CSR Duty

Indonesia

Economic News

22 Jul 2010
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On July 20, the House of Representatives endorsed a new law making social responsibility compulsory for certain corporations operating in Indonesia, adding complexity to the corporate law regime.



The move came as lawmakers warned Indonesian businessmen about not complying with environmental standards and using voluntary CSR as a public-relations instrument.



Although the CSR regime was initially meant to cover all Limited Liability Companies (LLCs) and involved a mandatory contribution of up to 5% of a company's net profit, strong opposition from the business community forced parliament to re-establish the jurisdiction of the bill to preserve the balance needed to continue attracting foreign investment. As a result, paragraph 74 of the bill now states that only companies operating in the natural resources sector and companies producing hazardous waste such as that produced by hospitals must comply with CSR rules. The new bill does not specify exact percentages of profit to be diverted to CSR programmes, but the tax deductibility of such CSR contributions has been assured. The government made clear its prerogative remains to promote foreign investment despite the new rules.



"The percentage of funds taken from a company's profit for the CSR programme has to be set carefully, because the government does not wish to let the CSR rules block the development of companies that have just started to grow," Bachtiar Chamsyah, minister for social affairs, said on July 16.



Nonetheless, by segmenting corporate law between resource-based companies and others, the legislature has created two categories of corporations, which has met with severe criticism among industry insiders who argue that the measures contradict the notion of a level playing field initially engrained in the 1995 Corporate Law.



Additionally, there remain questions surrounding those state-owned companies or hospitals not incorporated as LLCs, which thus do not have to comply with the new rules.



Industry players are waiting for the implementation of regulations, due to follow in the next three months, as actual figures on the amount of funding that would have to be dedicated to CSR and sanctions for non compliance have not yet been defined.



"If an oil company invests in a CSR programme during the exploration phase, then this may not be included in the CSR requirements given that the company is not turning a profit yet," one industry insider told OBG.



Much debate is underway, with the chamber of commerce and industry (KADIN) and the Indonesian Petroleum Association (IPA) working with government authorities to clear up grey areas left by the bill. In the context of regional decentralisation, the implementation of the law could overlap on the existing environment law and various regulations imposed at the local level, further complicating the procedures.



"What we want to do now is talk to the government so that they will listen to our views on what CSR is," Franky Sibarani, spokesman for the Federation of Industrial Associations, said after the law was enacted.



Non-governmental organisations (NGOs) have been lobbying to establish standards and reporting mechanisms to ensure the programmes incorporate social and environmental considerations. While NGOs proposed fiscal incentives and preferential treatment in the awarding of government contracts to CSR-compliant firms, the House of Representatives opted for the stick approach by including punitive measures for LLCs not complying with the new CSR law.



Many insiders argue though that CSR schemes should remain voluntary and that the role of the government should be restrained to providing incentives for such companies engaging in CSR.



Voluntary CSR has successfully taken root in certain sectors, not only in resource-based industries such as the oil sector. For instance in the telecoms business, all major players see their CSR programmes, beyond natural disaster relief, as integral parts of their development strategies. Moreover, the multiplication of scholarship grants and computer support for small and medium sized-companies bears testimony to the strengths of a voluntary system.



"We encourage companies to introduce technology to schools," Kusmayanto Kadiman,the state minister for research and technology, told OBG. "Take the case of Telekom Indonesia, they have a programme called 'internet goes to school', which they fund as part of their corporate social responsibility programme."



In the oil sector, examples of CSR schemes initiated by large multinationals abound. BP has been funding community projects surrounding its Tangguh project in West Papua, while ExxonMobil has funded schools and hospitals in the Aceh province.



Although no one contests the spirit of the law is commendable, many worry about its details. With negotiations underway between all stakeholders, industry leaders hope the new law will not end up complicating the procedures engrained in Indonesia's corporate law.

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