In line with national development and sustainability efforts, changes to Indonesia’s legal framework aim to enable green financing, facilitate land acquisition and management for international companies, and outline the formation of public-private partnerships (PPPs). Carbon and emissions trading, as well as the newly formed Land Bank Agency (LBA) are set to influence the expansion and diversification of Indonesia’s economy in the coming years.
Carbon Trading
Carbon trading is a market-based mechanism to reduce greenhouse gas (GHG) emissions through the sale and purchase of carbon units – whereby a carbon unit equates to proof of carbon ownership per tonne of CO . This can be conducted through both domestic and foreign trade. Within Indonesia, carbon trading can only be carried out if there are mitigation actions taken by businesses and activities, and can be carried out either directly or via the domestic carbon market.
The government’s efforts to regulate carbon trading are implemented through the enactment of Presidential Regulation No. 98 of 2021 (PR 98). The government is committed to contributing to the curtailment of increasing global temperatures by setting a nationally determined contribution (NDC) target to reduce GHG emissions.
Carbon Economic Value
PR 98 mainly aims to effectuate the carbon economic value (CEV) – which assigns a cost to each unit of GHG emissions resulting from human and economic activities – as well as to reduce and control GHG emissions through policies, measures and activities to achieve NDC targets. Carbon pricing under PR 98 is further regulated under Ministry of Environment and Forestry (MoEF) Regulation No. 21 of 2022 regarding the Guidelines for CEV Implementation (Regulation No. 21), which provides more technical provisions concerning CEV.
The implementation of CEV is one aspect of climate-change mitigation measures that can help to achieve NDC targets. The stakeholders who shall implement the effectuation of CEV are:
• Ministries or agencies;
• Regional governments;
• Business entities; and
• The community. CEV is implemented through several mechanisms, namely:
• Carbon trading;
• Performance-based payments;
• Carbon levies; and
• Other mechanisms in accordance with the development of science and technology, as determined by the MoEF. In carrying out carbon trading, both domestic and foreign trade shall:
• Align with the relevant carbon trading roadmap for the sector or segment concerned;
• Implement emissions-reduction buffers; and
• Possess an Emissions Reduction Certificate ( Sertifikat Pengurangan Emisi Gas Rumah Kaca, SPEGRK) for cross-sector carbon trading. An emissions-reduction buffer denotes a specified number of carbon units set aside as a risk control to help achieve the annual NDC target via carbon trading in the years leading to 2030. In the event of any remaining buffer, carbon units can be partially or completely returned or traded, as long as NDCaligned targets for the sector, segment and subsegment have been achieved for two consecutive years.
Furthermore, international carbon trading must fulfil the following additional conditions:
• NDC target in the segment or subsegment for Foreign Carbon Trading has been achieved;
• Authorisation has been obtained from the relevant minister; and
• Trading must be conducted after the strategy for NDC achievement in the sector and segment has been submitted to the appropriate minister.
Emissions-Cap Allowance
Carbon trading is divided into two mechanisms: GHG emissions offsetting and emissions trading. To implement the emissions trading mechanism, the government has imposed an emissions-cap allowance for business entities and activities within sectors outlined in the NDC roadmap. The sectoral emissions cap allowance (Persetujuan Teknis Batas Atas Emisi, PTBAE) is set by the relevant ministries based on the sectoral emissions reduction target and roadmap.
Based on the PTBAE, the appropriate ministries can set an individual emissions-cap allowance for business entities and activities (PTBAE-Pelaku Usaha, PTBAE-PU) based on emissions or emissions-cap performance, or by request in response to a proposal. After the compliance period, businesses with a PTBAE-PU must conduct measurement, reporting and verification (MRV) to verify the remaining emissions quota, which can then be sold to other PTBAE-PU holders or converted into carbon credits in the form of an SPE-GRK. The emissions quota for a compliance period expires after two years.
