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3 March, 2017
Earlier this year, the Indonesian Parliament issued Law No. 2 of 2017 on Construction Services (the 2017 Construction Law) which revoked the old construction law (the 1999 Construction Law). The 2017 Construction Law states that its fundamental purpose is to improve the Indonesian construction regulatory framework to reflect the dynamics and modern developments in construction service businesses in Indonesia. However, in reality, the 2017 Construction Law is a continuation of business-as-usual for the nationalistic and heavily regulated Indonesian construction industry, with very few meaningful reforms introduced by the 2017 Construction Law.
The notable changes introduced by the 2017 Construction Law include the following:
The Indonesian language version of bi-lingual construction contracts must prevail in the event of any inconsistency with the English language version.
There is no express requirement for a tender/selection/appointment procurement process to be used for any construction services contracts which are not financed through State funds or relate to public services projects.
Nonetheless, the 2017 Construction Law retains the authority of the Indonesian Government to develop a tender/selection process for the appointment of construction service providers generally. Further, pending the issuance of new implementing regulations, the existing implementing regulations under the 1999 Construction Law will continue to apply, to the extent that they are not directly inconsistent with the 2017 Construction Law.
There are no criminal sanctions under the 2017 Construction Law, with a new emphasis on resolving disputes or breaches amicably or through the application of civil and administrative sanctions in a way intended to limit the interference with (or suspension of) the delivery of construction services in Indonesia.
Classification of Construction Services Business
Under the 2017 Construction Law, there are 3 main types of construction services business, namely: (i) construction consultation services (which also largely incorporates the categories of construction planning and construction supervision services from the 1999 Construction Law); (ii) construction performance services; and (iii) integrated construction services (which is a new formal category of construction services business under the 2017 Construction Law).
These main types of construction services businesses are further described here.
Foreign investment in the construction industry
Similar to the regulatory regime under the 1999 Construction Law, under the 2017 Construction Law (and other prevailing regulations) foreign construction companies can only participate in the Indonesian construction industry through:
(a) a foreign construction representative office which forms a joint operation with a ‘large’ qualification locally-owned construction services business entity for each construction project, whereby both parties will be jointly and severally liable for the construction services provided; or
(b) an Indonesian-incorporated joint-venture company, with a maximum of 67% (or, for investors from ASEAN countries, a maximum of 70%) foreign ownership whereby, in practice, the local shareholder must be a ‘large’ qualification locally-owned construction services business entity.
Under the 2017 Construction Law, both foreign construction representative offices and foreign-owned Indonesian-incorporated joint-venture companies are still only permitted to be involved in projects considered high risk, using high/advanced technology and involving high cost. Consistent with Indonesia’s territorial jurisdiction, the 2017 Construction Law does not expressly purport to apply to construction services which are provided entirely from offshore in relation to Indonesian construction projects.
Licensing arrangements
In general, the 2017 Construction Law has not materially amended the licensing requirements for construction services businesses in Indonesia (including the requirement to obtain a Construction Services Business License (Izin Usaha Jasa Konstruksi or IUJK) from the relevant Government authority and a Business Entity Certification (Sertifikat Badan Usaha or SBU) through certain certification and registration processes with the Minister of Public Works and Society Housing (the MOPW)).
Building Procurement Business
The 2017 Construction Law formally introduces the concept of a building procurement business. A ‘building procurement business’ includes the construction of buildings and civil projects (financed from public or private sources) which is implemented by the building owner or through a building procurement agreement between the building owner and the relevant construction services entity.
The 1999 Construction Law technically applied to business entities carrying out construction services activities for the benefit of third parties. However, this express concept of a building procurement business in the 2017 Construction Law also includes building owners/developers who do not actually carry out construction services activities for the benefit of third parties but are, nonetheless, inherently involved in the Indonesian construction industry as project principals.
The 2017 Construction Law states that further provisions regarding the regulation of building procurement businesses will be stipulated through future Presidential Regulations.
Construction contracts
Consistent with existing regulatory requirements, the 2017 Construction Law requires that all construction contracts must contain prescribed minimum provisions and requirements (including that all Indonesian construction contracts must be made in the Indonesian language). However, the 2017 Construction Law expressly adds that the Indonesian language version of a bi-lingual construction services contract must prevail in the event of any inconsistency with the English language version.
The 2017 Construction Law expressly states that a prescribed tender/selection/appointment procurement process (as applicable) is required to be implemented in accordance with the prevailing laws and regulations for the appointment of construction service providers for projects which are financed through State funds or for the appointment of an affiliate of the building owner as a construction service provider for public services projects.
However, the 2017 Construction Law does not expressly set out any tender/selection/appointment requirements for privately-funded construction projects. Nonetheless, the 2017 Construction Law retains the authority of the Indonesian Government to develop a tender/selection process for the appointment of construction service providers generally. As a result, it is possible that tender/selection/appointment requirements for privately-funded construction projects will be applied and further prescribed by future implementing regulations.
The 2017 Construction Law states that only specialist construction work or supporting work can be sub-contracted to third parties. The 2017 Construction Law then provides further details in relation to the type of work which is considered specialist construction work. Please see the link to our table above for further details of the classification of ‘specialist’ construction work. Further, in relation to the sub-contracting of supporting work, the 2017 Construction Law states that construction service entities must prioritize ‘small’ qualification sub-contractors.
Similar to the 1999 Construction Law, the 2017 Construction Law requires construction service providers to be liable for any building failure in accordance with the construction lifespan, up to a maximum period of 10 years after the date of final delivery of the construction services. Thereafter, the liability for any building failure will reside with the building owner.
Comprehensive Manpower Management
The 2017 Construction Law requires all construction workers to be classified based on their disciplines. Construction workers who are qualified as operators, technicians/analysts or experts must be certified through a standardized training program run by registered training institutions and, ultimately, obtain a Work Competency Certificate registered with the MOPW. This certification requirement also applies to expatriate workers, who must obtain a certification of registration from the MOPW which is consistent with the construction competency certificate held by them in their country of origin.
Sanctions and implementing regulations
The 2017 Construction Law retains the typical administrative sanctions for various breaches of the law. However, the 2017 Construction Law has removed all criminal sanctions and has placed a new emphasis on resolving disputes or breaches amicably or through the application of civil and administrative sanctions in a way intended to limit the interference with (or suspension of) the delivery of construction services.
The 2017 Construction Law requires the Indonesian Government to issue various implementing regulations by no later than 12 January 2019, including in relation to the construction contract award process, the construction manpower classification, qualification and registration regime, claim procedures in relation to construction activities and the requirements for performance guarantees. In the meantime, all implementing regulations issued under the 1999 Construction Law remain valid except in the event of inconsistency with the 2017 Construction Law.
For further information, please contact:
David Dawborn, Partner, Herbert Smith Freehills
david.dawborn@hbtlaw.com
