In May, Indonesia released details of a liberalization of foreign ownership rules on investment by announcing changes to its “negative investment list.” Lawyers tell Ranajit Dam that the changes should spur increased investor interest in the country

Indonesian President Joko Widodo’s “Big Bang” reform measures might not have had the kind of explosive impact suggested by the moniker just yet, but overall the reaction so far has been positive. Industry watchers, including those in the country’s legal sector, have in particular lauded the changes to the “negative investment list” that were announced in May as having the capacity to increase the flow of foreign capital into the country and boost growth.

The changes include the relaxation of rules for international companies in various sectors, including tourism, retail and transportation, as well as the film industry. Indonesia first announced the new rules back in February, as part of a review of the list by the Investment Coordinating Board (BKPM), which covers sectors in which restrictions on foreign investment apply. In May a new presidential regulation related to the negative investment list was signed, officially confirming the changes.

Lawyers have generally welcomed the changes. “The new negative list was highly anticipated by the business community,” says Eko Basyuni, a partner with Assegaf Hamzah & Partners. “As expected, the new negative list has removed many investment restrictions found in the previous list which was issued in 2014. The changes are in line with the government’s objective to accelerate economic growth by encouraging foreign direct investment and streamlining the licensing process.”

Noting that the 2016 list “generally met expectations,” Mark Innis, foreign legal consultant at Hadiputranto, Hadinoto & Partners says that it has increased foreign ownership percentages in around 65 business sectors, simplified business sector categories, opened up around 45 business sectors and removed – for 83 business lines – the need for specific recommendation requirements from the relevant ministries. “However, there were expectations that the government might have liberalized hospital ownership further, opened up advertising and fully opened up e-commerce,” he adds.

Marion Elisabeth, partner with AYMP Atelier of Law believes the changes are able to balance the interests of the foreign investors on one side, as well as those of the SMEs and cooperatives on the other.

KEY HIGHLIGHTS

Elisabeth says that there were several sectors that were previously conditionally open, that are now open unconditionally, for instance, direct selling and futures brokerages, pension funds, film production services, and raw materials for pharmaceuticals. However, several sectors that were not in the 2014 list are now included as closed or conditionally open; these include investment finance companies. In addition, foreign investment caps for some business fields have increased considerably, such as distribution and warehousing, or no longer have caps, such as cold storage and restaurants.

According to Daniel Pardede, partner at Hadiputranto, Hadinoto & Partners, one of the sectors most benefiting from many of these changes is the tourism and creative economy sector. “Despite SMEs being protected elsewhere in the 2016 negative list, foreigners can now wholly own bars, restaurants, cafes, fitness centers and other sporting facilities, as well as wholly own businesses associated with film, including studios, production facilities, film distribution and cinemas,” he says.

Another sector is the transportation sector, with foreigners now being allowed majority ownership in many business lines, notes Pardede. “This is a welcome change and will facilitate logistics and public transportation,” he says. Additionally, keeping in line with the government’s desire to improve healthcare, healthcare supporting services have been substantially liberalized and foreigners in these businesses, such as specialized clinics, health equipment and other ancillary health supporting businesses, can also wholly own these businesses.

Of the 30 business activities that have been removed from the negative list entirely – which means that those businesses have now become open to 100 per cent foreign investment – are toll road management, says Basyuni, along with the laboratories and medical clinics, and film distribution and cinemas mentioned earlier. Additionally, he says that there are around 10 business sectors that are now open to 100 per cent foreign investment subject to certain conditions. “For example, B2C e-commerce activity subject to involvement of investment of more than 100 billion rupiah, or around $7.7 million and C2C e-commerce activity subject to having a partnership with a local SME,” he notes.

Given Indonesia’s commitments under the ASEAN Economic Community (AEC), investors from those countries are able to invest in certain sectors where direct investment from other countries is not possible, such as advertising. In other sectors, they are allowed up to 70 per cent foreign ownership, while investors from other countries have a slightly lower percentage, lawyers say. “Indonesia in this respect is ahead of some other ASEAN countries and shows the government’s willingness to meet its commitments and to welcome further investment from ASEAN,” says Pardede. Basyuni adds that there are additionally higher foreign investment caps for investments in the eastern areas of Indonesia.

POTENTIAL IMPACT

Generally, these changes have been deemed as positive by lawyers. “Opportunities for foreign investment will increase thanks to the expansion of sectors for foreign investment, thus boosting economic growth,” says Elisabeth. Basyuni says that these new rules open up the opportunity for investors to invest in a wider range of business sectors. “Also, there are new opportunities for existing investors to increase their share of ownership – and thereby control – in their companies in Indonesia,” he notes.

For Innis, the 2016 negative list presents “real opportunities” in certain sectors such as the tourism and creative economy, health supporting services and transportation sectors. “From an M&A perspective, though, the key issues at the moment are valuation expectations and quality of assets, which is hampering deal origination and/or closure,” he says. “Consequently investors may need to look at establishing operations rather than acquiring companies.”

While he considers the 2016 negative list to be a “real liberalizing regulation,” other country assessment issues may influence investors’ decisions. These include “a slowing economy, although in our view investors should look long term at the many opportunities Indonesia offers, as well as a changing corporate and compliance culture,” says Innis.

