The Indonesian government has recently strengthened the regulatory framework for coastal areas through a new regulation regarding the utilization of small islands. For investors and business owners, this regulation serves as a vital instrument that provides legal certainty while setting new standards for business operations in Indonesia’s maritime territories.

Here are the strategic points you need to know:

1. The “License Before Operation” Principle

A critical point for business owners is the “Permit Before Operation” principle. This regulation mandates that any form of utilization on small islands—especially for Foreign Direct Investment (FDI/PMA) entities—must obtain a specific permit from the Ministry through the integrated licensing system.

This permit is a fundamental requirement. Without this legality, any activity on the land carries the risk of administrative sanctions, ranging from formal warnings to potential hurdles when processing building permits (PBG) in the future.

2. Divestment Obligations: A Long-Term Commitment

For FDI (PMA) companies, compliance now includes long-term share ownership structures. There is a requirement to gradually transfer shares to Indonesian participants (either individuals or domestic legal entities).

• Proportion: The allocation of shares to be divested must be at least 20%.
• Timeline: This divestment process must be fulfilled no later than 10 years after the utilization permit is issued.

This indicates that investment in small islands is designed to create sustainable partnerships with the local economic ecosystem.

3. Asset Management and Operational Strategies

In business practice, the management of land assets and daily operations are often separated to ensure efficient risk management.

• Asset Holding Entity: Focuses on the holding of land rights.
• Business Operating Entity: Takes full responsibility for technical permits, the execution of work plans, and the fulfillment of share divestment obligations.

This functional separation allows for more organized management. However, it must be supported by strong legal agreements between entities to ensure that the utilization permit remains valid in the eyes of the government.

4. Transition Period and Adjustments

The government provides a window for businesses that already own assets or were operating before this regulation was enacted to make adjustments. There is a specific grace period (transition period) to ensure all licensing documents are aligned with the latest standards. Overlooking this transition period could jeopardize the future validity of your company’s operations.

5. Environmental and Spatial Constraints

The utilization of small islands continues to prioritize conservation. There are strict land-use divisions between areas that can be managed commercially, areas that must remain under state control, and the mandatory provision of green open spaces within the project area.

Conclusion

This regulation is not merely about document fulfillment; it is a long-term investment protection strategy. Given the complex technical details involved, it is highly recommended for business owners to conduct a thorough review of their current legal structures to ensure they remain within the prevailing legal corridors.

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Reference:

• Minister of Marine Affairs and Fisheries Regulation No. 10 of 2024 concerning the Utilization of Small Islands and Surrounding Waters.

By: Adv. Dipo Farizi, S.H., CLA.