New Negative List

The Government has enacted a new Negative List under Presidential Regulation No. 44 of 2016, which became effective on 18th May 2016 ("2016 Negative List"), although the 2016 Negative List became publicly available only on 23rd May 2016. The 2016 Negative List is the implementation of the 10th Economic Package that was announced by the Government on 11th February 2016 ("10th Economic Package Announcement"). The 2016 Negative List revokes the previous Negative List stipulated under Presidential Regulation No. 39 of 2014 ("2014 Negative List").

Although there are some differences between the information announced in the 10th Economic Package Announcement and the 2016 Negative List, the terms of the 2016 Negative List are generally consistent with the 10th Economic Package Announcement.

As required under Law No. 25 of 2007 on Capital Investment ("Investment Law"), the Government is required to determine the business lines that are closed to all investment (foreign and domestic), and the business lines that are open for investment (foreign and domestic) with requirements. In principle, all business lines are open to foreign investment, except for those sectors specifically mentioned in a "negative list" and other laws and regulations. This is specifically recognised in article 3 of the 2016 Negative List.

The 2016 Negative List has simplified the categories for the business lines that are open for investment (foreign and domestic) with requirements. The categories are now:

1. Business lines that are reserved for or subject to partnership with micro, small and medium enterprises ("Local SME") as well as cooperatives ("Koperasi").
2. Business lines with foreign ownership limitations.
3. Business lines with location requirements.
4. Business lines with special licensing requirements.
5. Business lines reserved for 100% domestic (Indonesian) ownership.
6. Business lines with a higher foreign ownership in the context of cooperation of the Association of Southeast Asian Nations (ASEAN)

Further, a "partnership" requirement is not intended to limit foreign ownership, but it is a requirement to establish a cooperation with a Local SME(s) when implementing investments in Indonesia. The cooperation is implemented based on a mutual agreement.

What the 2016 Negative List Says

Liberalisation of Certain Sectors

There is significant liberalisation under the 2016 Negative List namely:

• Opening up of 45 business lines (by removing those business lines from the 2016 Negative List or otherwise requiring partnership or special licenses). These business lines are listed in Attachment 1.
• Removing, for 83 business lines, the need for specific recommendation requirements from the relevant Ministries - for example, plantation seeding and plantations above 25 Ha.
• Simplifying business lines categories. For example, there were 39 business lines for construction services business lines under the 2014 Negative List (e.g., warehouse construction, building construction, building reparation) which have been combined into 1 business line of "construction services".

• Increasing the permitted foreign shareholding in certain business lines:

  1. 2 business lines have been increased from 33% to 67%;
  2. 23 business lines have been increased from 49% to 67%;
  3. 11 business lines have been increased from 51% to 67%;
  4. 3 business lines have been increased from 65% to 67%; and
  5. 26 business lines currently not open to foreign investment have been opened in varying percentages.

  The above business lines are listed in Attachment 2.

• Similar to the 2014 Negative List, the opening of foreign ownership or allowing higher foreign ownership for investors from ASEAN member States is maintained.

  The Government has continued to recognise its obligations under the ASEAN Comprehensive Investment Agreement (ACIA) of 2009 under which investors that are natural persons or juridical persons of ASEAN member States ("ASEAN Investor") can enjoy a higher foreign ownership percentage in certain sectors.

  A non-ASEAN company which owns or controls an ASEAN company may be able to avail itself of national treatment and investment market access privileges in an ASEAN company. However, a member State (such as Indonesia) may deny the benefits of the ACIA to an ASEAN Investor if, inter alia:

  1. a non-ASEAN investor owns or controls that ASEAN Investor and the ASEAN Investor has no substantive business operation in the territory of the host ASEAN member State;
  2. the ASEAN Investor is owned by an investor of the denying ASEAN member State and the ASEAN Investor has no substantive operations in the territory of the host ASEAN member State; or
  3. the ASEAN Investor is owned by a non-ASEAN investor and the denying ASEAN member State has no diplomatic relations with the country of the non-ASEAN investor.

  Indonesia has limited experience in applying these criteria and it remains to be seen if the Investment Coordinating Board ("BKPM") will look through and seek to deny an application by an ASEAN Investor on the above grounds.

  In the immediate term, subject to tax planning and specific advice, (i) it would be appropriate for the ASEAN Investor to be owned or controlled by ASEAN based investors (control is defined as the power to name a majority of directors of the ASEAN Investor or legally direct the actions of the ASEAN Investor), and (ii) the ASEAN Investor should have substantive business operations in its ASEAN country of origin. Sectors with higher foreign ownership limitations under the ASEAN Investor scheme are set out in Attachment 3.

• Investments in sectors categorised as open for investment (foreign and domestic) with requirements will be categorised as open to foreign investment if the investment is implemented in special economic zones determined by the Government. However, this treatment will not apply to business lines that have been reserved for Local SME and Koperasi.

Changes from the 10th Economic Package Announcement

As mentioned above, there are several changes between the information in the 10th Economic Package Announcement and the 2016 Negative List. Some of the changes are:

• the business line of staple food (pangan pokok) plantation seeding with an area of more than 25 Ha is not reserved for Local SMEs, so this business line is still limited to 49% foreign investment; and
• the business line of healthcare research centre is excluded from the 2016 Negative List with the intention that this business line should be conducted by the Government instead of private companies.

