Foreign investment in The New National Capital City of Indonesia (IKN)

Foreign investment in The New National Capital City of Indonesia (IKN): the relaxed requirement and favorable legal condition Davin Timothy Haposan Sihite1, Muhammad Riadi Setiawan2 ABSTRACT The government of Indonesia (The Government) has announced its ambitious plan to relocate Indonesia's national capital to East Kalimantan Province, establishing the new capital city, Nusantara Capital City (IKN). As a project which has strategic value for the national economy, IKN will offer interesting facilities to investors. Therefore, they are expected to be drawn to invest in the new capital. The project, funded 80% from sources outside the state budget, aims to attract global investors. Through Government Regulation No. 12/2023, The Government tried to establish a solid legal foundation, providing certainty for investors entering IKN, with several relaxed requirements highlighted in the regulation. Furthermore, it is also important to highlight the significance of maintaining a favorable legal condition set forth under Bilateral Investment Treaties (BITs) and the enduring nature of foreign direct investments. This article, underscores the relaxed requirements in IKN, while also highlighting the importance of maintaining a favorable investment climate through legal mechanisms, constant promotion by the President, and inclusion in Indonesia's National Long-Term Development Plan (RPJPN) 2025-2045. By doing so, the Indonesian government aims to secure private sector participation, particularly from foreign investors, in funding the IKN project, ensuring its sustainable development and economic growth.

Keywords : Foreign Investment, Relaxed Requirement, Favorable Legal Condition, Nusantara Capital City (IKN), Investment Promotion.

1

The Author is an undergraduate student in Faculty of Law, Padjadjaran University, Bandung, davin21001@mail.unpad.ac.id 2 The Author is an undergraduate student in Faculty of Law, Padjadjaran University, Bandung, muhammad21078@mail.unpad.ac.id

BACKGROUND The government of Indonesia (The Government) has announced a plan to move the national capital to East Kalimantan Province, which was agreed upon at the DPR RI Plenary Meeting in early 2022. The new capital city, to be named Ibu Kota Nusantara (Nusantara Capital City or “IKN”) is being funded by the state budget for merely 20% of the costs required to develop IKN, with the remaining 80% coming from outside the state budget which opens up business expectations from all around the world. As a project which has strategic value for the national economy, IKN will offer interesting facilities to investors. Therefore, they are expected to be drawn to invest in the new capital. Not limited to the local investors, The Government also clearly invites foreign investment to invest in this new project. This intent could be seen through the GR 12/2023 (Government Regulation No. 12/2023) on the Granting of Business Licenses, Ease of Doing Business, and Investment Facilities for Business Actors in Nusantara Capital City, specifically on Article 5 which stated that “certain business fields in the IKN may be excluded from foreign ownership restrictions that generally apply in Indonesia.” The government aims to promote infrastructure development, new renewable energy, healthcare facilities, and transportation systems, while also strengthening investment in the manufacturing, tourism, and commercial sectors.

To encourage further investment into the IKN, the Government has issued a number of regulations setting out the funding schemes available for investing in IKN. As part of IKN Regulations, the Government has established the IKN Authority (Otorita Ibu Kota Nusantara) to execute the planning, development, and transfer of the Indonesian capital, and to later administer the IKN as its local government. To do so, the Government of the Republic of Indonesia has enacted Law No. 3/2002 “The IKN Law” to regulate matters regarding its national capital city, since prior to the enactment of this law, there were no laws that specifically regulate the National Capital in Indonesia.3 The IKN Law has also given the IKN Authority special powers and authority compared to those of local governments in general. IKN Authority is continuously busy with the heavy flow of investments from various private companies all over the world. Until

3

Law No. 3 of 2002 “The IKN Law.”

