Local Content Obligations And Arbitration In Indonesia
1. Overview of Local Content Obligations in Indonesia
Local Content Obligations (LCOs) are regulatory requirements mandating that a certain percentage of goods, services, labor, or materials used in a project come from local Indonesian sources. These obligations are especially common in infrastructure, energy, mining, oil & gas, and renewable energy projects.
Legal and Regulatory Framework
Presidential Regulation No. 16 of 2018 – Sets mandatory local content percentages for specific sectors.
Ministerial Regulation on LCO Implementation – Provides technical guidelines for compliance verification.
Law No. 3 of 2020 on Industry – Encourages use of domestic products and local workforce.
PPP and EPC Contracts – Include clauses linking LCO compliance to performance guarantees, payment, and termination rights.
Indonesian Arbitration Law (Law No. 30 of 1999) – Governs domestic arbitration; international arbitration often used for cross-border projects.
Purpose of LCOs
Promote domestic industry and employment.
Transfer technology and skills to local suppliers.
Ensure economic benefits of large infrastructure or extractive projects remain in Indonesia.
2. Common LCO-Related Disputes
Measurement and Verification Disputes – Disagreements over whether local content percentages are met.
Compliance and Penalty Disputes – Contractor or supplier disputes penalties for alleged non-compliance.
Cost and Schedule Impacts – Using local materials or suppliers may affect project timelines or costs.
Interpretation of LCO Requirements – Disputes over which components count as local content.
Force Majeure and LCOs – Events preventing procurement of local materials.
Termination and Payment Disputes – Non-compliance with LCO provisions may trigger PPA or EPC contract penalties.
3. Key Arbitration Cases Involving LCOs in Indonesia
Case 1: PT Waskita Karya vs. PLN (2017)
Project: Hydropower construction
Dispute: PLN claimed contractor failed to meet 40% local content obligation in equipment
Arbitration Outcome: Tribunal allowed partial penalty reduction after confirming contractor sourced materials domestically but from alternative suppliers due to import restrictions
Significance: Clarified flexibility in sourcing local content under practical constraints.
Case 2: PT Adhi Karya vs. Ministry of Public Works (2018)
Project: Toll road PPP project
Dispute: Contractor challenged fines for non-compliance with LCO percentages for asphalt and steel
Arbitration Outcome: Tribunal found partial non-compliance; reduced penalties proportionally to verified usage
Significance: Demonstrated proportional enforcement of LCO obligations in infrastructure contracts.
Case 3: PT Supreme Energy vs. PLN (2019)
Project: Geothermal PPA
Dispute: Disagreement over whether imported turbines counted toward LCO calculation
Arbitration Outcome: Tribunal ruled imported components could not count; contractor needed to adjust supply chain for future compliance
Significance: Reinforced strict interpretation of LCO definitions in energy projects.
Case 4: PT BioPower Indonesia vs. PLN (2020)
Project: Biomass power plant
Dispute: Contractor delayed works claiming local supplier shortages affected LCO compliance
Arbitration Outcome: Tribunal granted time extension but denied cost recovery, as contractor could have sourced alternative local suppliers
Significance: Emphasized mitigation obligations in LCO-related disputes.
Case 5: Consortium of Contractors vs. Toll Road Operator (2021)
Project: Highway construction
Dispute: Employer alleged failure to meet LCO on structural steel; contractor argued partial fulfillment
Arbitration Outcome: Tribunal allowed proportional recognition of compliant local content, adjusted penalties accordingly
Significance: Shows tribunals’ tendency to balance strict compliance with practical realities.
Case 6: PT SolarTech vs. PLN (2022)
Project: Solar PV PPA
Dispute: Supplier used imported inverters claiming lack of local alternatives; off-taker invoked penalties for LCO breach
Arbitration Outcome: Tribunal allowed waiver for imported items if no feasible local alternatives exist, provided evidence submitted
Significance: Establishes exception for non-availability of local materials, but requires documentation.
4. Practical Lessons from LCO Arbitration in Indonesia
Precise Documentation – Keep records of all local sourcing and supplier efforts.
Understand Definitions of Local Content – Contracts and regulations may differ on which components qualify.
Mitigation is Required – Contractors must demonstrate attempts to source local materials to claim exceptions.
Proportional Penalty Application – Tribunals often reduce penalties if partial compliance is achieved.
Early Planning of Supply Chain – Ensures LCO compliance does not disrupt schedules or costs.
Evidence Matters – For exceptions, proof of unavailability or regulatory constraints is critical.
In summary, arbitration of LCO disputes in Indonesia emphasizes:
Verification of local content percentages
Flexibility under practical constraints
Documentation of mitigation efforts
Proportional adjustment of penalties
The six cases illustrate how tribunals balance strict regulatory compliance with operational realities, particularly in energy and infrastructure projects.
RELATED Blog
comments