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Key Legal Issues in Entering Afforestation Enterprise in Indonesia

2011.07.15

Recently, there have been increased interest and activity in overseas resources investment, and as such, this article will lay the foundation regarding investment in Indonesian afforestation projects. 
 
 
1. Types of Permits 
 
According to the Indonesian Forest Law, the business license required for use of timber from its forests can be divided into two categories: (1) Business Permit for Timber Forest Product Utilization – Nature Forest (Izin Usaha Pemanfaatan Hasil Hutan Kayu pada Hutan Alam, hereinafter "IUPHHK-HA") and (2) Business Permit for Forest Timber Product Utilization – Industrial Plantation Forest, hereinafter "IUPHHK-HTI"). 
 
Of the two types of permits, those interested in afforestration businesses need to obtain IUPHHK-HTI, which grants the licensee the right to enhance the quality and potency of production forest using silvicultural system to fulfill raw material needs through such permitted activities as land preparation, nursery, planting, maintenance, harvesting, processing and marketing in the permitted industrial plantation forest. The license period of IUPHHK-HTI can be up to 100 years at most, but it cannot be extended beyond that. Evaluation is carried out by the Ministry of Forestry office every 5 years. [Reference: 「"Preparation of Forest and Forest Management Plan, and Forest Utilization" Indonesian Government Regulation No.6 Tahun 2007」Article 1, 13, 15, 53]. 
 
 
2. Prohibition and/or Restriction on Foreign Investment 
 
The first thing to check before before acquiring interest in Indonesian afforestation enterprise is whether any Indonesian investment laws and regulations prohibit and/or impose any restrictions on foreign investment for the type of business that the enterprise engages in. 
 
According to 「Presidential Regulation of the Republic of Indonesia No. 36 of 2010 on List of Business Fields Closed to Investment and Business Fields Open, with Conditions, to Investment」, IUPHHK-HA, the business license regarding utilization of natural forest, is can only be owned by a legal entity that is 100% owned by Indonesians. 
 
However, IUPHHK-HTI, which grants business licenses for utilization of industrial plantation forest, can be issued to a legal entity with foreign investment. Moreover, Indonesian law imposes no special requirement on the ratio of foreign interest in the IUPHHK-HTI legal entity. 
 
Nevertheless, BKPM or the Ministry of Forestry can, at its own discretion, recommend that either Indonesian individual or Indonesian legal entity participate in the afforestation enterprise in the process of examining and issuing the business license. 
 
 
3. Procedure for Obtaining Permit 
 
The procedure for obtaining the IUPHHK-HTI permit is; (1) Select the desired location of the afforestation project and obtain written consents from the local residents; (2) secure the First Approval Letter (SP-1) after inspection of the project's general and technical specification with the Director General of Forest Production, head of Forest Planning Agency, head of provincial forest service office, and head of regency/municipality forest service office; (3) obtain the Principal Approval Letter (SP-2) after conducting a feasibility study and environmental assessment with a consulting company registered with the Ministry of Forestry; (4) after receipt of the environmental assessment by the Minister of Forestry, the head of Forest Planning Agency prepares the drawing of the working area and submits it to the Director General of Forest Production, who then prepares and submits the initial afforestation permit application to the Minister of Forestry; (5) after examination of the application, the Minister decides whether to issue the Ministerial Decree to utilize the forest area; and finally (6) if the Decree is issued, the Director General of Forest Production issues the order for payment of applicable forestland tax, and when the afforestation enterprise (applicant) pays the tax, the final written Ministerial Decree is sent to the applicant by mail. 
 
 
4. Time Limit on Transfer of Interest in Afforestation Enterprise 
 
(1) Transfer of Interest After Obtaining IUPHHK-HTI 
 
According to the Ministry of Forestry Regulation No. P.34/MENHUT-II/229 dated May 15, 2009 (hereinafter "Regulation No.34"), transfer of interest in afforestation enterprise with the IUPHHK-HTI permit can take two forms; (1) Transfer of interest in the enterprise that obtained IUPHHK-HTI, or (2) transfer of the IUPHHK-HTI itself. However, the latter form of transfer is permissible only after five years have passed since the acquiring of the permit. 
 
(2) Transfer of Interest Before Obtaining IUPHHK-HTI 
 
While there is no provision that explicitly prohibits transfer of interest in the afforestation enterprise prior to the issuance of IUPHHK-HTI, there is a possibility of problems if any interest in the enterprise is transferred before the issuance of the final permission of IUPHHK-HTI (SK Final Decision Letter). 
 
 
5. Conclusion 
 
There are difficulties in analyzing the legal issues of investment in Indonesia, such as obtaining the latest laws and regulations and properly interpreting them. Moreover, there are a number of requirements and limitations that are not explicitly written in the regulations, but must be satisfied in practice. Therefore, when analyzing the possible legal issues in relation to potential investment in Indonesia, it is imperative to conduct multi-angled query and analysis regarding the laws and practices in close cooperation with one or more Indonesian law firms.

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News Update Key Legal Issues in Entering Afforestation Enterprise in Indonesia 2011.07.15

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