In late September, the Minister of Public Works (Minister) issued Minister Regulation number 10/PRT/M/2014 regarding Guideline Requirements for Giving Permission Foreign Construction Service Representative Office (New Regulation). The New Regulation for construction representative offices in Indonesia replaces the old Minister regulation 05/PRT/M/2011 (Old Regulation) which had a similar title. The New Regulation has become more comprehensive than the Old Regulation and in this column we will discuss the most significant changes for foreign investors.
Change in Requirements of Joint Operation Partner
In the Old Regulation, a Foreign Construction Representative Office must start a cooperation in the form of a joint operation with a Indonesian construction company (100% Indonesian shareholders), in order to be able to perform construction activities in Indonesia. In the New Regulation, this main rule is maintained for construction representative offices in Indonesia. However the regulator added an exception to this rule. The Minister can approve a joint operation which does not fulfill the requirements of the main rule, if such joint operation fulfills the following requirements:
1. The shares of the Indonesian construction company are at least owned and controlled for 65% by Indonesian citizens and/or entities.
2. The post of managing director, finance director and the HR director in the Indonesian construction company are occupied by Indonesian citizens; and
3. The Indonesian construction company can proof that it is already engaged in activities that encourage the production supply chain of the construction industry in Indonesia.
High Risk, High-Tech and High-Cost of Construction Work Further Defined
The Old Regulation did not include an explanation of the terms “High Risk”, “High-Tech” and “High Cost”. The New Regulation adds the following explanations for these terms:
• High Risk is the execution of construction work and the use of building construction which endangers public safety, property, human life, and the environment.
• High-Tech is the execution of construction work using a special method of construction, high-tech equipment, specialized construction equipment and which requires many experts.
• High-Cost is the construction work with a construction value of at least 100 billion rupiah and planning work and/or construction supervision work of at least 10 billion rupiah.
Internal Procedures for Construction Joint Operation Defined
The New Regulation sets clear requirements for the distribution of work between the Foreign Construction Representative Office and the Indonesian construction company.
Unless regulated differently by a related authority, for construction work the distribution of work in a Joint Operation is as follows:
1. At least 50 percent of the value of construction work is performed in Indonesia; and
2. At least 30 percent of the value of construction work is performed by the Indonesian construction company.
For construction planning work, the distribution of work in a Joint Operation is as follows:
1. The entire technical planning work is performed inside Indonesia; and
2. At least 50 percent of the value of construction planning work is performed by the Indonesian construction company.
Transfer of Knowledge to Local Construction Company Defined
The Old Regulation required the Foreign Construction Representative Office to transfer knowledge to the Indonesian construction company, however it did not provide any regulations for implementation of such knowledge transfer. The New Regulation sets implementing rules for the knowledge of transfer, which include:
1. The preparation of a transfer of knowledge plan;
2. A statement from local workers to whom the knowledge is transferred;
3. Training requirements of the local workers;
4. Facilitation for local workers who are appointed to perform field training or academic research;
5. The requirement to conduct Corporate Social Responsibility activities to the public.
Administrative Sanctions Against Construction Representative Office Further Defined
In the New Regulation the provision of sanctions is regulated much more comprehensive than in the Old Regulation. A Foreign Construction Representative Office can now be subject to three kinds of sanctions, namely a written warning, freezing of Representative License and revocation of Representative License. The aforementioned sanctions will be imposed to the Foreign Construction Representative Office based on the type and severity of the violation. In case of revocation of Representative License, the foreign company can only apply for a new Representative License after a period of three years.