The government also provides a mechanism for businesses and activities in sectors that do not have a PTBAE to participate in carbon trading through GHG emissions offsetting. First, the business must prepare a Climate Change Mitigation Action Plan Document (Dokumen Rancangan Aksi Mitigasi Perubahan Iklim, DRAM). If the DRAM is validated, the business can proceed to implement its climate change mitigation actions. Upon the end of the action period, the business must prepare a final report to be submitted to the Director General of Climate Change (Direktur Jenderal Perubahan Iklim, DJPI). The DJPI then forms an MRV team to assess the final report. Based on the assessment, the DJPI can then issue carbon credits for the business or activity in the form of an SPE-GRK.
Certificate of Emissions Reduction
As the carbon credit unit recognised in Indonesia, SPEGRKs are registered in the National Registry System (Sistem Registri Nasional Pengendalian Perubahan Iklim, SRN PPI), which is under the management of the DJPI. SPE-GRK is a tool for:
• Proving the result of GHG emissions reduction;
• Carbon trading;
• Payment for the results of climate-change mitigation action;
• GHG emissions compensation; and
• A proof of performance for environmentally friendly businesses to help obtain funding from bond and sukuk (Islamic bond) schemes. Regulation No. 21 also provides a mechanism for recognising certificates issued by other agencies – such as TÜV Rheinland’s International Sustainability and Carbon Certification – designed to be equivalent to SPE-GRK for use in the domestic carbon market. However, the issuing agency must first engage in cooperation for mutual recognition with the MoEF, which is then published in the SRN PPI. Meanwhile, Regulation No. 21 requires the business to obtain authorisation from the MoEF before transferring SPE-GRK for use in foreign countries. The authorisation can be obtained by issuing an application to the MoEF, who then must process authorisation within 14 business days.
Challenges
Despite representing a considerable breakthrough in carbon trading regulation in the country, GR 98 and Regulation No. 21 still have scope for improvement – particularly concerning the authorisation for transferring carbon units out of Indonesia. This is for two key reasons. First, the regulations do not govern the criteria and conditions that must be fulfilled for authorisation to be issued. This means that the MoEF has broad discretion to approve or reject the authorisation request. Second, the regulations do not provide enforceability provisions or automatic approval conditions if the MoEF does not respond within the allocated time period. Consequently, authorisation requests remain in indefinite status, without resolution.
Land Bank Agency
Article 135 of Law No. 11 of 2020 on Job Creation (Job Creation Law) – before the Job Creation Law was replaced by Law No. 6 of 2023 on the Stipulation of Government Regulation in Lieu of Law No. 2 of 2022 on Job Creation to Become Law (Law No. 6 of 2023) – mandated the formation of the LBA. As a follow-up, on April 29, 2021 the government enacted Government Regulation No. 64 of 2021 on LBA (GR 64).
The LBA is a governmental agency, formed as a transparent, accountable and non-profit Indonesian legal entity – established by the central government to be autonomous and independent, with rights to exercise for land management. The LBA acts as a bridge between the state and public entities. It is expected to expedite the process for foreign investors seeking land for their business in Indonesia by allowing them to directly cooperate with the LBA instead of independently searching for landowners. The LBA operates with the following structure:
• Committee;
• Supervisory board; and
• Implementing board. The LBA has the following responsibilities:
• Carry out the preparation of the master plan;
• Help provide business and licensing approval;
• Carry out land acquisition; and
• Determine rates to utilise the land in the form of lease, rent, sale or other forms.
LBA Functions
The LBA is mandated with the below functions.
Planning: The LBA shall carry out land planning, which is divided into three phases:
• A long-term plan, which spans 25 years;
• A medium-term plan, covering five years; and
• An annual plan. These three planning periods are based on the National Medium-Term Development Plan and Spatial Plan and are determined by the implementing board after obtaining approval from the committee.