Restricted Business Lines

There are business lines which are now specifically closed, have increased minimum project value requirements, or where the permitted foreign investment has been reduced. These include:

• Specifically closing investment for 2 business lines of (i) usage (taking) and distribution of: coral/decorative coral from the nature for aquarium and coral/recent death coral from transplantation/propagation result and (ii) lifting of valuable items from a sunken ship’s cargo.

• Providing more protection for Local SMEs and Koperasi, by among other things:

  1. Reserving additional 19 business lines for Local SMEs under the public work sector (i.e., business service/construction consultant service using low or medium technology and/or low or medium risk and/or the project value is less than 10 billion IDR) - for example, predesign and architecture consultancy services, architecture design services and contract administration services; previously foreign investment was permitted up to 55%.
  2. Increasing the project values of 39 business lines under the pubic work sector (i.e., construction services (construction implementation service) using low and medium technology and/or low and medium risk and/or the project value is up to 50 billion IDR) that are reserved for Local SMEs from 1 billion iDR to 50 billion IDR - essentially, this means foreign owned construction services companies can only qualify for projects with a value of over 50 billion IDR.
  3. Adding 3 business lines that require a partnership with a Local SME or otherwise in the form of a plasma cooperation, namely:
     1. sugar industry (white sugar, refined sugar, raw sugar);
     2. salting/drying fish and other water biota industry; and
     3. retail trading through mail order or the internet.

  The above business lines are listed in Attachment 4.

• Reducing the permitted foreign investment in 2 business lines. These business lines are:
  1. Reducing the permitted foreign shareholding in the business line of provision and business for crossing harbours to become 49% - previously 100% foreign ownership.
  2. Reducing the permitted foreign shareholding in the business line of provision and business for and lake harbours to become 49% - previously 100% foreign ownership.

Grandfathering/Restructurings

The prior grandfathering provisions remain, thereby protecting prior approved investment if there has been a reduction in the permitted level of foreign investment in the 2016 Negative List. The position of BKPM is that business lines that have been grandfathered will still be permitted to conduct a business expansion.

Applicability of the Negative List to Public Listed Companies

The position remains unchanged. The 2016 Negative List does not apply to "indirect or portfolio investment", (being a restatement of the elucidation under article 2 of the Investment Law). Although the 2016 Negative List has tried to emphasise that indirect or portfolio investment in companies (engaged in business lines that are open for investment with requirements) through domestic capital market will be exempted from the requirements (meaning the business lines will be open for investment), there are no provisions in the 2016 Negative List removing the ambiguity of the phrase "indirect or portfolio investment" and how in practice the list is applied. Consequently the current market practice will prevail.

Monitoring, Evaluation and Resolution of Investment Issues

As mentioned in the 10th Economic Package Announcement, to monitor, evaluate and resolve investment issues, the Government will establish, under a separate Presidential Decree, a National Team for the Enhancement of Export and Investment. The National Team will be under the coordination of the Coordinating Minister in the field of Economic Affairs (Menteri Koordinator Bidang Perekonomian).

Conclusion

• In general, the Government is giving a positive signal that Indonesia is more open, and the terms of the 2016 Negative List are consistent with what had been previously announced in the 10th Economic Package Announcement.
• For domestic investors, the following should be considered as a result of the proposed foreign investment liberalisation:
  1. identify any threats that may arise given increased competition;
  2. identify any new opportunities in establishing a joint venture with foreign investors; or
  3. identify any call option(s) under which foreign shareholders may be entitled to, in order to increase their shareholdings in joint ventures.
• For foreign investors, the things to consider are:
  1. identify opportunities to invest in Indonesia given the additional liberalised sectors (either wholly owned or through joint ventures);
  2. assess the possibility of increasing shareholdings in existing joint ventures (and for certain business lines this will allow financial consolidation), whether through negotiation or the exercise of call options or the conversion of convertible financing instruments; or
  3. assess the possibility (if appropriate) to remove the small shareholdings held by Indonesian investors (e.g., where foreign investment is now open 100%).
• Despite various lobbying with the Government to specifically exempt indirect or portfolio investment through the domestic capital market, the Government may have taken a status quo position on this issue by not further clarifying the phrase "indirect or portfolio investment" in the 2016 Negative List. Consequently, current market practice will prevail. However, continuous monitoring is required on how this ambiguity is viewed in the future.
• The effectiveness of the National Team for the Enhancement of Export and Investment will also be a key factor to ensure that the entire economic stimulus packages that have been issued by the Government are monitored and implemented accordingly.
• Hopefully the (i) opening of certain business lines to foreign investors, and (ii) the protection given to businesses conducted by domestic investors, Local SMEs and Koperasi, will provide more certainty when investing into Indonesia.

Hadiputranto, Hadinoto & Partners, Member of Baker & McKenzie International - 27th May 2016

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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

Indonesia’s New Negative Investment List; A Big Bang?

The Tenth Economic Package – Principles for the New Negative List

Useful Documents

Presidential Regulation No. 44 of 2016