With increased interest in Indonesia and the impending completion of the ASEAN Economic Community, foreign investors are looking for a means to do business in Indonesia. SSEK discusses the revised Negative Investment List, the impact of the ASEAN Free Trade Area on Indonesia and Bilateral Investment Treaties. 

Q: A new major development in Indonesian trade law has been the revised Negative Investment List (DNI), which has essentially opened up some business sectors to foreign investment by ASEAN member countries. How will this revised list help to strengthen ASEAN as a whole and position Indonesia within it?

A: The issuance of the Indonesian Trade Law (Law No. 7 of 2014) did not have a significant impact on the Negative Investment List, which is issued in a Presidential Regulation and governs those lines of business that are closed to foreign investment or open with restrictions. Indonesia’s first trade law was issued to, among other things, provide a legal basis for the issuance of regulations in the field of trade. Most of the provisions in the Indonesian Trade Law have already been regulated under Minister of Trade regulations or regulations issued by other ministries.

In the trade sector, research and public polling services is the only line of business open only to foreign investors from ASEAN countries under the new Negative Investment List. The new Negative Investment List was promulgated under Presidential Regulation No. 39 of 2014 regarding the List of Business Fields that Are Closed and Open with Conditions in the Investment Sector (PR 39/2014). Research and public polling services is open to a maximum 51% foreign ownership for investors from ASEAN countries and is closed for foreign investors from non-ASEAN countries.

Outside the trade sector, there are other lines of business that are more open to foreign investment by ASEAN investors than non-ASEAN investors. These lines of business include tourism services, advertising, sea transportation and health care. PR 39/2014 does not set out defined parameters of ASEAN investors and to our understanding ASEAN investors will include citizens of ASEAN countries and legal entities incorporated in ASEAN countries, even if these legal entities are owned by investors from non-ASEAN countries.

One of the considerations for the issuance of the new Negative Investment List was to materialize Indonesia’s commitment in relation to the ASEAN Economic Community (AEC). Hence, the new Negative Investment List seeks to contribute to the attainment of the relevant objectives enshrined in the AEC blueprint (e.g., regional economic integration and the progressive liberalization of the investment regime) and to increase the level of Indonesia’s attractiveness to ASEAN investors.

Q: Are there vehicles for non-ASEAN countries to invest in Indonesia?

A: Indonesian investment laws and regulations only allow foreign investment in Indonesia in the form of a limited liability company (Perseroan Terbatas or PT). This applies for all foreign investors, from both ASEAN and non-ASEAN countries. The limited liability with any foreign ownership is known as a foreign investment limited liability company, or in Indonesian a Perseroan Terbatas Penanaman Modal Asing or PT PMA.

Q: The ASEAN Free Trade Area (AFTA) went into effect in 1992, which sought to incrementally liberalize trade and eliminate trade tariffs on imports within the ASEAN member countries. How has AFTA affected foreign direct investment in Indonesia?

A: AFTA is a scheme that is now implemented under numerous multilateral legal instruments. The legal basis for the establishment of AFTA is the 1992 Framework Agreement on Enhancing ASEAN Economic Cooperation, which stipulates that AFTA will be established within 15 years after the conclusion of the said agreement.

One of the features of AFTA is the liberalization of trade by reducing the tariffs levied on a wide range of products traded within ASEAN and eliminating intra-regional tariffs and non-tariffs barriers. The main mechanism for the realization of AFTA is the 1992 Agreement on the Common Effective Preferential Tariff (CEPT) Scheme for the ASEAN Free Trade Area, which obligates ASEAN member countries to reduce intra-regional tariffs to 0-5% over a period of time. Based on a publication issued by the ASEAN Secretariat, this scheme will drive the manufacturing sector in ASEAN to be more cost-competitive and consequently attract foreign direct investment.

According to ASEAN Secretariat statistics, from 1993 to 2003 intra-ASEAN trade grew by 93.6%, from $82.4 billion USD to $159.5 billion USD. According to the Investment Report 2013-14 prepared by ASEAN and the United Nations Conference on Trade and Development (UNCTAD), regional economic integration in ASEAN has facilitated regional production networks, allowing goods to be moved and sourced more easily, achieving production efficiency and cost minimization. Such advantage attracts investors to establish or expand their business in ASEAN countries.

Indonesia has benefited from the enhancement of the cost-competitive manufacturing sector and has attracted intra- and extra-regional foreign direct investment. For instance, a number of parts and components companies set up new plants in Indonesia in 2013 and 2014. In addition, AFTA had contributed to the doubling of export and import volume of Indonesian trade from 2003-2010, as noted by the Center of Regional and Bilateral Policy - Fiscal Study of Indonesian Ministry of Finance.

Q: The ASEAN Secretariat does not have any enforcement powers. However, Bilateral Investment Treaties (BITs) and other similar agreements that are legally binding provide a solution to the enforcement issue within ASEAN, with respect to the issues covered in the BITs. Have you seen a rise in BITs entered into by Indonesia, and has this affected your practice and how you advise corporate clients?

A: There has not been a significant rise in the conclusion of Bilateral Investment Treaties by Indonesia. Rather, Indonesia has reviewed the provisions under its BITs to better accommodate the state’s interests. We note that there was increased discussion in mid-2014 among lawyers and business players that Indonesia would terminate more than 60 BITs after the Embassy of the Netherlands in Indonesia issued a statement regarding the purported termination of Indonesia’s BIT with the Netherlands in 2015. However, as clarified in news reports, Indonesia sought to discontinue the BITs in compliance with the terms of the BITs and did not seek their incidental unilateral termination during the terms of the BITs. So foreign investors with existing investments or that have invested according to the terms of existing BITs are still provided with legal safeguards under the BITs.

With regard to ASEAN investors, considering that Indonesia is a party to the ASEAN Collective Investment Agreement (ACIA), ASEAN investors are still provided with the protections and preferential treatment as contemplated under the provisions of the ACIA.

SSEK - 29th June 2015

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Indonesia Snapshot

Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)

Related Topics

ASEAN Investors Afloat in a Sea of Uncertainty in Indonesia’s Shipping Industry

New Negative Investment List Introduces Changes to Health Investment in Indonesia

Incorporating a PMA Company in Indonesia

Minimum Capital Requirements for Foreign Investment in Indonesia

Representative Offices in Indonesia

Useful Documents

Presidential Regulation No. 39 of 2014

Indonesian Trade Law (Law No. 7 of 2014)