Acquisition: Lands that can be acquired by the LBA consist of lands resulting from the determination by the government and lands deriving from other parties. Lands acquired by the determination from the government comprise state lands originating from:
• Former land rights;
• Abandoned areas and land;
• Land from the release of forest areas;
• Incurred land;
• Reclamation land;
• Former mining land;
• Land on small islands;
• Land affected by spatial-change policy; and
• Land that has yet to be controlled by any other parties. Lands obtained from other parties refers to lands that derive from:
• The central government;
• Regional governments;
• State-owned enterprises (badan usaha milik negara, BUMN);
• Regionally owned companies (badan usaha milik daerah, BUMD);
• Business entities;
• Legal entities; and
• The general public. Lands may be obtained from other parties through the processes of:
• Purchase;
• The receipt of grants, donations or similar;
• Exchange;
• Waiver of rights; and
• Obtained via other valid forms.
Procurement: Land procurement is to be carried out by the LBA, following land-procurement mechanisms for developments in the public interest or direct land procurements.
Management: LBA activities consist of:
• Land development;
• Maintenance and safeguarding of land; and
• Control of land.
Utilisation: The LBA shall utilise land in cooperation with other parties through:
• Sale and purchase of land;
• Rental;
• Business cooperation;
• Grants;
• Swaps; and
• Other forms agreed with other parties, such as the central government, regional governments, BUMN, BUMD, business entities, legal entities and the general public.
Distribution: The LBA shall provide and distribute land to entitled parties, including:
• Ministries or agencies;
• Regional governments;
• Social and religious organisations; and
• Local communities, as determined by the central government.
LBA Implementation
The LBA can cooperate with other parties – namely, the central government, regional governments, BUMN, BUMD, business entities, the general public, cooperatives and other parties – in carrying out its functions. The LBA can also receive entrusted land and manage said land in the form of business cooperation.
Land Rights of the LBA
In its land management duties, the LBA is granted a right to manage (Hak Pengelolaan, HPL). The LBA may grant land rights above the HPL to other parties through agreements using the following land rights:
• Right to cultivate;
• Right to build, which may be subject to periodic extension and rights renewals once the land is used, and utilised for the purpose of the granting of this right; and
• Right to use. The LBA may also use and hand over parts of HPL land to other parties through agreements. In this regard, the land rights as outlined above may be encumbered with mortgages. Additionally, HPL lands may be released into public ownership through right of ownership, provided that said lands have been properly utilised for at least 10 years for housing for low-income communities, agriculture and plantations within certain named areas.
Challenges
Some challenges remain with respect to LBA provisions. GR 64, as one of the technical regulations of the Job Creation Law, was also impacted by the Constitutional Court Decision No. 91 of 2020 issued in November 2021. This stipulated that if the government did not amend the Job Creation Law within two years, it – along with its technical regulations, in this case GR 64 – would be unconstitutional and theoretically cease to effect. Subsequently, the government made the necessary corrections and enacted Law No. 6 of 2023.
The authority to unilaterally terminate an agreement poses another key issue. In implementing its functions, the LBA board chairman is authorised to unilaterally terminate or annul cooperation if the land is transferred, damaged, neglected or not utilised in accordance with the initial agreement. This shall be preceded by two warning letters from the board chairman. However, GR 64 does not give a detailed elaboration on the threshold for neglected or damaged land; the formulation of a fair mechanism is required to overcome this.
Lastly, the LBA is among the authorities designed to ease the process of foreign investment through streamlining business licensing and approval with respect to land and spatial planning. However, it remains unclear whether this will be in the form of recommendation, licence acceleration or any other form as GR 64 does not elaborate on the matter.