November 2023, there are at least 300 letters of intent coming from foreign investors to invest in the new capital city.4 When making an investment, an investor must have a “legitimate expectation” which can be said as reasonable and justifiable expectations that they can rely on.5 A legitimate expectation of an investor may come from legal rights that come from the Bilateral Investment Treaty “BIT” and contractual commitments, formal and informal representations made to investors, and also the general regulatory framework in force in the host state at the time of the investment that includes the stability and a favorable legal condition.6 Here, IKN Law serves to realize national objectives from the Preamble of the Indonesian Constitution (UUD 1945) itself which is to protect the entire Indonesian nation and promote the general welfare. This law will regulate the better governance of the national capital, both in terms of government and dimensions of spatial planning and the environment.7 This law also aims to increase economic growth and as an equalization in eastern Indonesia that can support the achievement of national goals and in accordance with the fifth precept of Pancasila: “Keadilan Sosial Bagi Seluruh Rakyat Indonesia”.8 With the IKN Law in mind, foreign investors can rest assured that they have legitimate expectation in the form of ease of access to invest in IKN considering that the President of the Republic of Indonesia itself has continuously promoted foreign investors to inject their capital in this project. However, as it is approaching the year 2024 where Indonesia will hold the general election and eventually will go to a political transition, as a result the ongoing foreign investment may have no clarity nor stability to invest in a favorable legal condition. Therefore to encourage foreign investment to invest in IKN, the government of Indonesia must ensure the upcoming investor that their investment in IKN will not be harmed even if a political transition will occur.

4

Eva Safitri, "Jokowi Sebut Ratusan Investor Asing Teken LoI soal IKN: Yang Real Mulai Belum." https://news.detik.com/berita/d-7046021/jokowi-sebut-ratusan-investor-asing-teken-loi-soal-ikn-yang-real-mulai-bel um, accessed on 27 November 2023.

5 Thunderbird v. Mexico, arbitral award, 26 Jan 2006, para. 147.

6 Gami v. Mexico para. 23, Murphy v. Ecuador (II) PCA para. 248, ADC v. Hungary ICSID para. 424.

7 Naskah Akademik Rancangan Undang-Undang Tentang Ibu Kota Negara, Juni 2016.

8 Ibid.

PROBLEM IDENTIFICATION Research in this article primarily analyzes the problems arises as follows: 1. What are the key features of the relaxed requirements for investing in IKN, and how do they differentiate from standard Indonesian investment regulations?

2. What is a favorable legal condition and why is it important for the Indonesian government to maintain a favorable legal condition?

METHOD This article is formed using a research method with a normative legal approach, namely legal research conducted by researching library materials or secondary data. This research is conducted to obtain materials in the form of theories, concepts, legal principles and legal regulations related to the subject matter, which in this case relates to Foreign Investment Facilities, especially in IKN. ANALYSIS 1. The key features of the relaxed requirements for investing in IKN and the differentiation from standard Indonesian investment regulations The relocation of the New Capital City (IKN) is a national strategic project to create a sustainable city, environment city, forest city, green city, and smart city which drew not only domestic investors, but also foreign investors to invest in this project. To support this intent, The Government has established the IKN Authority (Otorita Ibu Kota Nusantara) to execute the planning, development, and transfer of the Indonesian capital, and to later administer the IKN as its local government.9 IKN aspires to be a global city accessible to all, with a focus on sustainability, acting as a driving force for the nation's future economic prosperity and serving as a representation of Indonesia's diverse identity based on Pancasila and the 1945 Constitution.

However, substantial capital is needed for IKN's development, prompting the government to explore strategies to enhance investments in the region. The recent issuance of Government Regulation No. 12/2023 on the Granting of Business Licenses, Ease of Doing Business, and

9

Vernando,Skema KPBU, Apa Perannya dalam Mendukung Pembangunan IKN. KPBU KEMENKEU, 2022, https://kpbu.kemenkeu.go.id/read/1142-1364/umum/orangjuga-bertanya/skema-kpbu-apa-perannya-dalam-menduku ng-pembangunan-ikn.

Investment Facilities for Business Actors in Nusantara Capital City, aims to attract investments.10 This regulation is enacted to establish a solid legal foundation, providing certainty for investors entering IKN, with several relaxed requirements highlighted in the regulation.

