Although Indonesia is home to one of the fastest-growing construction industries in Asia, with foreign direct investment (FDI) inflows to the sector surging between 2013 and 2015, FDI dropped to a seven-year low in 2016, even as the number of new projects increased.
In a bid to bolster FDI inflows and provide greater clarity for investors, the government revised its negative investment list (DNI) in 2016, reducing several restrictions on foreign investment in the construction industry. Although the revisions also closed smaller firms using low-level technology to private investors, they are expected to encourage new FDI, which is set to rise in 2017 on the back of growth in the number of foreign-funded deals reaching financial close.
GROWTH & INVESTMENT: In July 2016 US construction consultancy firm AECOM reported that Indonesia is one of the largest construction markets in Asia, projecting that the industry will rise to become the fastest growing of any country on the continent by 2020 as a result of the government’s multi-billion-dollar infrastructure agenda, which envisions the completion of major road, airport, port and affordable housing projects, as well as oil refineries, power plants and utilities systems. In total, 30 infrastructure projects valued at $68bn were forecast for completion between 2015 and 2019.
Despite the positive outlook in terms of activity, FDI inflows to Indonesia’s construction industry dropped off significantly in 2016. According to Statistics Indonesia (BPS), total foreign investment realisation based on capital investment in the construction sector reached a low of $239.6m in 2012 before rebounding to $526.8m in 2013 and surging to $1.38bn in 2014. While it then fell to $186.9m in 2016, a seven-year low, the total number of construction projects launched by foreign investors in Indonesia has risen steadily, reaching a seven-year high of 437 in 2016.
NEGATIVE INVESTMENT LIST: Presidential Regulation No. 44 of 2016 came into effect in May 2016, revising foreign investment limits for businesses involved in the construction of public works. Under the new DNI, construction implementation firms using low- or medium-level technology pursuing projects with low- or medium-risk and/or a work value of up to Rp50bn ($3.8m) are now only open to local small and medium-sized enterprises. The same also applies to construction consultancy services using the same levels of technology and risk and/or a maximum work value of Rp10bn ($753,800).
On the other hand, the new DNI looks to engage overseas investors further in high-tech and high-risk projects. For consultancies in this category and/or with a contract value of at least Rp50bn ($3.8m), the ownership cap has been raised from 55% to 67% for foreign companies and 70% for those based in ASEAN. Furthermore, consultancies that utilise high technology, are high risk and/or have a work value of more than Rp10bn ($753,800) but less than Rp50bn ($3.8m), are now open to 100% foreign ownership, up from 55%.
For implementation companies that pursue high-tech, high-risk work, and/or with a work value of more than Rp50bn ($3.8m), the same ownership parameters apply, although under the previous DNI the minimum value was set much lower at Rp1bn ($75,400).
INVESTMENT POTENTIAL: The measures remove the possibility of foreign acquisition for some construction firms and might affect prospective industry consolidation, while the changes brought about by the New Construction Law of April 2017 could also pose a challenge to FDI inflows (see overview). However, large-scale multinational investors should benefit from the revisions to the DNI related to ownership in companies pursuing higher-value projects.
Furthermore, consultancy PwC reported that project finance deals in foreign-backed infrastructure-related developments rose during the first nine months of 2016, compared to the same period in 2015, noting that this could mean higher FDI inflows in 2017 as investment capital starts to flow into various projects.
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