Risk-Based Business Licensing (OSS) in Indonesia
Under the Risk-Based Approach, the number of licenses and permits that are issued by the government will be based on business risk level that will be determined by the scale of the hazards that a business has the potential to create.
Changes to the business licensing regime coming!
For many years, the Indonesian government has taken a strict business licensing approach that required investors to obtain various types of licenses
and/or permits before they were able to complete their investment plan and start doing business in Indonesia. This approach has unfortunately in practice introduced complexities and hurdles that investors have had to overcome when starting a business in Indonesia, a situation reflected in the World Bank’s Ease of Doing Business (“EODB”) index ranking for Indonesia.
Considering the above, the Job Creation Omnibus Law (“Omnibus Law”) has mandated the introduction of a new business licensing approach, called the Risk-Based Approach, with the objective to further simplify Indonesia’s business licensing requirements.
Risk-Based Business Classifications
Under the Risk-Based Approach, the number of licenses and permits that are issued by the government will be based on business risk level that will be determined by the scale of the hazards that a business has the potential to create.
The scale of the potential hazards will be determined by the following four aspects, among others: health, safety, environment, and the utilisation and management of natural resources – while also considering the criteria, type, and location of the business, any limitations on natural resources, and
business volatility risks. The potential hazards are classified into four categories: unlikely, probable, possible, and likely.
Based on the scale of the potential hazards, the government then categorise new businesses into one of the following three classifications:
- Low risk businesses;
- Medium risk businesses; and
- High risk businesses.
In order to implement this new approach, government has recently issued KBLI (Klasifikasi Baku Lapangan Indonesia) 2020, replacing the previous KBLI 2017, to ensure that it is able to account for the increasingly diverse range of business activities in Indonesia.
Business Licensing (OSS) Requirements
The Omnibus Law determines the business licensing requirements for each level of risk classification as follows:
For all classifications of businesses, companies will be required to register their business and obtain an NIB as a minimum requirement for conducting business.
- For businesses with low risk classification, this is expected to be the only requirement.
- For businesses with a medium risk classification, the company must also comply with certain business standards, as determined by the government.
Those businesses that are medium low risk only need to provide a statement that they comply, while those of medium high risk will also be required to obtain a Standards Certification from either the central government or a regional government, confirming their fulfilment of the business standards. As such, this will simplify the current requirements, which state that all businesses must obtain a business license/permit either from the central government or a regional government. - For businesses with a high risk classification, considering the scale of the potential hazards, the Omnibus Law still requires such companies to obtain
a business permit in addition to an NIB in order to conduct business.
To ensure the alignment of the regional governments with the central government, in relation to the structuring of the Standards or Licensing Authorities, the government will in due course introduce further guidance, named the Norms of Criteria Procedure Standards (“NSPK”/Norma Standard Prosedur Kriteria).
Supervision
Under the Risk-Based Approach, the government will perform inspections to supervise businesses and make sure that companies are complying with the
necessary business standards for conducting their business. The frequency of such inspections will depend upon the business’s level of risk classification, as determined by the government – i.e. the government will adopt a form of standards-based supervision.
What this means for Investment and Business
The detailed regulations related to the implementation of the Risk-Based Approach is based on the Omnibus Law and issued in the form of a Government Regulation issued by BKPM (Indonesia Investment Board). Such detailed regulations are the following:
- BKPM Regulation No.3 of 2021 concerning the Electronic-Integrated Risk-Based Business Licensing System.
- BKPM Regulation No.4 of 2021 concerning Guidelines and Procedures for Risk-Based Business Licensing Services and Investment Facilities.
- BKPM Regulation No.5 of 2021 concerning Guidelines and Procedures for Supervision of Risk-Based Business Licensing.
Following the issuance of the detailed regulations, companies will need to identify the risk classifications of their businesses, based on the KBLI (including a review of whether their existing KBLI has changed under the KBLI 2020). Based on this, it will be necessary to assess whether any adjustments or amendments to current business licenses are required.
For monitoring going forward, it will also be necessary to identify any business standards that will need to be complied with, and formulate a plan to implement and monitor such compliance.
BKPM Regulation No.3 of 2021:
BKPM Regulation No.4 of 2021:
BKPM Regulation No.5 of 2021:
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