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ASEAN Economic Community (AEC), from the Law and Business Point of View

August 10, 2015

Small Group Discussion by HPRP Partners and National Media
Jakarta, 21 May 2015

Background of AEC

As determined by the ASEAN members’ heads of state and heads of government’s in the ASEAN Summit in Kuala Lumpur, December 15, 1997, ASEAN nations aspire to create an ASEAN Community by 2020. These ideals were followed by ratification of Bali Concord II at the 9th ASEAN Summit in Bali, 2003, which agreed on the establishment of the ASEAN Community (ASEAN Community) (“Bali Concord II”).

The ASEAN Community consists of 3 (three) pillars, namely:

  1. The ASEAN Economic Community (AEC)
  2. The ASEAN Political Security Community (APSC); and
  3. The ASEAN Socio Cultural Community (ASCC).

The implementation of AEC is a form of cooperation among the ASEAN countries through integration in the economic sector as a single market in the region of Southeast Asia. Based on the Bali Concord II, as followed up by the signing of the AEC Blueprint in Singapore in 2007 (“AEC Blueprint”), the ASEAN countries agreed to create the AEC by 2015.

Indonesia’s Position as a Country Member of ASEAN

As a member of ASEAN, Indonesia was involved in the formation of the AEC. In practice, Indonesia implied its participation by its endeavours to support the improvement of the investment climate and trade, and to improve national competitiveness. Despite all of the AEC’s shortcomings or controversy in Indonesia, one of the AEC’s effects will be to facilitate the entry of foreign investment into Indonesia, and so the AEC is expected to support economic growth in Indonesia. In addition, the AEC is also expected to support the improvement in quality of domestic products, in which business people will be competing fiercely with producers from abroad in a free market.

One of the government’s commitments in the implementation of the AEC Blueprint was the issuance of Presidential Instruction No. 11 Year 2011 on the Implementation of Commitments of the Association Of Southeast Asian Nations Economic Community Blueprint in 2011 (“Instruction No. 11/2011”). In Inpres 11/2011 Indonesian government committed itself to taking strategic steps in order to face the AEC.

In line with the AEC Blueprint, the purpose of Presidential Instruction No. 11/2011 was to achieve:

  1. Single Market and Production Base;
  2. Highly Competitive Economic Area; and
  3. Regions with Balanced Economic Development, which focuses on the development of the Small and Medium Enterprises Sector.

Indonesia’s Readiness to face AEC

Indonesia has several advantages in facing the AEC. These advantages include (i) the total population of Indonesia is the largest among the ASEAN countries, (ii) Indonesia has many more natural resources compared to other ASEAN countries, and (iii) Indonesia is a member of the G20 economic cooperation forum.

At the same time these advantages can also be challenges, if Indonesia is only able to be a market for the services and products of other countries. Challenging conditions for Indonesia are:

  1. Competition of domestic export products with imported products from abroad;
  2. The readiness of the domestic infrastructure;
  3. Development that tends to be concentrated in Java; and
  4. The workforce education level is still dominated those with a high school education or less.

Unpreparedness in the fields of Human Resources (HR) and capital are also an important cause for concern, in that it could jeopardize local business people. In the single market era, foreign investors would dominate the market in Indonesia, while the local business people would be unable to compete with foreign investors. Currently there are eight professions which will be free to work within ASEAN countries: engineers, doctors, dentists, nurses, surveyors, architects, tourism related professions, and accountants.

Opportunities for Local Business People in the AEC

Basically local business people will be able to take advantage of the AEC momentum Indonesian products competing with products from other ASEAN countries. The AEC implementation which provides facilities for import duties and other tax facilities may be utilized by exporters and importers. SME products with good quality are expected to grow, as the purchasing power in several ASEAN countries is high, especially Singapore and Malaysia.

Indonesian domestic investors who’d like to invest in other ASEAN countries can also take advantage of the AEC momentum. With investment requirements and restrictions among countries becoming simpler, Indonesian investors who have sufficient capital will be able to invest and expand their business in other ASEAN countries.

The right fiscal and customs policy is essential for the ability and development of business people. The mechanism of certification and standardization is also important in order to protect our business people.

AEC Implications for Indonesian Law

In the era of the AEC, future foreign and domestic investors and traders who want to perform their business activities in Indonesia must be aware that they will be competing on an ASEAN scale. Investment policies in a country will tend to be lighter for ASEAN investors with bigger capital to invest in almost all lines of business. This was also implied by Presidential Decree No. 11/2011, which was preparation for the formation of a free market in ASEAN.

