Indonesia makes significant changes to construction law

Builders and property developers will have to get used to a changed legal regime in Indonesia after the enactment of a new law on construction services. 

Market participants welcome some of the new law’s provisions, such as the abolition of tender requirements for private projects, but are uncertain about other changes, such as the prevailing language requirements and more stringent rules for foreign construction services providers. The implementing regulations will probably follow later this year or in 2018, but must be in place by January 12 2019, the two-year anniversary of the law’s enactment.

Heru Mardijarto

“The previous law was created in 1999, so this No. 2 law has been a long time coming,” says Heru Mardijarto, partner at Makarim & Taira S.

“This law is much more comprehensive and combines government and ministerial legislations that were in the previous law,” says Eddy Leks, partner at Leks&Co.

“The new law has more stringent requirements for foreign construction companies and will make it harder to establish a new company,” says Syahdan Aziz, partner at SSEK Legal Consultants.

Tender requirements

One of the most significant changes concerns the tender requirements for public services. Tenders to appoint a construction contractor are no longer required for privately funded projects, only for construction work for public services funded out of the state budget.

“In the past, construction providers for any work had to be appointed through a tender,” says Mardijarto. “With the change, only projects funded by the state budget need to go through a tender, but there is no definition of what the state budget means. Privately funded projects can choose their own contractors which helps to accelerate the process instead of going through a very complicated tendering process. However, it is unclear, for example, whether independent power projects funded from overseas but get subsidised through the government-owned electricity corporation PLN could be considered a state-budget-funded project.”

Prevailing language

A change that has caused confusion is the change to the prevailing language of a construction contract. In case of any discrepancies between the Indonesian version and the version using an international language, such as English, the Indonesian version will prevail under the new law.

“English works much better especially for big projects,” says Mardijarto. “In case of disputes in projects, it is challenging for parties to resolve disputes in international arbitration centres such as the Singapore International Arbitration Centre. Foreign banks may find it difficult to accept any ambiguities in the Indonesian version of contracts as the interpretation of the law could be different. There may be exceptions set out in the implementing rules but these are not clear at this point.”

Dispute settlement

Eddy Leks

With the goal to keep construction disputes out of court as much as possible, the law includes a new provision setting up a dispute board in case of conflicts. “Construction services agreement will need to stipulate that in case of disputes, a dispute board will be created on an ad hoc basis to aim to settle the dispute out of court,” says Leks. “The panel of judges of the dispute board will be decided by the parties.”

Foreign construction services providers

The use of local content must take priority over foreign content under the new law. Local knowledge needs to be considered and technology transfer from an international to an Indonesian company is mandatory. Foreign entities may establish a foreign investment company or a foreign construction services business entity to perform construction activity in Indonesia. When establishing the business entity, the foreign partner must establish a joint operation with a certified national business entity and the head of the joint entity must be an Indonesian national. “It will be difficult for some foreign companies to find a local person that they can trust,” says Aziz.

Competency of construction workers

Syahdan Aziz

A new requirement targeting construction workers is the need to complete a competency test. “Workers must have a working competency certificate and register with the Ministry of Public Works,” says Aziz. “They must pass a competency test organised by a professional certification industry to recognise their expertise.”

Subcontracting

The new law distinguishes between general and specific construction services. Only specific work may be subcontracted. “Three types of categories are in place which are construction consultancy services, construction work services and integrated services between the two,” says Mardijarto. “This will be good for the construction industry in improving and accelerating the appointment of service providers.”

“There will also be an information system in place to provide accurate data and information on the provider of construction services that is managed by the central government,” says Leks.

Sustainability

In addition to the safety, security and health provisions that were previously in place, there will be a fourth aspect focusing on sustainability. “Construction projects will need to encompass environmental sustainability to projects in addition to the employee health and social protection aspects,” says Leks. “What this encompasses will need to be further detailed by the implementing regulations.”

No criminal sanctions

A final difference between the old and new law is that non-compliance with the new law will not bring criminal sanctions. Instead, administrative sanctions such as written warnings, suspension and fines will apply. “Disputes will be settled in the civil court,” says Leks. “But that doesn’t mean that there are no criminal provisions, as there will be covered under the criminal code.”

Indonesia’s new construction law will help to accelerate the tendering, contracting and dispute resolution processes in construction but is also laden with ambiguity. Those in the construction industry will need to keep an eye on the implementing regulations to provide more clarity on definitions and any exceptions to the rules under the new law.