INDONESIA NEWSLETTER – ISSUE 5 – OCTOBER 2016

A bumpy road ahead for FMCG and pharmaceuticals in Indonesia


Lauren O'Neil, Senior Consultant

Investors in the FMCG and pharmaceuticals sectors in Indonesia are likely to face a bumpy few years, as Indonesia looks to align the regulatory landscape with the government’s objective of encouraging increased investment in domestic value-added manufacturing – it will be a fine balancing act at best. While the Joko Widodo government is keen to attract increased foreign investment into Indonesia’s manufacturing sector to support economic growth and supply products to satiate the demands of Indonesia (and the region’s growing population), his overarching objective is to improve Indonesia’s domestic manufacturing capacity and competitive advantage.

The halal law is Indonesia’s answer to establishing itself as a niche producer, while ensuring products supplied and manufactured in the country meet the needs of the country’s vast Muslim population – nearly 85% of Indonesians are Muslim. The Halal Product Assurance Law was passed in 2014 and requires all food, cosmetics and pharmaceuticals that are produced, distributed or traded in Indonesia to be halal certified (products that are not halal certified are required to be clearly marked as non-halal). There is a five-year transition period, with the law taking effect in 2019.

It is not so much the intent of the halal law that is problematic for foreign manufacturers and distributors of food, cosmetics and pharmaceutical products – after all, the Muslim marketplace is emerging as one of the largest (and most rapidly growing) internationally – but rather concerns about consistent, transparent and effective implementation. At present, the authority responsible for issuing halal certification in Indonesia is the Indonesian Ulama Council (MUI). The law stipulates the MUI will oversee the certification process and a fee will be charged to manufacturers, importers and distributors. There will also be sanctions and fines for companies that fail to comply with the law.

Under the new law a Halal Product Certification Agency (BPJH) will be established under the Religious Affairs Ministry to implement the halal law (including issuance of halal certifications). Once established, the BPJH will work with the MUI to issue halal certifications, with a newly established Halal Inspection Institute (LPH) to be established to conduct product audits and verification. However, despite the looming October 2017 deadline for the agency’s establishment, there are no signs the BPJH or LPH are being set up. This, combined with the lack of any implementing regulations for the law to date (the Religious Affairs Ministry was scheduled to release them in September, but is yet to do so), does not bode well for regulatory certainty for importers and producers of food, cosmetics and pharmaceutical products. The halal certification process, across a wide range of products, is therefore unlikely to be implemented quickly or smoothly. Many of the raw materials for these products are imported, complicating the overall auditing process further. In the event of continued delays in establishment of the BPJH and LPH, the MUI will continue to be responsible for halal certification.

What this will mean in practice is there will be a lot of uncertainty regarding the certification process, in particular for manufacturers reliant on imported raw materials. While the law states Indonesia will recognise foreign halal certifications, this has proven problematic in the past. The complex nature of what satisfies halal requirements varies between markets – in Indonesia these complex and varied requirements are liable to manipulation. Investors may find themselves facing extended and expensive certification procedures, as the various regulatory stakeholders interpret halal requirements differently, or actively seek to be in favour of local industry. Monitoring and effectively documenting compliance with halal certification requirements throughout the supply chain, as well as understanding the interplay between various Indonesian stakeholders and implementation of the regulations, will be essential to mitigating compliance and reputational risks.

Compulsory licences

The Indonesian government in 2012 issued nine “government use” licences, which are still in force today. The licences overwrote pre-existing pharmaceutical patents (primarily for hepatitis and HIV medicines) and allow the government to exploit patent-protected products in the event of national security threats or urgent public needs.

 

In addition to halal certification requirements, pharmaceutical companies will also need to tackle recent amendments to Indonesia’s patent laws, which were introduced in July 2016. Despite some improvements to Indonesia’s IP protection frameworks under the revised laws, a number of provisions have the potential to favour domestic companies at the expense of foreign investors, which will likely further undermine intellectual property rights protections in coming years. The amendments permit the Indonesian government to override patent protections for imported pharmaceutical products, where prices for the product in Indonesia are considered very high compared to the same product abroad. This will allow the Indonesian government or local manufacturers to produce generic products in, for example, the interests of public health. Key amendments of interest for pharmaceutical companies include provisions excluding protections for second medical use claims (where a new patent is sought on the basis that a new application has been identified for an existing drug), while also expanding protections for simple or “utility” patents (allowing patents to be issued for products or devices that are not necessarily innovative, but present a new or practical value) and compulsory licences (where, as per the above, the Indonesian government can permit someone other than the patent holder to produce a patented product). These last two issues have been a point of contention with Indonesia for many years and the latest amendments could potentially deter investment in high-tech or high value-added manufacturing as foreign investors are not willing to take the risk that they may be forced to localise their intellectual property.

Navigating regulatory change

Control Risks regularly supports clients to navigate Indonesia’s complex regulatory environment and better understand the drivers behind the regulatory issues that they face in the country. In addition to Indonesia’s often unclear and complex regulatory environment, a lack of capacity within regulatory authorities further complicates the implementation of new regulations. This uncertain environment can lead to manipulation of regulations by various stakeholders. Therefore, understanding their interests and how they influence regulation and your business operations is key to mitigating the risks associated with operating in Indonesia.