Risk-Based Business Licensing
Regulation No. 5 of 2021 on the Organisation of Risk-based Business Licensing (Regulation No. 5) was enacted as an implementation of Article 12 of the Job Creation Law, which was subsequently amended to Law No. 6 of 2023. This regulation aims to boost the investment climate and business activities in Indonesia by simplifying the business licensing issuance process. It sets out the regulatory framework for the organisation of risk-based licensing introduced under the Job Creation Law. Consequently, Regulation No. 5 repeals and replaces Government Regulation No. 24 of 2018 as well as various other regulations.
Arrangements
To start and carry out business activities, businesses must fulfil the requirements for business licensing and/or risk-based business licensing. The basic requirements for business licensing include conformity to spatial utilisation activities, environmental approval, building approval and function-worthiness certificates – each of which is regulated by statutory regulations in the domains of spatial planning, environment and buildings.
Risk-based business licensing shall be carried out based on the determination of risk level via the results of risk analysis and a scale rating of business activities including micro-, small and medium-sized enterprises (MSMEs) and large-scale businesses. Based on the assessment of danger level, potential for danger, risk level and business activity scale rating, business activities are classified into:
• Low-risk business activities;
• Medium-low-risk business activities;
• Medium-high-risk business activities; and
• High-risk business activities. Each level of activity requires different permits.
Low-risk business activities: Low-risk business activities require a Business Registration Number (Nomor Induk Berusaha, NIB) – which serves as the identity of the business entity – as well as the legal authorisation to carry out business activities. The NIB for low-risk business activities conducted by MSMEs also enables certification for the Indonesian National Standard and Halal Guarantee Statement.
Medium-low-risk business activities: Medium-low-risk business activities require an NIB and a standard certificate – which grants the legality to carry out business activities – in the form of a declaration of compliance with business standards through the online single submission (OSS) system.
Medium-high-risk business activities: Medium-high risk business activities require an NIB and a standard certificate, which is issued by the government based on the verification of fulfilling standards for the implementation of business activities.
High-risk business activities: High-risk business activities require an NIB and a permit from the government. If high-risk business activities require the fulfilment of business standards and product standards, the government shall issue business-and product-standard certificates based on the verification of meeting said standards.
Existing companies that have been carrying out business in Indonesia are expected to adapt their licences in accordance with the appropriate risk level of their activities, based on their Indonesian Standard Industrial Classification (Klasifikasi Baku Lapangan Usaha Indonesia, KBLI) numbers.
Licensing
Regulation No. 5 stipulates the norms, standards, procedures and criteria for risk-based business licensing in the following sectors:
• Marine and fishery;
• Agriculture;
• Environment and forestry;
• Energy and mineral resources;
• Nuclear power;
• Industry;
• Trading;
• Public works and public housing;
• Transport;
• Health, medicine and food;
• Education and culture;
• Tourism;
• Religious;
• Postal, telecommunication, broadcasting, and systems and electronic transactions;
• Defence and security; and
• Employment. Furthermore, the central government is given the authority to establish policies in each sector to organise risk-based licensing, using the KBLI specified in Appendix I of Regulation No. 5, including:
• The KBLI number;
• The scope of activities;
• Risk parameter;
• Risk level;
• Business licensing;
• Time period;
• Validity period; and
• Business licensing authority.
OSS Risk-Based Approach System
Risk-based business licensing is implemented electronically and in an integrated manner through the OSS RiskBased Approach system, which shall be applied by applicants that consist of:
• Individuals;
• Local and foreign business entities; and
• Representative offices. Business entities that fill out the business entity profile, business capital, taxpayer identification number, KBLI and business location data in the OSS system will obtain an NIB.
Moreover, business entities are required to continue the process in the OSS system to obtain riskbased business licensing by entering data on main business activities for each of the five-digit KBLI codes and the location, containing at least:
• The types of products produced;
• The product capacity;
• The number of workers; and
• The investment value plan. Regulation No. 5 determines that the minimum investment provisions for foreign investment shall include the total investment of more than Rp10bn ($650,000), excluding land and building, per fivedigit KBLI business sector per project location. The following business activities adhere to different minimum funding requirements:
• Wholesale trading: more than Rp10bn ($650,000), excluding land and building, for each business subgroup;
• Food and beverage services: more than Rp10bn ($650,000), excluding land and building, for each business division and each location;
• Construction: more than Rp10bn ($650,000), excluding land and building, for each business sub-group; and
• Industry and manufacturing: more than Rp10bn ($650,000), excluding land and building, for each production line.
