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CLIENT ALERT 2021 | The Government of Indonesia’s Shift to Risk-Based Approach for Business Licensing to Improve the Investment Climate

10 May 2021

The Updates
As a series of issuing implementing regulations of Law No. 11 of 2020 on the Job Creation (“Job Creation Law”) and improving the Indonesia’s investment ecosystem, the Government of Indonesia (“GOI”) enacted Government Regulation No. 5 of 2021 on the Risk-Based Criteria Business Licensing (“Business Licensing Regulation”) on 2 February 2021.


The Business Licensing Regulation revokes Government Regulation No. 24 of 2018 on the Electronic Integrated Business Licensing Services − the underlying regulation of the business licensing process conducted through the Online Single Submission (“OSS”) system. It changes the method of
determining business licenses for certain business activities on risk-based criteria which will be officially adopted on the OSS system on 2 June 2021. Further, while the Business Licensing Regulation provides that the relevant implementing regulations shall be issued within two months after its enactment date (i.e. by 2 April 2021), until the issuance of this alert, it appears that no implementing regulation has been issued yet.

Discussions

Anatomy of the Business Licensing Regulation
The Business Licensing Regulation consists of 567 clauses which are divided into 12 chapters with four
detailed attachments. The Business Licensing Regulation seems extensive in volume because it covers
business licensing procedures for each of the following 16 sectors:

a)marine and fisheries;i)transportation;
b)agriculture;j)healthcare, medicine and food;
c)environment and forestry;k)education and cultural;
d)energy and mineral resources;l)tourism;
e)nuclear energym)religious affairs;
f)industry;n)post, telecommunication, broadcasting and
electronic system and transaction;
g)trade;o)defense and security; and
h)public works and housings;p)manpower.

Attachment I of the Business Licensing Regulation comprehensively sets out business licensing required for each business sector according to the Indonesia Business Classification Code (Klasifikasi Baku Lapangan Usaha Indonesia or also known as “KBLI”), including risk parameter and risk level, term of license, and the authority of government as the issuer. With this Attachment I, an applicant should easily be able to identify relevant licenses it requires to carry out its business activities. Further, Attachments II, III and IV of the Business Licensing Regulation respectively set out the requirements and obligations of the relevant business licensing, the risk level analysis guidance, and the guidance for relevant ministers or head of institutions to draft sectoral regulations on business activities and/or product standards.

We note that some KBLIs are still left out from this Business Licensing Regulation and therefore, further consultations with relevant government officials will be necessary for those particular KBLIs.

Risk-Based Business Licensing

The analysis of level of business risk is conducted and determined by the GOI by:

(a) identifying the business activities;
(b) assessing the hazardous level;
(c) assessing the likelihood of hazardous impact;
(d) determining the risk level and business scale; and
(f) determining the type of business licensing.

All business activities are divided into two stages and four risk levels category as illustrated below.

1. Business Activities Stages

a) PREPARATION:
At this stage, the companies can (i) acquire land, (ii) construct buildings,
(iii) procure equipment and facilities, (iv) hire employees, (v) fulfill business standards, and (vi) other related activities before commencing the operation and commercial activities including conducting feasibility study and financing during the construction period; and

b) OPERATIONAL & COMMERCIAL:
At this stage, the companies can conduct (i) production activities, (ii) logistic and distribution activities, (iii) marketing activities, and (iv) other relevant activities permitted under laws. Also, as applicable, the GOI will identify if there is any supporting license required for those business activities.

2. Risk Level Category

a) LOW: Lines of business which are categorized as low risk can operate and perform commercial activities after obtaining the Business Identification Number (“NIB”);

b) MEDIUM-LOW: Lines of business which are categorized as medium-low risk can operate and perform commercial activities after obtaining the NIB and a standard certificate;

c. MEDIUM-HIGH: Lines of business which are categorized as medium-high risk can operate and perform commercial activities after obtaining the NIB and a verified standard certificate;

d. HIGH: Lines of business which are categorized as high risk can operate and perform commercial activities after obtaining the NIB and licenses.

Further, the process of issuance of a business license can simply be described with the following diagram:

Supervision and Sanction

The GOI carries out its supervision functions on a regular basis and incidental basis. The regular supervision is carried out based on mandatory periodic reports submitted by companies and field inspections regularly conducted by authorized supervisors, while the incidental supervision is initiated by the authorized supervisors based on (incidental) reports from the public or companies.

Any violation or non-compliance with the license obligations shall be imposed with administrative sanctions in varied forms ranging from a warning letter up to closure of the business. The Business Licensing Regulation sets out supervision and sanction mechanisms for each business sector.