The first relaxed requirement is regarding the non-applicability of foreign ownership restriction, reflected through Article 5 of Government Regulation No. 12/2023.11 As a general rule, certain business sectors in Indonesia may be subject to foreign ownership restrictions, as outlined in the ‘Positive Investment List’ under Presidential Regulation No. 10/2021 on Investment Business Fields as amended by Presidential Regulation No. 49/2021, as well as Law No. 3/2023 on Job Creation. However, article 5 of Government Regulation No. 12/2023 explicitly stated that “certain business fields in the IKN may be excluded from foreign ownership restrictions that generally apply in Indonesia.” This shows that the Government is aiming to attract foreign investors by creating a favorable legal condition towards foreign investors, which would draw any foreign investor to invest and develop the New Capital City. Accordingly, there is a clear intent from the Government to expedite the investment in IKN for the optimal realization of future development, since the swift involvement of foreign investors is crucial in regards to expeditious developmental initiatives and economical escalation.

Furthermore, the second relaxed requirement in regards to special land entitlement. The IKN Regulation provides extended durations for land entitlements within IKN, compared to the standard terms applicable in Indonesia under the Investment Law No. 25/2007, as amended by Presidential Regulation in Lieu of Law No. 2/2022 and Constitutional Court Decision No. 21-22/PUU-V/2007 (“Investment Law”). For instance, Right to Use (Hak Pakai or "HP") for business under Constitutional Court Decision No. 21-22/PUU-V/2007 (“Investment Law”) only lasts for 45 years which may be renewed for 25 years (70 years in total). On the other hand, Article 20 of Government Regulation No. 12/2023 establishes that Right to Use (Hak Pakai or "HP") for business lasts for 30 years, extended for 20 years, then renewed for 30 years (80 years total).12 In addition, According to the IKN Regulations, the granting and transfer of these land titles are exempted from a 0% Acquisition of Land and Building Duty (Bea Perolehan Hak atas 10

Government Regulation No. 12/2023 on the Granting of Business Licenses, Ease of Doing Business, and Investment Facilities for Business Actors in Nusantara Capital City.

11 Article 5 Government Regulation No. 12/2023 on the Granting of Business Licenses, Ease of Doing Business, and Investment Facilities for Business Actors in Nusantara Capital City.

12 Article 20 of Government Regulation No. 12/2023 on the Granting of Business Licenses, Ease of Doing Business, and Investment Facilities for Business Actors in Nusantara Capital City.

Tanah dan Bangunan or “BPHTB”) for a duration that will be determined later by the Head of the IKN Authority. This relaxed requirement serves as an incentive for investors, allowing them to obtain land without the obligation to pay the usual 5% Acquisition of Land and Building Duty (Bea Perolehan Hak atas Tanah dan Bangunan or “BPHTB”). This exemption in acquiring land in IKN is a significant facilitation, simplifying the process and resulting in cost savings.

The third relaxed requirement pertains to the use of foreign workers within IKN, in contrast to the standard regulations applicable to foreign workers in Indonesia. In the general terms, Foreign workers can be employed only through a Use of Foreign Workers Plan (Rencana Penggunaan Tenaga Kerja Asing or "RPTKA"), which requires approval from the Ministry of Manpower. Typically, this approval is granted for a duration of two years and may be subject to extension.13 On the contrary, RPTKA approvals for foreign workers in IKN can be granted for periods of up to 10 years, with the possibility of extensions. Consequently, foreign workers in IKN have the option to obtain residency permits for a maximum duration of 10 years, which can be extended based on the validity periods specified in the relevant employment agreement for the foreign worker. Moreover, the residency permits of foreign shareholders who concurrently hold positions in a company's management can be approved for the duration of their tenure in such positions.14 2. Favorable legal condition and its importance for the Indonesian government to maintain a favorable legal condition Foreign investment itself is a long-term relationship between the investor and the host country.15 By that, prior to the investment being made, an investor must lay out in advance the risks that may come from such a long-term relationship with a foreign state, be it from a business perspective and legal point of view to minimize risks that they may endure during their investment.16 The obligation from the host state to create a favorable conditions itself can be seen through various BIT’s that Indonesia has committed, as we can see in Article 2 of the

13

Article 17 of Law No. 34/2021 on the use of Foreign Workers.

Article 23 of Government Regulation No. 12/2023 on the Granting of Business Licenses, Ease of Doing Business, and Investment Facilities for Business Actors in Nusantara Capital City.

15 R. Dolzer, C. Schreuer - PRINCIPLES OF INTERNATIONAL INVESTMENT LAW, FIRST EDITION (Oxford, 2008): 3 16 ibid.

14

Indonesia-Korea BIT:17 “Either Party shall encourage and create favourable conditions for investors of the other Party to invest in its territory, and shall admit such capital in accordance with its laws and regulations.”

