Indonesia: Legal Update – Foreign Investment in Construction Projects

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In January 2017, the House of Representatives approved Law No. 2 of 2017 regarding Construction Services (“Construction Law”), which became effective as of January 12, 2017.
 
Pursuant to the Construction Law, construction services shall be classified as follows:
 

 

Construction Services

 

​ ​ ​ ​
(1) Construction Consultation (2) Construction Works (3) Integrated Construction Services
General Specific General Specific 
Classification






  • Architectural services
  • Engineering
  • Integrated engineering
  • Landscape architecture and area planning
     
     
  • Scientific and technical consultation
  • Technical testing and analysis
     
     
     
     
  • Building construction
  • Civil construction
     

     
     
     
      
  •  Assembly work
  • Specific construction
  • Prefabrications
  •  Completion measures Rental of equipment

     
  • Building
    construction
  • Civil construction
     
     
     
     
     

     
Range of Business Services
  • Assessment
  • Planning
  • Design
  • Construction supervision
  • Construction management
  • Construction surveying
  • Technical testing
  • Analysis

     
  • Construction maintenance
  • Demolition work
  • Renovation

  • Work on particular parts of the building
  • Further constructional activities
  • Building plans
  • Engineering, procurement and execution

 

According to the Construction Law, a foreign investor intending to participate in an Indonesian construction project can choose one of the following two forms of investment:
  • a Foreign Construction Representative Office (“BUJKA”) or
  • a Foreign Investment Company in a joint venture with a local construction company (“PT PMA”).
     

BUJKA – Construction Representative Office

BUJKA shall comply with the following regulations:
  • A BUJKA must be based on a so-called “big qualification”, meaning the foreign construction company must be certified as a “major company” ( as to be distinguished from small and medium sized enterprises) not only by its country of origin but also by the construction development agency in Indonesia;
  • A BUJKA license has to be obtained;
  • The national construction company involved in the collaborative construction project also needs the official certificate as a “major company” as well as business licenses for all construction services in Indonesia. The implementation of the joint operation shall be based on equality with regard to qualification, scope of services and shared responsibility;
  • The BUJKA is obliged to hire more Indonesian nationals than foreign staff. According to the general practice in Indonesia, three domestic employees have to be hired for one foreign employee. However, the precise ratio required for a BUJKA has not yet been defined
  • Leading positions in the BUJKA have to be occupied by domestic employees; 
  • Domestic materials and technologies shall preferably be used for local construction projects by a BUJKA; and
  • High-technologies –using state-of-the-art technology, being efficient and environmentally friendly – as well as local know-how shall be used;
  • The transfer of technology shall be fostered; and
  • All provisions of relevant laws and accompanying regulations have to be complied with.
     

The BUJKA license will be issued by the Ministry of Public Works (“MPW”). Additional regulations concerning the procedure for the acquisition of a BUJKA license, the cooperation with the local project partner and the hiring of domestic employees are also determined by the Ministry of Public Works.
 

PT PMA – Foreign Investment Company in a joint venture with a local construction company

Pursuant to the Construction Law, basically every joint venture with foreign shareholding (PT PMA) has to comply with all prevailing laws and regulations. The so-called “big qualification” (see above) as well as the existence of all required business licenses are equally basis prerequisites for the PT PMA.
 

In addition, the following aspects have to be taken into account when setting up a PT PMA focusing on construction services:
  • The maximum shareholding in a PT PMA with scope of business in the field of construction consultation or construction work is generally 67 % for foreign investors and 70% for investors from ASEAN countries.
  • PT PMA can only be set up for those construction projects where high-technologies are used, high risks exist or the project value exceeds 50 billion IDR for construction works or 10 billion IDR for construction consulting services.
     

The Construction Law also obliges both, BUJKA and PT PMA, to obtain a Certificate of Business Entity (“SBU”). For this purpose, a registration at the MPW through a state-approved association is required.
 

Administrative sanctions for specific violations

The following administrative sanctions will be imposed on BUJKA and PT PMA for specific violations of the Construction Law:
 

No Violation

Administrative Sanctions

 

1Failure to obtain SBU
  • Administrative penalty
  • Suspension of business activity and/or
  • Entry to the blacklist
2Lack of business license
  • Written warning
  • Administrative penalty and/or
  • Suspension of business activity
3

Executing construction services in Indonesia without having established either a BUJKA or a PT PMA

 

  • Written warning
  • Administrative penalty and/or
  • Temporary suspension of business activity
4BUJKA does not comply with the legal requirements
  • Written warning
  • Administrative penalty
  • Temporary suspension of business activity
  • Entry to the blacklist;
  • Freeze of license and/or
  • Revocation of license

 

Upon the entry into force of the new Construction Law, the Law No. 18 of 1999 concerning construction services (the “Old Law”) has been repealed. The implementing regulations of the Old Law not contravening the new Construction Law will remain in force. The implementing regulations of the new Construction Law are to be adopted by January 12, 2019.

 

updated 4 July 2017 

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