On 11th February 2016, the government announced a tenth economic package ("Announcement"). The Announcement outlines the principles that will be adopted in the new Presidential Regulation on Negative List of Investments in Indonesia ("New Negative List") (noting the President has been pushing for a speedy issuance of the new list). The New Negative List will replace the current list under Presidential Regulation No.39 of 2014 ("Current Negative List").

Consequently, the Announcement is not the list itself. Until the New Negative List is issued, the Current Negative List still applies.

Given the Announcement covers broad categories and may not be exhaustive, it will be necessary to wait for the New Negative List to be officially issued to learn more about the details (including the relevant industry/business classification numbers) and the government's concrete position in further liberalising foreign investment.

Furthermore, there are still ongoing deliberations within the government on certain issues and sectors and the result of these deliberations will be reflected in the New Negative List.

What the Announcement Says

1. The government claims that the New Negative List is clearer for investors, namely it will include the following provisions:

   1. defining the term of "partnership" which is a requirement for approximately 51 business lines;
   2. ensuring business certainty by keeping the concept of "grandfathering" prior approvals;
   3. ensuring that the relevant Ministries and Regional governments comply with the provisions of the New Negative List; and
   4. establishing a task force to accelerate investment and export (which will also be tasked to swiftly resolve implementation issues when the New Negative List has been issued).

2. The New Negative List will cover the same business sectors as the Current Negative List, i.e. 16 business sectors.

3. 35 business lines will be removed from the New Negative List, resulting in these business lines being open to 100% foreign ownership (please see Attachment 1).

4. The New Negative List will add one business line that will be closed to investment for environmental preservation reasons, i.e. extraction and distribution of coral.

5. The New Negative List will provide more protection to micro, small and medium businesses, and cooperatives – small and medium enterprises, which must be Indonesian owned ("local SME"), by:

   1. reserving 19 additional business lines for local SMEs – these business lines are generally related to construction consultancy services for projects using low or medium technology and valued 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 value range for 39 business lines in the construction sector 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; and
   3. adding three business lines that require foreign investors to partner with local SMEs, i.e. plantation seeding with an area of more than 25 ha, the sugar industry (white sugar, refined sugar, raw sugar), and retail trading through mail order or the internet;

6. The Announcement requires that certain investment processes be simplified by:

   1. removing, for 82 business lines, the requirement to obtain specific recommendations from relevant Ministries – for example, businesses such as accommodation services (hotels and motels), billiard halls, bowling alleys, golf courses, staple food plantations, plantation seeding and plantations above 25 ha; and
   2. simplifying business categories. For example, there are 39 business lines in construction services (e.g. warehouse construction, building construction, building reparation, etc.) that will be combined under one category, "construction services".

7. The New Negative List will increase the permitted foreign investment in certain business lines:

   1. three business lines will be increased from 33% to 67%;
   2. 23 business lines will be increased from 49% to 67%;
   3. 11 business lines will be increased from 51% to 67%;
   4. two business lines will be increased from 65% to 67%;
   5. one business line will be increased from 85% to 100%;
   6. five business lines will be increased from 95% to 100%; and
   7. 20 business lines currently closed to foreign investment will be opened in varying percentages.

Please see:

1. Attachment 1, for the business lines that may be open completely for foreign investment (namely removing the business lines from the New Negative List); and
2. Attachment 2, for the business lines where increased foreign investment may be permitted.

Please note that the Announcement does not necessarily cover all areas that may be liberalised, nor should the Announcement or the attachments to this publication be read as being definitive, until the New Negative List is issued.

We have highlighted matters which are not specifically referred to in the Announcement. We have collated the information in the attachments based on the broad categories referred to in the Announcement and also from various other sources and draft position papers. However, there are ongoing deliberations within the government. Consequently, the information in the attachments needs to be read accordingly and is caveated that the information may well change.

Conclusion

Only time will tell whether the New Negative List will reflect fully the substance in the attachments to this publication.

However, domestic investors should consider whether, as a result of the proposed foreign investment liberalisation, there are:

1. any threats that may arise given an increase in competition;
2. any call options under which foreign shareholders may be entitled to exercise to increase their shareholdings in joint ventures.

As a result of the proposed foreign investment liberalisation, foreign investors:

1. may identify opportunities to invest in Indonesia given the additional liberalised sectors;
2. may consider increasing their shareholdings in existing joint ventures (and for certain business lines this will allow consolidation), whether through negotiation or the exercise of call options;
3. may consider it appropriate to remove the small shareholdings currently held by Indonesian investors (e.g. where foreign investment is 100% open).

The government is targeting to issue the New Negative List in March or April 2016. However, given the Announcement, the issuance of the New Negative List could be sooner rather than later.

Hadiputranto, Hadinoto & Partners, Member of Baker & McKenzie International - 18th February 2016

Tweet

digg

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

New Presidential Regulation to Accelerate 35GW Power Generation Programme

Government Introduces Regulatory Framework on Bonded Logistics Centres

Indonesia Introduces Regulation on Non-Conventional Oil and Gas Operations

Indonesia Readies New Negative Investment List: What Should Investors Expect?

Useful Documents

Presidential Regulation No. 39 of 2014 on the Negative Investment List