The Interpretation of this clause is in line with the preamble of the BIT itself which both of the parties “Intended to create favourable conditions for investments by investors of one Party in the territory of the other Party on the basis of sovereign equality and mutual benefit”.18 As was interpreted by the tribunal in Siemens v. Argentina that when both parties entered into concession in the form of a BIT, both parties recognized and intended that the promotion and protection of these investments by a treaty may stimulate private economic initiative and increase the well-being of the peoples of both countries. To realize this intention is to create favorable conditions for investments and to stimulate private initiative.19 Thus, a favorable legal condition is an obligation of the host state to provide a regulatory framework that is favorable for investments to stimulate private initiative. From the legal standpoint, an investor is bound to the legal regime of the host state in conducting their investment. A potential change in regulatory framework will lead to lack of interest from foreign investors to invest in a country, since if it does happen, the regulatory regime might be unfavorable to the investment.

In the context of IKN, there are several sources of financing for the IKN relocation project itself. In addition to domestic funding, the IKN development plan will also involve foreign investors through foreign investment activities. The government ensures that most of the IKN development budget does not come from the State Budget (APBN), but the majority comes from the private sector, including foreign investors.20 Therefore, it is important for the government to secure and promote foreign investors in funding IKN by maintaining favorable conditions for foreign investment in Indonesia, especially investments that were made in IKN to stimulate private initiative in funding IKN.

17

Article 2 of The Agreement Between The Government of The Republic of Korea and The Government of The Republic of Indonesia Concerning The Promotion and Protection of Investment, 1994.

18 Ibid.

19 Siemens A.G. v. The Argentine Republic, ICSID Case No. ARB/02/8, Decision on Jurisdiction (6 February 2007) para. 81.

20 Ichwani, Alfirza Dafrin Achmad. "Foreign Direct Investment Sebagai Salah Satu Sumber Pendanaan Dalam Pembangunan Ibu Kota Negara “Nusantara”." Madani: Jurnal Ilmiah Multidisiplin 1, no. 5 (2023): 1.

To support this idea, the Indonesian Government has conducted several measures to ensure that Indonesia’s legal conditions are favorable toward foreign investments. Some of the measures are: 1. The implementation of the IKN Law which ensure that the development of IKN is protected by the Domestic Law, 2. Constant Promotion to invest in IKN by the Indonesian President Joko Widodo which shows that the highest authority of the government has made representative and ensure upcoming investors of their expectations in investing in IKN, and 3. Putting IKN in Indonesia’s National Long-Term Development Plan (RPJPN) 2025-2045 that proves the government plan on IKN is sustainable in the long run and shows the government commitment in a long-term business relationship with foreign investors.

By conducting these measures, the government of Indonesia clearly shows that they are promoting the IKN project by ensuring favorable conditions for the foreign investors which is important to stimulate private initiative in funding IKN and also to provide investors with a sense of security for their investment in IKN.

CONCLUSIONS The Indonesian government's ambitious plan to relocate the national capital to East Kalimantan Province, creating the Ibu Kota Nusantara (IKN), presents a significant opportunity for both domestic and foreign investors. The government's commitment to funding 20% of the development costs and encouraging foreign investment through the IKN Law and various regulations, including Government Regulation No. 12/2023, reflects a strategic move to boost economic growth and achieve national objectives. The IKN project aims to be a sustainable, green, and smart city, attracting global investors with the promise of relaxed requirements, such as exemptions from foreign ownership restrictions, extended land entitlements, and more flexible arrangements for foreign workers. These measures are designed to create a favorable legal condition, ensuring that investors have a legitimate expectation of stability and security in their long-term relationship with the host country.

The importance of maintaining a favorable legal condition is underscored by the government's reliance on private sector funding, especially from foreign investors, to realize the IKN development. The government's efforts, such as the enactment of the IKN Law, consistent promotion by the President, and inclusion of IKN in the National Long-Term Development Plan, demonstrate a commitment to providing a regulatory framework conducive to foreign investments. As the IKN project progresses, it becomes crucial for the Indonesian government to uphold these favorable conditions, especially in the face of potential political transitions around the 2024 general election. Ensuring legal stability and clarity during such transitions will be imperative to sustain investor confidence and continued private sector support for the IKN initiative. In essence, the success of the IKN project hinges on the Indonesian government's ability to uphold a conducive legal environment that fosters trust, encourages long-term investments, and realizes the vision of a thriving and sustainable new capital city.

