A new Transport Ministry regulation may provide greater certainty for transport app providers, but at a price.
Indonesia is mired in traffic, particularly in Greater Jakarta. Its 29 million people endure average traffic speeds of 10 kilometres per hour, with adverse consequences for productivity, the environment and quality of life.
Young and technologically savvy, it isn't surprising that Indonesians were among the first smart phone users in the world to use transport apps. Go-Jek launched in Jakarta in 2010, a year before Uber's launch in San Francisco.
Like Uber, Go-Jek enables consumers to order a driver (whose mobile phone number and photo is provided) to a specified location. Unlike Uber, the service only offers motorbike rides and payment is required in cash (due to Indonesia's low rate of credit card use).
Go-Jek's model benefits consumers who no longer need to rely on under-developed public transport networks or the traditional, unregulated motorbike taxis (known as ojek-ojek), thereby avoiding the need to negotiate the fare or risk an unidentified driver.
Go-Jek has recently expanded its offering to include a broad range of services, from cleaning to massages, and an Uber equivalent in Go-Car.
Go-Jek soon faced competition from Malaysia's GrabBike, offering an equivalent motorbike service, and from Uber itself, offering its taxi-replacement service. GrabBike has since launched GrabCar, competing with both Go-Car and Uber.
As witnessed in Australia, the entry of these new players has provoked protests from traditional motorbike and taxi service providers, lamenting as much as a 50% drop in their earnings.
In March, Indonesia's largest and most highly-regarded taxi brand, BlueBird, was among those blamed for a mass demonstration which brought Jakarta's traffic to a standstill for several hours and featured a number of 'blue' (BlueBird) on 'black' (Uber) confrontations.
Subsequently, it has been reported that Go-Jek (whose Go-Car venture has enjoyed limited success) is in discussions with BlueBird to provide a joint service to compete with GrabCar and Uber.
Regulatory intervention is never far behind. In an apparent response to the demonstration, on 1 April the Transport Ministry issued Regulation 32 of 2016 (New Regulation).
The New Regulation applies to, among others, companies like GrabCar and Uber (App Providers) and companies licensed to provide public transport services (Public Transport Companies). Go-Jek and other motorbike services have escaped for now and are yet to be regulated.
Under the New Regulation, an App Provider cannot directly provide public transport services, unless licensed as a Public Transport Company. Accordingly, App Providers:
- may not hire drivers, or determine drivers' wages or passenger fares; and
- must enter into a cooperation agreement with a Public Transport Company (under which such wages and fares will be determined).
App Providers will also be required to establish a presence in Indonesia and therefore be subject to local taxes.
A Public Transport Company (and any App Provider seeking to be a Public Transport Company) must:
- either be incorporated as a state-owned entity, limited liability company or cooperative;
- own at least five vehicles (each subject to periodic vehicle tests);
- provide vehicle maintenance and parking facilities; and
- ensure all drivers are licensed.
Under Indonesia's investment laws, a Public Transport Company must be 100% Indonesian-owned. Therefore, foreign providers like GrabCar and Uber can only operate indirectly in Indonesia under cooperation agreements (as opposed to directly as a Public Transport Company).
Regulation of other app providers
On 31 March 2016, the Communications Ministry issued a circular letter on 'over-the-top' services (Circular). A circular letter is a common way for Indonesian government agencies to provide advance notice of a regulation or to explain a regulation once issued.
Like the New Regulation, the Circular was released amid political controversy. Although there were no demonstrations, the Circular was a response to public outcry over 'decency standards' not being met by companies such as Netflix, whose video streaming services were temporarily banned in January.
The Circular, while broadly drafted, seems to distinguish between app providers (whether providing messaging, video call or social media services) and content providers (ranging from companies like Netflix to Steam, which provides games for download).
If providing services in Indonesia, both app and content providers will be:
- regarded as having a permanent establishment under tax laws and be subject to local taxes (even without having established a formal presence, such as a foreign investment company); and
- required to comply with a broad range of laws and regulations, including those regarding censorship, allowing law enforcement agencies access to data and requiring use of the Indonesian language.
The Circular preludes a new regulation, the final content of which is still unclear. In the meantime, app and content providers potentially affected are grappling with the implications, including being subject to local taxes and allowing law enforcement agencies access to their consumers' data.
Neither the New Regulation nor the Circular will have immediate effect: the New Regulation enters into force on 1 October, while there is limited guidance as to when the regulation contemplated by the Circular will be released.
While Indonesia's 'e-commerce boom' offers great opportunities, app providers will need to be ready to adapt to increased regulation, as the government responds to political pressures and new tax opportunities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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