Other Key Points

1. Special Treatment

The Business Licensing Regulation provides acceleration process to obtain business licenses for high-risk level businesses located at KEK, KPBPB and industry areas, or listed as national strategic projects (proyek strategis nasional or “PSN”) in which case, the authorized issuers can directly issue an effective business license without the applicant needs to first fulfill
relevant requirements for such license. The applicant can fulfill those requirements after obtaining the license, but the Business Licensing Regulation is silent on the deadline for such requirements fulfilment. Further, we note from the Business Licensing Regulation that the PSNs are fully exempted from the obligation to fulfill the requirements.

2. Minimum Investment for a Foreign Investment Company

The minimum investment for a foreign investment (“PMA”) company shall be more than Rp10 billion excluding the value of land and building (“Minimum Investment”). This Minimum Investment amount is applicable for each five-digits of KBLI per project location except for the following conditions:

a) for large trading business activities, the Minimum Investment can cover for some KBLIs with the same first four-digits of KBLI − for example, if a PMA company intends to carry business activities with KBLI 46441 (large trading for pharmaceutical medicine for human) and KBLI 46443 (large trading for cosmetic for human), the total investment for both KBLIs is allowed at the Minimum Investment since both KBLIs are within the group of KBLI 4644 (large trading for pharmaceutical, medicine and cosmetic);

b) for food and beverages services, the Minimum Investment can cover for some KBLIs with the same first two-digits of KBLI per one location − for example, if a PMA company intends to carry business activities with KBLI 56101 (restaurant), KBLI 56210 (catering service) and KBLI 56305 (house of traditional medicine), in one location, the total investment for those KBLIs is allowed at the Minimum Investment since those KBLIs are within the group of KBLI 56 (food and beverages service provider);

c) for construction activities, the Minimum Investment can cover for some KBLIs with the same first four-digits of KBLI per one activity − for example, if a PMA company intends to carry business activities with KBLI 42204 (electrical civil building construction) and 42206 (telecommunication central construction), the total investment for those KBLIs is allowed at the Minimum Investment since those KBLIs are within the group of 4220
(construction of irrigation, communication and waste);

d) for industrial activities which produce more than one product in one production line, the Minimum Investment can cover for some KBLIs with different five-digits of KBLI − for example, if a PMA company produces coconut cruel oils (which is under KBLI 10422) and coconut cooking oils (which is KBLI 10423) in one production line, the company may invest at the Minimum Investment; and

e) for business activities intended to support main business activities (which are not the main source of incomes) and can be done and completed before the operation of main business activities, a PMA company may invest at the Minimum Investment. The Business Licensing Regulation, however, does not further regulate on how the GOI will determine a certain activity to be deemed as a supporting business activity.

On a separate note, the KBLIs discussed above refer to the KBLI issued in 2020 which supposedly revoked the KBLI 2017 from 15 September 2020. However, until now, the OSS system has not yet adopted the KBLI 2020 and apparently is still using the KBLI 2017 as the

business activities reference. We note from relevant government officials that the KBLI 2020 will be fully adopted on the same day the OSS system adopts the Business Licensing Regulation (i.e. 2 June 2021)

3. Additional Functions of NIB

In general, NIB is issued to evidence registration and as a business license for low risk level business activities. Under the Business Licensing Regulation, NIB has additional functions as
follows:

(a) Import Identification Number (API);
(b) Membership of Health Social Security and Manpower Social Security (BPJS);
(c) Mandatory Manpower Report (for the first period);
(d) Halal Guarantee Statement (only for Micro, Small and Medium Enterprise); and
(e) Indonesia National Standard (SNI) (only for Micro, Small and Medium Enterprise).

4. Transitional Provisions

The Business Licensing Regulation provides a grandfather clause which states that any business license which:
a) has been approved and effective before the issuance of the Business Licensing Regulation is exempted from the provisions of the Business Licensing Regulation (unless the provisions of the Business Licensing Regulation are more beneficial to the business); and
b) has not been effective before the issuance of Business Licensing Regulation, shall be subject to the Business Licensing Regulation.

It is also important to note that the holders of existing licenses are required to re-register their OSS account and update their data. However, the Business Licensing Regulation is silent on further technical implementations of such re-registration and update procedures

Conclusion

As the Business Licensing Regulation is intended to simplify business licensing process and increase the certainty to obtain licenses for investors, this regulation seems to have met such expectation.

As a game changer, it is then interesting to see how well and effective this regulation will be implemented by the GOI once it goes live on 2 June 2021. Synchronization and good coordination among government offices are a must to ensure that the Business Licensing Regulation meets its purposes of issuance.