasi Baku Lapangan Usaha Indonesia / “KBLI”) under items 10 to 33.
D. Strategic Industries
A strategic industry is one that:
Strategic Industries must be controlled by the State, which may be realized through (i) full ownership by central government; (ii) joint venture between central government and the private sector; or (iii) restrictions on foreign ownership. For a joint venture, at least 51% of the share capital must be owned by central government. Business licenses for strategic industries are issued by central government, which also has authority to make determinations regarding such things as production, pricing, distribution and matters related to supervision.
The first thing to be remarked about the Regulation is the scale of the new standards and compliance obligations that it imposes on manufacturing companies, and the extent and scope of the supervision that it envisages. While many of the standards and mechanisms were referred to vaguely in previous legislation (including the Industry Law of 2014), they were never prescribed and set out in such detail. Thus, it would certainly appear that the government is planning to tighten up its oversight of the industrial sector going ahead.
For many large-scale manufacturing companies, the additional requirements will most likely not be unduly onerous. Indeed, many of them will already be in compliance with or even exceed the new requirements. However, for mid-sized local companies, it may prove costly to bring their operations into line with what appears to be expected of them.
In line with Indonesia’s civil law system of “trickle down” legislation, further implementing regulations will be needed in order to put the Regulation fully into effect. So, we will have to wait for these before we can make any assessment as to its likely effect in practice. In this regard, it should be remembered that just because something is written on the dry pages of the statute book does not necessarily mean that it will be implemented in full on the ground. Even prior to the Regulation, Indonesia’s manufacturing sector was subject to quite strict environmental, manpower and consumer protection legislation. However, the enforcement of the legislation in practice was often patchy. So, it remains to be seen to what extent the new standards and requirements set out in the Regulation will be implemented in the real world, and whether commercial and economic considerations, such as the need to provide jobs, will trump the high standards envisaged by the Regulation.
By partner Mr. Freddy Karyadi (email@example.com), senior associate Ms. Christine Hakim (firstname.lastname@example.org), and counsel Mr. James Boyd (email@example.com).
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