Challenges
The technical aspects of risk-based licensing still pose some challenges. First, there are conflicting formulations in the scope of business between KBLI numbers issued by ministries and those issued by Statistics Indonesia (BPS). KBLI classification by BPS was issued in 2020 and has yet to be revoked. This can create some confusion for companies in determining which KBLI numbers should be used to carry out business in Indonesia.
The central government will further regulate matters related to KBLI numbers by using the KBLI numbers referenced in Appendix I of Regulation No. 5. The Indonesia Investment Coordinating Board (BKPM), through BKPM Regulation No. 3 of 2021 concerning the Electronically Integrated Risk-based Business Licensing System, has further regulated KBLI numbers. However, as of May 2024 there were still several KBLI numbers that had not been regulated, which means that related business entities are unable to process their NIB and business licenses.
Differing interpretations of the minimum investment requirement present another important issue. Regulation No. 5 requires a total investment of more than Rp10bn ($650,000). However, the term investment is different from the terms used in Indonesian company law, which uses the terms authorised capital, paid-up capital and issued capital – all of which have different meanings and usage. The term investment could thus offer multiple interpretations, presenting the potential for confusion.
Public-Private Partnerships
At the end of 2023 the National Development Planning Agency (BAPPENAS) enacted a new regulation governing the process of public-private partnerships (PPPs) in the country. The new BAPPENAS Regulation No. 7 of 2023 concerning the Implementation of PPPs in Infrastructure Development (Regulation No. 7) replaced the previous regulation, which was enacted in 2015 and updated in 2020, in a move to increase funding opportunities for projects that are suitable for PPP schemes. The regulation introduced clearer stages to govern the process for unsolicited PPPs, compared to both Presidential Regulation No. 38 of 2015 on Cooperation between Government and Business Entities in the Procurement of Infrastructure and the previous BAPPENAS regulation.
Process for Unsolicited PPPS
The implementation of PPPs is carried out in three stages.
Preparation stage: The preparation stage begins with the submission of a letter of intent, followed by the issuance of an approval letter for the initiative. As a rule, this stage is divided into two parts. First, a letter of intent and supporting documents are submitted and, if approved, are followed by the preparation of feasibility studies and supporting documents. Then, if the feasibility study is approved, the government contracting agency (GCA) will issue an approval letter for the initiative.
Transaction stage: After the issuance of the approval letter, the GCA will:
• Confirm the business location;
• Commence the process for procurement of the implementing business entity;
• Oversee the signing of agreements; and
• Ensure the fulfilment of infrastructure financing. During this stage, the business entity undertaking procurement will conduct a bid award that will determine the winner of the tender. The appointment or bidding procedure is also clarified in the provisions of Article 80 of Regulation No. 7.
Management stage: Management is carried out through two stages: preparation for managing the PPP process; and control of the agreement’s execution, consisting of construction to build, provision of services and preparation for termination of the agreement. Regulation No. 7 set deadlines for examination by the government, such as:
• 15 days to complete the evaluation of the statement of the letter of intent and supporting documents;
• A one-month period for the assessment of documents from prospective initiators;
• Two to eight months for the procurement of the implementing business entity;
• One to three months for the establishment of an implementing business entity and the signing of an agreement; and
• 12 months to ensure the fulfilment of financing. However, there are no sanctions in the event that execution exceeds the predetermined time limit.
