Reed Smith Client Alerts

Authors: Gerald Licnachan Kendra MacDonald Matthew Gorman

Type: Client Alerts

Recent changes to Indonesia’s revised Negative Investment List have largely been positive, with relaxation being the order of the day. In this briefing we look at some of the key changes and their likely impact on foreign investors.

Negative Investment List Foreign investment in Indonesia is regulated by a negative investment list which is maintained by the Indonesian Investment Coordinating Board (BKPM). The list is regularly reviewed and updated to take into account policy reviews, legislative changes and the prevailing economic landscape, among other things.

On 18 May 2016, a revised negative list (the Negative Investment List), which was introduced by President Regulation Number 44 of 2016, became effective. The new Negative Investment List is the first since President Joko “Jokowi” Widodo took office late in 2014. It had been the subject of some anticipation in light of Jokowi’s commitment to public spending and economic growth, which was set against the backdrop of the increasingly nationalistic sentiments that had pervaded the final years of President Susilo Bambang Yudhoyono's second term. This had resulted in largely negative law-making in relation to foreign investment.

On the whole, the new Negative Investment List is positive news. It appears to show an increasing willingness by the Indonesian government to allow foreign investment, and opens up the market somewhat in a number of areas.

Opening of sectors previously closed to foreign investors A number of sectors in which no foreign investment was previously allowed have been opened up to foreign investment. Examples include:

Sector   2014 Negative List  2016 Negative List 
Construction and installation of high voltage electricity  No reference included  49% foreign investment now permitted 
Crumb rubber industry  Foreign investment expressly prohibited  100% foreign investment now permitted (provided that a special licence from the Minister of Industry is obtained) 
Passenger transportation over land  Foreign investment expressly prohibited  49% foreign investment now permitted 
Biomass pellet producing industry  Only permitted when in partnership with a local SME  100% foreign investment now permitted 

Complete opening of certain sectors to foreign investment Several sectors which were previously only partially open to foreign investment have now been completely opened up, such that foreign investors can enjoy 100 per cent ownership. Some of the sectors which are included are as follows:

Sector  2014 Negative List  2016 Negative List 
Futures broking  Limited at 95% foreign investment  100% foreign investment now permitted 
Business related to toll roads  Limited at 95% foreign investment  100% foreign investment now permitted 
Salvage service and/or underwater work  Limited at 49% foreign investment  100% foreign investment now permitted (provided that a special licence from the Ministry of Transportation is obtained) 
Non-hazardous waste management and disposal  Limited at 95% foreign investment  100% foreign investment now permitted 

Relaxation of foreign investment requirements in certain sectors Certain sectors have had the percentage of allowed foreign investment increased to allow majority foreign ownership for the first time – often regarded as a must-have by many investors. Examples of such increases include:

Sector   2014 Negative List  2016 Negative List 
Provision of airport services  Limited at 49% foreign investment  67% foreign investment now permitted
Provision of fixed and mobile telecommunications  Limited at 65% foreign investment  67% foreign investment now permitted 
Internet services  Limited at 49% foreign investment  67% foreign investment now permitted 

Infrastructure It is interesting to note that a number of the sectors that have been opened up under the new Negative Investment List, either partially or wholly, are infrastructure related. This is no doubt a result of the commitment by the Jokowi government to spend US$22.5 million on building infrastructure in: (i) the outskirts of developed areas; (ii) villages outside Java; and (iii) other remote and border areas – a goal that can only be reached with significant foreign support.

Transportation As demonstrated in the tables above, there is increased flexibility for foreign investors across the transportation sector. This ties in with the Jokowi government’s commitment to increased spending on building infrastructure, as any infrastructure improvements are unlikely to have the desired effect if they are not backed up by the requisite transport links.

Energy and natural resources The new Negative Investment List provides that large scale power plants (>10MW) can now have up to 100 per cent foreign investment compared with the previous 95 per cent. This is likely to encourage foreign investment in this sector, as full control over such investments can be paramount for many investors.

Marine and fishing industries The new Negative Investment List opens up fishery, and the processing of specific fishery products, to 100 per cent foreign investment. However, sea sand quarrying is no longer open for foreign investment. Therefore, this is one of the sectors where there is both forward and backward movement.

Closure of business sectors In further good news, only one activity has been added to the list of sectors which are closed for foreign investment – the collection of valuable objects from sunken ships.

The new Negative Investment List sets out 145 sectors which are reserved for SMEs or which require a partnership with them in order to invest. This effectively closes off these sectors to foreign investors as they are prohibited from owning SMEs.

Higher foreign ownership percentage for those from ASEAN member states In accordance with the ASEAN Comprehensive Investment Agreement (2009), natural persons or juridical persons who are investors in Indonesia and from an ASEAN member state (ASEAN investors) can have the benefit of a higher foreign ownership percentage across categories within the following sectors: (i) manufacturing; (ii) tourism; (iii) agriculture; (iv) forestry; (v) tourism; (vi) trade; (vii) transportation; and (viii) health.

Where the percentage of ownership available to foreign investment has been increased as a result of the new Negative Investment List, the percentage available to ASEAN investors has also increased. For example, the unloading/loading of cargo is limited to 67 per cent foreign investment (previously 49 per cent) but this increases to 70 per cent (previously 51 per cent) for investors from ASEAN member states (however, this is limited to four ports only).

Grandfathering provisions All existing investments are grandfathered, such that all prior approved investments are protected where there has been a subsequent reduction in the allowed level of foreign investment.

Conclusion On the whole, the new Negative Investment List is to be welcomed, both generally - in that it signals a more permissive approach to foreign investment as a whole - and specifically in those sectors to which the changes primarily relate. It will be interesting to see how foreign investors react to the opportunities presented and whether this will lead to an influx of much needed capital.

 

Client Alert 2016-146