Furthermore, please note that all ASEAN countries are committed to achieve the AEC, one of which commitments is to adjust the legal instruments in each country. Notable examples of the implementation of AEC are reflected in Presidential Decree No. 39 of 2014 that contains the Investment Negative List in Indonesia (Daftar Negatif Investasi or “DNI”), which distinguishes between foreign ownership limits for non-ASEAN and ASEAN investors. There are some other differences such as:

Business Sectors / Industries The Ownership Limit for Non-ASEAN Foreign Investors The Ownership Limit for ASEAN Foreign Investors
Shipping (non sabotage) 49% 60%
The making of film Promotions, Advertising, Posters, Stills, Photos, Slides, Negatives, banners, pamphlets, billboards, folders, etc. 0% 51%
Specialist Hospital Services 67% 70%
Specialist Medical Clinic  Services 67% 70%

 

Again, the right government fiscal and non-fiscal policies will determine Indonesia’s competitiveness and ability to get benefits from AEC or to serve only as a market. Non-tariff policies include certification and standardization to protect Indonesian products and business people. As the largest country in ASEAN, and also one of the biggest economies within the Asia region, it’s about the time that we became aware of and demonstrated Indonesia’s bargaining power. Other ASEAN countries such as Singapore, which is currently the hub of many countries in entering the Asian market, can be a way for countries outside ASEAN to get benefits from this single market. Infrastructure improvement is essential for Indonesia’s competitiveness. Loss or reduction in the manufacturing industry in Indonesia in the last 10 years due to the influx of Chinese products could pose a threat to the domestic industry’s capabilities and ability to compete in the ASEAN market.

Investment Development in Indonesia

According to the First Quarter data on Foreign and Domestic Investment Realization from BKPM, which was obtained from a comparison of investment between the first quarter of 2014 and the first quarter of 2015, there was an increase of IDR 10.1 trillion in the first quarter of 2015 from IDR 72 trillion to IDR 82.1 trillion.[1]

20150521_Masyarakat Ekonomi ASEAN dalam Hukum dan Bisnis- HPRP Lawyers release_BKPM

 

 

 

 

 

 

 

 

 

Participation of the Law Firm Hanafiah Ponggawa & Partners (HPRP Lawyers) in Welcoming AEC

HPRP was appointed by the Investment Coordinating Board (Badan Koordinasi Penanaman Modal or BKPM) as a legal consultant to conduct a study on existing Bilateral Investment Treaties (BIT). Led by Partners Al Hakim Hanafiah and Giovanni Mofsol Muhammad, the HPRP team developed new BIT templates that will give benefits to Indonesia as the host country.

On the implementation of AEC, protection that can be applied is non-tariff policies. HPRP is also one of the few law firms in Indonesia which has an  International Trade practice . Harry Prabawa is the Partner in charge of this field.

With the AEC, Indonesian companies and workers must also be able to meet global standards. HPRP through its subsidiary, RHT Solutions Indonesia, provides advice related to compliance for banking and public companies including compliance of IT systems and data centers. Andre Rahadian and Erwin Winenda are Partners in charge of these activities. In addition, HPRP is also active in providing advice to prospective foreign investors as well as foreign investors who already run businesses in Indonesia on the investment legal aspects and corporate law in accordance with Indonesian regulations.

For Bahasa version, please download the PDF file here 

 

About Hanafiah Ponggawa & Partners (HPRP Lawyers)

Hanafiah Ponggawa & Partners originated from the law firm L. Hanafiah in 1953, one of Indonesia’s first post-independence law firms. Restructured in 1990 the firm then underwent several reorganisations before taking its present structure as Hanafiah Ponggawa & Partners (HPRP) at its head office in Jakarta.

To meet the market’s hopes, HPRP endeavours to give clients active and strategic advisory assistance with creative support in the following areas of practice: Corporate and Commercial, Labour and Litigation, Financial Services, Intellectual Property, Real Property, Resources and Infrastructure, and International Trade. In order to be able to give comprehensive legal services on a global scale, HPRP has joined the Meritas Alliance, a global alliance of independent law firms. HPRP is also collaborating with RHTLaw Taylor Wessing LLP, a law firm in Singapore affiliated with Taylor Wessing LLP, a British-based law firm. For wider regional access and to enhance its services, HPRP has taken the initiative with 8 leading law firms in North Asia and South East Asia to form the ASEAN Plus Group.

 

Media Contacts

Andre Rahadian, S.H., LL.M., M.Sc.                                              
Partner
E: arahadian@hplaw.co.id

Rachmawati
Marketing and Communications Manager
E: rachmawati@hplaw.co.id

Hanafiah Ponggawa & Partners
Wisma 46 Kota BNI, 41st  floor Jl. Jend Sudirman Kav 1 Jakarta 10220 – Indonesia
T: +6221  5746545,  5701837

[1] http://www7.bkpm.go.id/contents/p16/statistics/17#.VVxfOLmqpHw