Harmonised Regulations for FDI

Indonesia

Economic News

22 Jul 2010
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Last month, Indonesia expanded its 'negative investment list' of local industries in which foreign investment is restricted. The new list caps such investment in a wide range of sectors. Reactions and controversy have been heating up since.



Mandated under the new investment law enacted last April, the latest list, announced on June 25, will affect 338 business sectors, a substantial increase on the 83 previously covered. Crucially, the list, aimed at bolstering the development of Indonesian small- and medium-sized enterprises (SMEs) and increasing the level of investment transparency, does not require parliamentary approval.



The list covers sectors deemed of strategic national interest, such as armaments, as well as alleged 'high-polluting' sectors. Thus foreign investment in armaments will be closed while the regulations announce tight regulations for mining.



Foreign direct investment (FDI) will be restricted to 20% in broadcasting companies, 49% in transportation, 49% in fixed-line telecommunications, 65% in mobile telecommunications, 55% in construction, 65% in health services, 75% in pharmaceuticals, 80% in insurance and 95% in plantation companies.



Meanwhile, the 99% cap on FDI in the banking, oil and gas, power generation, toll-roads, water and agricultural sectors has remained unchanged. In addition, the cap on foreign ownership in certain sectors, such as travel agencies and hospitals, has been raised to 50% and 65% respectively.



The 61-page list follows similar moves by neighbours such as Malaysia and affects FDI rather than purchases of shares in companies listed on the stock exchange.



Although on the face of it more restrictive than previous caps, the list is much more detailed than previous regulations, thus adding to the transparency of the investment environment.



"We welcome the development as Indonesia now has a negative list that is compiled in one place and easily referenced," Adam Sack, Indonesia country manager for the World Bank's International Finance Corporation, told OBG. "There is little new in the scope of the restrictions, so this is a good step by the government of Indonesia towards creating a better and more transparent investment climate."



The government has created a commission to regularly review the impact of the list and reactions from investors. Balancing the need to protect strategic sectors against the need to attract foreign investment, the caps will be effective for three years unless revised by the commission.



"We are still open to discussion about what sectors to make more open," said Mohammad Ikhsan, a special adviser to the coordinating minister for the economy, when the policy was unveiled.



"The government put the national interest and the future of the nation first," said Mari Elka Pangetsu, minister of trade. "But basic principles such as transparency and legal certainty are also important things that will affect the investment climate in Indonesia."



The new investment law has been seen as playing an integral part in attracting the $426bn in combined foreign and domestic investment over the 2004-2009 period that is planned by the government. This will prove necessary for achieving its aim of an annual growth rate of 6.6% over the next three years. Indeed, the World Bank estimates that FDI accounted for 24% of GDP growth in 2006, up from 17% in 2002.



While realised FDI dropped from $8.9bn in 2005 to $5.9bn in 2006, foreign investment has rebounded in the first half of this year. Realised FDI rose 16.8% in first quarter of 2007 year-on-year, reaching $4.1bn.



The clarification of the regulatory environment stands as an important prerequisite for boosting FDI.



"Enhancing regulatory certainty is the most critical step towards improving the investment climate," Haruhiko Kuroda, president of the Asian Development Bank, told OBG.



In a bid to calm the nerves of foreign investors, the list of restrictions will not be applied retroactively. Thus Singaporean and Malaysian investors who own substantial assets in the telecommunications sector, such as Singaporean government-owned Temasek and Telekom Malaysia for example, will not have these assets expropriated.



Some responses to the restrictions have been lukewarm, although their full impact remains to be seen.



The Indonesian Chamber of Commerce and Industry (KADIN) protested at its lack of involvement in the creation of the list. "Some of the changes raise more questions than answers," said Mohamad Hidayat, chairman of KADIN. "We have been meeting representatives of foreign chambers of commerce this week to seek foreign views on the new list."



Although on the face of it more restrictive, the list of caps on foreign investments represents a rationalisation of the regulation system for foreign investments. In line with the new investment law, the government considers these new regulations increase transparency while ensuring greater visibility for foreign investors.

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