SUGGESTIONS In light of the comprehensive analysis of the Indonesian government's initiatives and regulations regarding the Ibu Kota Nusantara (IKN) project, it is imperative to offer a set of recommendations to further enhance the attractiveness of IKN for potential investors. First and foremost, the government should consider intensifying its efforts to provide clear and stable

conditions for foreign investors, especially as the country approaches the 2024 general election and potential political transitions. A transparent roadmap for investors during periods of political change would alleviate concerns and contribute to sustaining a favorable legal environment.

Additionally, while the IKN Law and related regulations have made significant strides in relaxing requirements and creating incentives, ongoing dialogue with foreign investors is crucial.

Establishing a dedicated communication channel or advisory board involving both government officials and foreign investors could ensure a continuous exchange of information and address any emerging concerns promptly. This proactive approach would contribute to building trust and confidence among the investor community. Furthermore, the government might explore avenues to streamline bureaucratic processes related to foreign investments in IKN. Simplifying administrative procedures, such as licensing and permit applications, would not only attract more investors but also contribute to the efficiency and speed of project implementation. A user-friendly and efficient investment process could position IKN as an even more attractive destination for global investments.

Lastly, continuous and targeted promotion of IKN on international platforms is essential.

The government, led by President Joko Widodo, should leverage diplomatic channels, international conferences, and business forums to showcase the project's potential. This sustained promotional effort will reinforce the government's commitment to the success of IKN and bolster investor confidence in the long-term viability of their investments. Thus, by incorporating these recommendations, the Indonesian government can further solidify IKN as an appealing investment destination, fostering sustained private initiative and securing the necessary funding for the successful realization of this ambitious project.

BIBLIOGRAPHY ADC Affiliate Limited and ADC & ADMC Management Limited v. The Republic of Hungary, ICSID Case No. ARB/03/16, Award of the Tribunal (2 October 2006) Eva Safitri, "Jokowi Sebut Ratusan Investor Asing Teken LoI soal IKN: Yang Real Mulai Belum." https://news.detik.com/berita/d-7046021/jokowi-sebut-ratusan-investor-asing-teken-loi-s oal-ikn-yang-real-mulai-belum, accessed on 27 November 2023 Gami Investments Inc. v. Mexico, UNCITRAL, Final Award (15 November 2004) Government Regulation No. 12/2023 on the Granting of Business Licenses, Ease of Doing Business, and Investment Facilities for Business Actors in Nusantara Capital City.

Ichwani, Alfirza Dafrin Achmad. "Foreign Direct Investment Sebagai Salah Satu Sumber Pendanaan Dalam Pembangunan Ibu Kota Negara “Nusantara”." Madani: Jurnal Ilmiah Multidisiplin 1, no. 5 (2023) Law No. 3 of 2002 “The IKN Law.” Law No. 34/2021 on the use of Foreign Workers.

Murphy Exploration & Production Company – International v. The Republic of Ecuador (II), PCA Case No. 2012-16, Partial Final Award, (6 May 2016) Naskah Akademik Rancangan Undang-Undang Tentang Ibu Kota Negara, Juni 2016 R. Dolzer, C. Schreuer - PRINCIPLES OF INTERNATIONAL INVESTMENT LAW, FIRST EDITION (Oxford, 2008).

Siemens A.G. v. The Argentine Republic, ICSID Case No. ARB/02/8, Decision on Jurisdiction (6 February 2007) The Agreement Between The Government of The Republic of Korea and The Government of The Republic of Indonesia Concerning The Promotion and Protection of Investment, 1994.

Vernando,Skema KPBU, Apa Perannya dalam Mendukung Pembangunan IKN. KPBU KEMENKEU,2022,https://kpbu.kemenkeu.go.id/read/1142-1364/umum/orangjuga-berta nya/skema-kpbu-apa-perannya-dalam-mendukung-pembangunan-ikn.