Initiating Unsolicited PPP Projects
One major change in unsolicited PPP procedures is that the project initiator is no longer required to submit a prefeasibility study to obtain preliminary approval before proceeding with the preparation of a proposal. Instead, Regulation No. 7 requires the project initiator to submit a letter of intent including the following supporting documents:
• Confirmation of compliance with related sector planning, government planning, regional spatial planning and detailed spatial planning objectives;
• Confirmation of indication of necessity for infrastructure provision;
• A preliminary review of project plans;
• Confirmation of financial capacity and adequate technical experience; and
• Preliminary identification of the relevant GCA. However, challenges persist. Among these, the regulation does not specifically detail who is authorised to provide such confirmation, nor how these matters can be confirmed. Moreover, the change deviates only slightly from Presidential Regulation No. 38 of 2015, which requires feasibility studies to initiate unsolicited PPP proposals. Furthermore, the change eliminates the fast-track option under previous legislation, which allows business entities that have compiled feasibility studies to submit the feasibility study directly for approval.
Change of Solicited PPP to Unsolicited PPP
Previously, changing a solicited PPP to an unsolicited PPP was governed under one paragraph that limited the change to projects without prefeasibility studies. Regulation No. 7 expanded the scope, while at the same time establishing more specific terms and conditions for the change to be allowed. In terms of procedure, the change from a solicited to an unsolicited PPP must first be preceded by evaluation across the following metrics:
• Necessity;
• Assessment of feasibility study and supporting documents; and
• Comparison of prefeasibility study with the feasibility study, with reference to the supporting documents prepared by the business entity. This way, the provisions aim to avoid the use of state budget for the preparation of projects that may ultimately be reclassified as unsolicited PPP projects.
Regulation No. 7 also provides opportunities for the GCA to change unsolicited PPP projects to solicited PPP projects at the proposal stage. This means that the GCA can take over unsolicited PPP projects at the proposal stage and develop such projects themselves. In order to do so, one of two conditions must be met:
• The project proponents resign themselves before procurement of the implementing business entity; or
• The procurement of implementing business entity fails and the GCA decides to dismiss the process. The new provisions may create doubt regarding the general success of unsolicited PPP proposals, with the government possessing the authority to determine whether unsolicited PPP proposals may proceed.
To illustrate, the regulation states that the condition for reclassifying a PPP proposal from solicited to unsolicited is met when the project proponent refuses to comply with changes to the feasibility study as instructed by the GCA. Project proponents must therefore comply with GCA demands if they wish to proceed with the proposal. Furthermore, the regulation includes provisions wherein the GCA is permitted to consider documents prepared by project proponents for unsolicited PPP projects.
Transfer of Intellectual Property
Regulation No. 7 attempts to clear up the transfer of intellectual property from the initiator of a feasibility study to the GCA candidate, as stated in the approval letter for the feasibility study. Article 72 of the regulation sets forth that the feasibility study and supporting documents submitted by the project proponents – including intellectual property – are proprietary to the GCA.
This attempt, however, is not without challenges. First, such statements have questionable legal force, since such processes have not been recognised as a valid means to transfer the proprietary of intellectual property under Article 16 of the Copyright Law.
The obscurity of consent from the project initiator for the proprietary transfer of project documents to the GCA poses another challenge. The approach in Regulation No. 7 contrasts with the Copyright Law, which requires any transfer to be carried out in writing to provide legal certainty. The provision is ambiguous regarding compensation in the event of proposal purchase – which could be undertaken by the project initiator under Article 74.
Regulation No. 7 guarantees that the proposal prepared by the project initiator shall be mandatorily purchased – including its intellectual property – if the project initiator is not selected during the tender process. It remains unclear whether the mandatory transfer is itself the compensation, and whether the project initiator is still entitled to sell the proposal if the mandatory transfer has occurred.
Overcoming such challenges through the adoption of clear procedures and alignment across different pieces of legislation presents an opportunity to help enhance certainty for private-sector participants in all stages of the PPP process in the years ahead.
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