But that said, some investors are likely to feel disappointed. “The increases in foreign investment caps for some business sectors are not as high as some of our clients would have hoped for, and are seen as not enough to entice them to actually take the plunge,” says Basyuni. “There are also businesses which were previously closed and have become open, but with conditions which our clients say either very difficult of impossible to fulfill, such as a requirement to procure raw materials from local sources at an unrealistic percentage level.”

Innis elaborates: “Investors in healthcare were hoping that hospital investments could be wholly owned, given the capital required and the difficulties of Indonesian joint venture parties funding this capital,” he says. “Investors are prepared to make substantial investments in this sector, and the associated training – which would ensure that medical expenditures would remain in Indonesia rather than going to places like Singapore and Kuala Lumpur.”

And while many investors appreciate the need to encourage small and medium enterprises, the substantial increase in the project values in 39 business lines under the public works sector – such as construction services using low and medium-grade technology and/or having low and medium risk to 50 billion rupiah caught many by surprise, Pardede explains.

BREATH OF FRESH AIR

Innis of HHP says that his firm is telling the world that people should take a fresh look at Indonesia, as the 2016 negative list did open up areas which were previously closed, and streamlined many matters. “Further the government and the Capital Investment Coordination Board, is really facilitating market entry, the ease of getting approvals and has cut some bureaucracy,” he says. “In particular for new foreign investors, there are real opportunities to invest in Indonesia given the additional liberalized sectors – either wholly owned or through joint ventures – and we are telling existing foreign investors that they should assess the possibility of increasing shareholdings in existing joint ventures and removing the small shareholdings held by Indonesian investors in industries where foreign investment is now open 100 per cent.”

Pardede adds that he is also telling investors that the government has been very progressive in its various economic packages: “These packages are liberalizing and a breath of fresh air, although investors need to appreciate that implementing fully the economic packages will take further time, given the myriad of regulations which need to be changed.”

Meanwhile, Basyuni of AHP says that the firm is advising clients to have preliminary discussions with BKPM and, if necessary, the relevant technical ministry, to find out their views on certain business sectors. “While generally lines of businesses that are not in the negative list are automatically considered open for 100 per cent foreign investment, we have seen BKPM and/or the relevant ministry impose investment restriction due to informal policy or their interpretation that certain activities fall into a business category which has foreign investment restriction,” he adds.

MORE TO BE DONE

Despite the positive vibes generated by the negative list, lawyers feel there is still more than can be done to improve Indonesia’s investment environment. “The government should continue to create a climate that is conducive to foreign investment, such as streamlining business set up and licensing requirements, making entry into Indonesian market a lot faster and easier,” says Basyuni. “It should work to increase the quantity and quality of infrastructure and local workforce, as well as promote greater legal certainty, in terms of law enforcement and also the handling of commercial disputes.”

Innis says the key issue is further streamlining Indonesia’s bureaucracy, which currently does not have a reputation for efficiency. “There have been good things done, such as how BKPM works – for example, the setting up of fast track approvals for large investments and after many years of being of advocated a real single window for many approvals – and quick approvals are now issued by the Ministry of Law and Human Rights. The perennial problem is often at the local level. For example, getting a domicile letter now takes much longer whereas previously this was days,” he explains.

Pardede says that the government’s suggestion to issue regulations in lieu of law - which will later be endorsed by the parliament as law - to facilitate changes is a good proposal and should be implemented. “This will speed up the implementation of certain of the initiatives under the government’s economic packages, such as foreigners owning apartments,” he notes.

Additionally, although the Ministry of Trade is reworking certain regulations, simplifying the supply chain requirements and having less intermediaries in the supply chain would assist with distribution and costs. And for infrastructure, land acquisition remains a problem despite regulations clarifying and simplifying the process, and this results in infrastructure project delays. “Unfortunately little more can realistically be done given land ownership issues in Indonesia,” says Pardede.

KEY SECTORS IN THE “BIG BANG” LIBERALIZATION

By Gayatri Suroyo and Fransiska Nangoy of Reuters

100 PER CENT OPEN TO FOREIGN INVESTMENT

– Toll roads

– Restaurants, bars

– Film making

– Film distribution

– Cinemas

– Cold storage

– Crumb rubber industry (subject to additional requirements on raw materials, etc)

– Non-toxic waste management

– Informal education, such as beauty, computer and language courses

– Futures traders (did not specify which asset class)

MAJORITY FOREIGN STAKE

– Department stores with sales floor between 400 m2 – 2,000 m2 (67 pct, must be in a mall)

– Distribution of trading business not affiliated with production (67 pct)

– Low-end hotels, museum operation, catering, golf course, bowling, etc (67 pct)

– MICE business (67 pct)

– Supporting services at airport, other transport terminals (67 pct)

– Maritime cargo handling services (67 pct)

– Healthcare facilities such as medical instruments (67 pct)

– Telecommunications networks and services, including call centers, internet service providers, content providers (67 pct)

– Warehousing (67 pct)

– Consulting services in construction (67 pct of the value of project over 10 billion rupiah)

SECTORS OPENED UP FOR THE FIRST TIME

– Installation of high-voltage utilization (49 pct)

– Land transport (49 pct)

– Several healthcare facilities such as medical instruments (67 pct)

– Film industry including distribution (100 pct)

– E-commerce (100 pct, excluding investment of less than 100 billion rupiah, which is capped at 49 pct)

RESTRICTIONS

– Cap on plantation sector remained 95 pct, but businesses must manage plasma portion of a minimum 20 percent for certain seedling

– Telco tower construction and services is off limits to foreigners