Case Study Investment Climate & Legal Certainty: Semen Indonesia
Although the Indonesian government has been eager to improve the nation's investment climate in a bid to attract more foreign direct investment (FDI) and thus boost economic growth of Indonesia, it is widely known that conditions in Indonesia's investment climate remain somewhat troublesome, reflected by the nation's mediocre ranking in the World Bank's Ease of Doing Business index 2017. Here it ranks 91 out of 190 countries across the globe.
This mediocre ranking - although it has been improving over the past decade - is part of the reason why most investors think twice before investing in Indonesia. Indonesia is indeed a very attractive market for investors due to its huge population, rapidly expanding middle class, presence of abundant natural resources, and low minimum wages. However, this attractive context comes with higher risks (the "high risk, high gain" principle).
Foreign investors are also paying close attention to several cases in Indonesia where foreign investors or foreign parties find themselves in legal trouble. For example, Freeport Indonesia's business structure in Indonesia has to change rather drastically after the Indonesian government introduced new regulations in the mining industry (regulations that are not in line with existing contracts between the miner and the government).
Read more: Freeport Indonesia May Resume Exports Soon but Dispute Continues
But there are also cases of legal setbacks in Indonesia - carefully followed by foreign investors - that do not involve a foreign party. In fact, the case we discuss below is the case of Indonesia's state-controlled Semen Indonesia, the nation's largest cement producer. The company is experiencing trouble with the construction of a new USD $374 million cement plant in Rembang (Central Java) after the Supreme Court revoked its environmental permit in 2016. The case went to Indonesia's Supreme Court after local farmers complained that activities at the plant would damage the unique local ecosystem and thus damage farmers' agricultural output. The Supreme Court ruled in their favor (although initially the local residents had lost their cases at the Rembang District Court as well as their appeal at the High Court).
Publicly-listed Semen Indonesia then had to postpone the launch of commercial operations at this facility in Rembang (which was initially planned for 2016). This case casts great doubts on legal certainty in Indonesia. When an environmental permit has been obtained (as well as all other necessary permits) and a new plant is in the later stages of its development, then it should not be possible to suddenly revoke a permit, potentially leaving the investor with a costly plant that cannot be used. If this can happen to a state-controlled entity (the central government owns a 51 percent stake in Semen Indonesia), then it can surely happen to a privately-held (foreign) entity.
Issues related to land - such as land acquisition and land clearance - remain among the key problems for direct investment in Indonesia (and many investors depend on the Indonesian government's ability to assist in this process). Often local residents are only willing to sell their land for very high prices but there are also stories about local residents being paid (by rival companies) to protest against the development of a certain investment project. The rumors are that this is the case in Semen Indonesia's Rembang cement factory issue.
The future of Semen Indonesia's cement plant in Rembang remains uncertain. It could decide to reduce the size of its operations in order to avoid any negative impact on the local environment. The story remains unfolding.