New Indonesian Plantation Law

The Indonesian House of Representatives has passed a new Law on Plantations (the Plantations Law), which came into effect at the end of October 2014. The Plantations Law replaces the existing 2004 legal framework and aims to accelerate investment into the sector. It provides, in general, a helpful consolidation of the law, but is characterised by vagueness and uncertainty in key areas such as foreign ownership, which will act as a brake on new investment.

Foreign Participation

Since the first draft of the new law was published in July 2014, there has been significant debate around the proposed 30 per cent cap on foreign investment. This would have adversely affected some of the largest producers in Indonesia. The Plantations Law has softened that initial position. It does not contain specific foreign investment caps, but rather a general statement that domestic investment will be prioritised under the new regime. However, the law also requires the Government to set an investment cap by passing a regulation within two years. There is no guidance as to what this cap should be.

The Plantations Law also requires a foreign investor to: (i) form a joint venture with a local partner; and (ii) obtain approval for that joint venture from the Minister of Agriculture. In practice, that allows the Minister to require, as a condition of his approval, a minimum level of domestic investment. This extends to acquisitions as well, as the Minister must first approve any proposed transfer of shares in a plantation company to a foreigner.

Any foreign investment will also be regulated by the BKPM (Indonesia's Capital Investment Coordination Board, which controls foreign investment into all private Indonesian companies). The BKPM already caps foreign shareholding in any significantly sized plantation business (either cultivation or processing) at 95 per cent.

The uncertainty around mandating a precise foreign investment cap in two years is likely to act as a significant brake on new investment unless this cap is clarified earlier. We recommend, at the very least, that any new investor conducts detailed discussions with the Ministry to ascertain their likely stance on a future cap.

Land Restrictions

Any company investing in the sector must utilise 30 per cent of its land area for plantation activities within three years of being granted the relevant land rights and, within a further three years, must use all of the land areas which can be cultivated. The maximum size for a palm oil plantation is set at 100,000 hectares and there are (mostly smaller) limits for the other main plantation commodities. The restrictions do not apply to SOEs and to "true" public companies, where the majority of the shareholders are public. The Government determines the actual permitted area for individual plantations. As is currently the case, cultivation rights for any foreign-owned company are secured by the certificated land title Hak Guna Usaha (HGU), which is a right to cultivate, lasting 35 years and extendable for 25 years. For certain very significant foreign investments, the right can be granted for up to 60 years with a 35-year extension. Any plantation business holding more than 1,000 hectares must be integrated with a processing business.

Plasma obligation and the local community
Within three years of securing HGU title, the developer must allocate 20 per cent of the land to the local community so that they can utilise it for plantation activities. It is likely that developers and communities will come up with pragmatic interpretations of this requirement, to allow the local community to benefit from the economies of scale associated with the larger plantation areas under single cultivation, and a single marketing and distribution channel for all the finished product.

The law does not give further detail about how this obligation should be given effect to, which is not uncommon with Indonesian primary legislation. The previous legislation also only gave very broad guidelines for plasma programmes. The way a plasma programme was set up depended heavily on the local community and the relations it has with the developer. In practice, these schemes were based on setting aside a similar 20 per cent area, together with technology transfer obligations and a requirement for the developer to purchase the proceeds of the plasma plantations at a reasonable price. This could be assisted by the developer providing a loan to the beneficiaries, which they would assign a state-owned bank and repay on soft terms.

Against this background, it is to be hoped that the Government will pass an implementing regulation which sets out the key components of the plasma obligation in clear terms. If the plantation is being developed on customary land title land which has been acknowledged by the Government, then the developer must also obtain the approval of the local customary society.

Initial Business Licenses

The Plantations Law splits businesses into three types – cultivation, processing and supporting services. The previous law did not cover services, but the new law does not elaborate how these services will be regulated. Depending on the business type, the Government can issue a cultivation business license, a processing business license or an integrated business license. The regent/mayor of the local area will usually be responsible for issuing the license, unless the boundaries of the plantation straddle regional or provincial boundaries, in which case the provincial governor or Minister of Agriculture must issue it. The key document to be provided by the developer is an environmental license and, in the case of a processing business, proof that 20 per cent of the applicant's manufactured raw materials will be sourced from its own plantation.

Anti-haze Measures

There are severe penalties (up to ten years in prison or fines of up to ₹10bn) for burning ground to either clear areas for plantation or to manage plantations.