Indonesia has been a magnet for foreign investment in the past few years, with a lot of the capital flowing in from Asian countries, particularly the North Asian neighbours Japan and Korea. Yet, despite the close economic ties, there are still many pain points for investors, which require legal assistance and support, lawyers working in the market say.
Last year marked 45 years of diplomatic relations between Indonesia and South Korea, and as if to celebrate that, companies from the two nations agreed to pursue $6.2 billion worth of deals at a bilateral business forum. Indonesia is also aiming for bilateral trade between the two countries to reach $30 billion by 2022. And in February this year, leaders resumed talks about their upcoming trade deal, pegged for later this year, according to Reuters.
Mohamed Idwan Ganie, managing partner at Lubis, Ganie & Surowidjojo, has witnessed first-hand the confidence Korean investors have in Indonesia. “Korean investment in Indonesia has increased steadily over the last decades and more than 45 years of diplomatic relationship, and South Korean investment in Indonesia shows no signs of abating. South Korea’s investment value continues to increase, making Korean companies one of the largest foreign investors in Indonesia,” Ganie outlines.
“For Korean investors, on the one hand, there is a large domestic consumer market, and on the other hand, there is availability of relatively low cost and skilled workforces. With its relatively low wages and a workforce of approximately 130 million, Indonesia has been an attractive destination for their investments,” Ganie adds.
Dina Khairunisyah, an associate at Kudri & Djamaris, paints a similar picture. Indonesia is blessed with strategically advantageous geography, and “great shipping lanes between the Indian Ocean and the Pacific Ocean, giving the country great international trading routes.”
While in the past the country has “relied heavily on its mineral resources exports and palm oil industry”, Khairunisyah suggests that Indonesia is transitioning to include greater emphasis on manufacturing too, with this having seen “great leaps and bounds, particularly the government vision sectors such as infrastructure and particularly transport system links.”
And the interest is also mutually beneficial he says, noting that cooperation in the automobile, infrastructure, information, communication and agricultural sectors has helped create employment opportunities on an impressive scale. “Korean-owned garment and shoe factories already employ more than 900,000 workers, and Korean businesses are a major source of investment in the chemical and steel sectors,” he adds.
Similarly, Japan accounts for 17.5 percent of all incoming foreign direct investment into Indonesia, making it one of the top three investors in the country alongside Singapore and China. However, despite the numbers, not all is rosy. The Jakarta Post reported that in August, South Korean investors met with Indonesian business executives and government officials to talk about problems on the ground. And a news report in February this year, Japanese portfolio investment in the form of shares and bonds in rupiah as of December 2018 totalled around made up about 3 percent of all foreign investment. Lawyers say that there are several obstacles investors face, and as result, there is ample room for improvement.
COMMON CHALLENGES
While the potential of the market is not doubted, Ganie explains there are opportunities where the Southeast Asian nation is missing out. “Indonesia is, for example, missing out on South Korean small and medium enterprises relocating out of China for investment opportunities elsewhere for example,” he says, explaining that this stems from the fact that “Korean investors would like to get speedier responses from the Indonesian government agencies regarding problems that are commonly found in doing business ‘on the ground’ in Indonesia.”
While there have been many areas that have already seen improvement, including across the electricity and finance sectors, as well as work carried out to protect minority investors and resolve insolvency, Ganie says Korean investors still experience fundamental problems when “starting a business, dealing with construction permits, clearer central and regional government tax regulations and easier enforcement of contracts.”
Poor coordination between different government agencies exacerbate this further, and in turn, this flares up every time regulations change. “For example, one agency applies the new regulation while others enforce the old one,” says Ganie, although he notes that these are common issues which are experienced not just by South Korean investors, but by foreign investors in the market generally, and even domestic businesses encounter such headaches when seeking to grow or establish operations in the market. “This is a general problem that is being overcome but there is still room for improvement that can easily be overcome by listening to investors needs in their day-to-day operations,” he advises.
Robert Hasan, an associate at Ivan Almaida Baely & Firmansyah Law Firm (IABF), says another challenge Korean investors sometimes encounter is the Indonesian government’s Negative Investment List, which outlines conditions or names sectors where investment is outright closed to foreign investors.
When there are conditional requirements, “for example in the field of freight forwarding services which will only allow a maximum of 67 percent foreign investment,” Hasan explains, IABF is able to help them source local Indonesian investors with the same business objectives.
Khairunisyah agrees that law and regulatory matters are challenges for foreign investors seeking to enter the Indonesian market. Among the key issues which are commonly experienced is government bureaucracy as businesses attempt to maneuverer the complex regulatory structure required, while also having to wait as licenses and permits can be slow to gain. And then, there is an issue which Japanese investors don’t have to consider: import tariffs.
“Unlike Japanese investors who are exempted of import tariffs, the government of Korea and Indonesia have not made any treaty or agreement on exempting of import tariffs. This may put Korean Investors to be more concerned with import tariffs and competing with Japanese and other foreign companies which have more less restrictive import tariff in entering the Indonesian market,” Khairunisyah says.
NO EASIER FOR JAPAN
While the investment relationship between Japan and Indonesia is more well-trodden than the relationship it currently has with South Korea, there remain some hurdles which must be overcome for Japanese investors should Indonesia wish to continue to encourage this in the future.
For Luky Walalangi, partner at Jakarta-based Walalangi & Partners, who works with primarily Japanese investors, the key challenge is the matter of compliance. While this isn’t the top concern for all clients investing in the market, Japanese clients remain cautious and highly attentive to the requirements of compliance. With 80 percent of the firm’ clients coming from Japan, this is a significant area of support for the firm.
Another area of apprehension is the challenges of uncertainty of Indonesia regulations and litigations and the fact that at times there may be unwritten policies. Because of this, helping to lead the way through these challenges, while explaining the risks and the climate is another important element of ensuring the process runs smoothly.
“So for our job, our main task will be to breach these issues and communicate with the client and explain what is going on. What the regulation says, what is in practice, and what the risks are. For the first step, I think that would be our main role,” Walalangi says.
A MORE ACCOMMODATING MARKET
While Japanese investment is already well established in the Indonesian market, and more South Korean investment is expected to flow into the market, the lawyers working with companies from these countries know exactly what can be done to court further investment and support the process along the way.
Ganie suggests that Indonesia could become a more accommodating market for foreign investors by speeding up the process and time constraints required when starting new businesses these include streamlining and speeding the time it takes to gain building and work permits, “increasing legal certainty, including for purposes of enforcing contracts,” and ensuring the “synchronization and transparency of central and regional government regulations and policies,” he says.
For each of the firms, the desire for greater clarity is a common thread, and a change that would enable them to offer more conclusive advice without grey areas.
Khairunisyah adds that that infrastructure support, stable economic growth, tax incentives, smooth regulatory processes are key to help support investment into the market by Korean firms. To put it simply, she says Indonesia could attract more investors if it “improved the business environment.”
“According to the World Bank’s 2018 report, Indonesia scored poorly on starting a business, dealing with construction permits, trading across borders, paying taxes and enforcing contracts,” Khairunisyah says, noting that this has been improving with the Indonesia Investment Coordinating Board (BKPM) “launching a one-stop service for business registrations and a three-hour Investment Licensing Service for businesses,” Khairunisyah says.
While lawyers in the market continue to play a supportive role, the next steps will be down to the government. Says Ganie: “Legal certainty is certainly one of the main concerns for Korean investors. Whilst government agencies are constantly improving in terms of speed, the judicial sector certainly has to catch up to create and contribute its share to create a conducive investment climate for foreign investors.”
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