Review on Indonesian Construction Law
Construction industry has for long been considered as the backbone of Indonesian economic and social development. In 2008, the construction industry’s direct contribution to the gross national product was around 6%, and employing more than 4.5 million people, which is around 7-8% of the country’s overall labor force. Currently the industry consists of more than 134.000 registered construction companies spread out in the country’s 33 provinces, where more than 120.000 among them are classified as small-scale business enterprises. In contrast, the largest 900 construction companies have been entrusted with the 80%-90% of the country’s US$ 17 billion national construction market. In order to widen the market, in recent years the government has encouraged the construction companies to go global to include the international market. Consequently, in the last ten to fifteen years, more international construction companies have also joined the market. Such condition has created additional threats and challenges to the growth of the industry. One of many challenges faced by the Indonesia construction industry is availability of sound and effective legal framework.
The political reform of 1998 put Indonesia into a new governance paradigm, which in turn also affected practices of the construction Industry. The first Indonesian Construction Law was put into effect in 1999, which was then followed by three government decrees. The three government decrees address issues relating to the business and role of construction society, the practices of construction industry, and construction industry development. This new set of legal construction standard of practices was established in response to increasing demand of local autonomy and global competition challenges. Under this regulation the role of centralized government in infrastructure and construction industry has shifted to allow more participation of private sector and the community. Among important issues addressed in this regulation includes governance, professionalism, and the role of society.
Many problems still arise and what was envisioned in that law is yet to be realized. Complains such as lack of fairness and professionalism, and even the often conflicting regulations, are among the problems faced by the industry. In addition, globalization also requires the national construction industry to respond to the world progress in international contract and regulations. In response, the government and other stakeholder are currently working together to improve the construction regulations.
The political reform of 1998 put Indonesia into a new governance paradigm, which in turn also affected practices of the construction Industry. The first Indonesian construction law was put into effect in 1999 (Construction Services Law), which was then followed by three government decrees. The three government decrees address issues relating to the business and role of construction society, the practices of construction industry, and construction industry development. This new set of legal construction standard of practices was established in response to increasing demand of local autonomy and global competition challenges. Under this regulation the role of centralized government in infrastructure and construction industry has shifted to allow more participation of private sector and the community. Among important issues addressed in this regulation includes governance, professionalism, and the role of society at large.
The Construction Service Law no 18 (Indonesia, 1999) was established in 1999 to response concerns over the fact that high construction growth was not accompanied by effective governance, which was reflected in, among others: a) low quality of product, on time construction, and inefficient use of resources, b) lack of enforcement and compliance to laws and regulations, and c) lack of fairness and synergic partnership amongst providers and users of construction services in terms on rights and responsibilities. Among many significant aspects, the law in particular has set the foundation for establishment of an independent body that would shift most roles of the government in leading and guarding the development and growth of the Indonesian construction industry.
Following the establishment of Construction Service Law no 18, in 2000 the government issued three Government decrees: 1) Government Decree no 28 on Business and Society Role in Construction Services, 2) Government Decree no 29 on Execution of Construction Services, and 3) Government Decree no 30 on Development of Construction Services. In principle, the first Government Decree regulates the professional requirements for entities to operate and the role of society in construction industry. The Government Decree 29 essentially regulates how the construction industry works in terms of contract, covering from selection of provider to execution of work, to construction failure and dispute. The Government Decree no 30 emphasis on the regulation concerning the role of government (both central and local) and construction society in regulating, empowering, and monitoring the construction operation.
The main spirit of Construction Service Law no 18 is to lessen the role and control of government over the construction industry. In 1999 the government also established Law no 22 in Local Autonomy and Law no 23 on Financing Balance between Central and Local Government; which was then replaced by Local Government Law no 32, 2004. These two laws have string influence on the development of local construction industry. Under these laws, local governments have more control over planning, budgeting and execution of construction works, which in turn will help strengthening the local construction industry. However, the capacity of local government and construction industry is still limited. Thus, the needs to exercise more autonomic rights are not balanced with adequate capacity to execute. Lack of adequate managerial and technical skills, coupled with low professionalism attitude are among the factors often cited as the low quality of construction practitioner and officials in local government. It seems that what was envisioned in Government Decree no 30 has yet to be realized.
On the authority of local autonomy, in order to protect the interest of local construction industry, many local governments established regulation that created a set of new additional bureaucratic mechanism. Yet, this new set of regulation is often proven to be ineffective and even contradict with other law and regulations.
In Jakarta and other major cities, where most commercial building construction works took place, the capacity of the construction companies are among the best in the nation. While state-owned construction companies can benefit from its long experience in construction industry, some newer private companies are also able to compete due to their more professional skills, and more flexible and less bureaucracy in adopting technology and business practices. Unfortunately the largest part of the construction industry does not possess those kinds of capacity. The majority of the Indonesian construction industry consists of medium and small-scale private-owned construction
companies, which mostly work in small scale building and commercial estate constructions. Amongst these small-scale contractors it is not considered uncommon practice where the winning bidders are not the ones who will execute the work but rather act as construction broker. Due to lack of access to project information, this group of companies often works without direct contract with the owner but rather as second or third tier contractor at lower cost than what the winning bidder has initially offer. Pre-arranged tendering process and puppet bidder are frequently cited as the sample of bad practices involving construction companies. This condition certainly causes inefficiency in construction industry.
Decreasing capacity of the government in providing adequate funding for construction has improved the changes for the private sector to play larger role in the construction industry. Like in many other countries, private sector is starting to take larger part in infrastructure constructions, such as toll roads and ports, through public-private partnership initiatives. Although this trend of partnership is expected to grow in the future, where more and more infrastructure investment will be offer to private sector, there are still some legal issues which are not yet specifically accommodated in the current construction laws and regulations. This includes major issues such as standard form of agreement and the responsibility and accountability of private sector to the public.