The so-called Domestic Component Level (Tingkat Komponen Dalam Negeri/TKDN) refers to the percentage or amount of local content present in a product, service, or a combination of both. Regulations related to TKDN in Indonesia were first introduced in the 1980s with the enactment of Law No. 5 of 1984 on Industry (later replaced by Law No. 3 of 2014 and amended by the so-called Omnibus Law as enacted on 31 March 2023). This law mandates the government to strengthen domestic industries by promoting the use of locally produced goods.
TKDN is a government policy aimed at fostering an economic environment that supports the growth of local industries, reduces reliance on imports, generates employment, and boosts the competitiveness of domestic products (i.e., products and services produced or rendered by companies investing or producing in Indonesia, or utilizing Indonesian manpower, or utilizing local components) in the global market.
Government Regulation No. 29 of 2018 on Industrial Empowerment as amended by Government Regulation No. 28 of 2021 and amended further by Government Regulation No. 46 of 2023 (together, “Industrial Empowerment Regulation”) provides a mandatory TKDN to be used by certain user groups.
The Industrial Empowerment Regulation, which has been implemented by various ministerial regulations for each industry sector, determines that domestic products must be used by the following users:
(1) State institutions, ministries, non-ministerial government institutions, other government institutions and regional work units in the procurement of goods or services if the source of financing comes from the state or regional budget, including loans or grants from within the country or abroad; and
(2) State-owned enterprises, other legal entities owned by the state, regional-owned enterprises and private enterprises in the procurement of goods or services where (i) financing comes from the state or regional budget, (ii) the work is carried out through a cooperation between the central government and/or regional government with a business entity and/or (iii) resources controlled by the state are exploited.
Minimum TKDN
As a general rule, the Industrial Empowerment Regulation determines a minimum TKDN level of 25% of the value of a certain product, service or combination of product and service. However, the Minister of Industry can set a different minimum TKDN level.
Further, the government has determined certain industries to be the focus in implementing the TKDN program, such as:
(1) health equipment industry: at least more than 60%;
(2) agricultural machinery and equipment industry: at least more than 43%.
Additionally, the government has stipulated certain exemptions and relaxation in the mineral, energy and power plant sectors as described below.
TKDN Non-Compliance
For non-compliance with the TKDN requirements, the following sanctions may be imposed:
(1) administrative sanctions, as follows:
(i) written warning;
(ii) temporary closure of business;
(iii) blacklist status;
(iv) suspension of business license; or
(v) revocation of business license.
(2) financial sanctions in the form of reductions of the bid price equal to the difference between the proposed TKDN achievement and the implemented TKDN achievement up to a maximum of 15% of the bid price (in the case of a government tender) or a fine of three times the price of the imported goods (if similar goods with TKDN compliant are available in Indonesia).
Exemptions
In sectors requiring substantial investment, such as the energy sector, the government has introduced exemptions to the local content (TKDN) requirement. Through the enactment of Minister of Energy and Mineral Resources Regulation No. 11 of 2024 on the Utilization of Domestic Products for the Construction of Electrical Infrastructure ("Regulation 11/2024"), the government has set new local content standards for the energy sector. Under Regulation 11/2024, power projects financed by offshore loans or grants from bilateral or multilateral creditors may be fully exempt from local content obligations.
This exemption aims to balance the promotion of domestic participation with ensuring project profitability, while acknowledging the challenges associated with international financing.
Impact to Foreign Investment in Indonesia
Although TKDN requirements apply to both foreign and domestic investors, foreign investors may face greater challenges in meeting these standards due to factors such as inadequate local infrastructure or limited local expertise in certain sectors.
Considerable debate surrounds the effectiveness of TKDN requirements in fostering Indonesia's economic growth, weighed against the potential to deter foreign investment. An additional complication arises in cases involving foreign loan agreements as part of economic aid, where stipulations may require a portion of the loan or aid to be spent on goods or services from companies in the lender's country. Furthermore, strict enforcement of TKDN requirements could potentially conflict with the free-market principles advocated by regional and global trade organizations to which Indonesia belongs.
Conclusion
Investors and businesses need to understand the regulatory framework regarding TKDN and its components and the application in different industries. Since the government will continue assessing and reviewing TKDN policies and regulations from time to time with the main objective of further increasing the use of domestic components, economic players continuously need to monitor regulatory developments in this area to ensure their compliance.
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