Recent Developments

On 11 February 2016, the Government announced a 10th economic package ("Announcement"). The Announcement outlines the principles that will be adopted in the new President Regulation on Negative List of Investments in Indonesia ("New Negative List") (noting the President has been pushing for a speedy issue of the new Negative List). The New Negative List will replace the current list under Presidential Regulation No. 39 of 2014 ("Current Negative List").

Consequently the Announcement is not the Negative List itself. Until the New Negative List is issued, the Current Negative List still applies.

Given the Announcement covers broad categories and may not be exhaustive, it will be necessary to wait for the New Negative List itself to be officially issued for the details (including the relevant industry/business classification numbers) and for the concrete Government position on liberalizing further foreign investment.

Further we are aware that there are ongoing deliberations within the Government on certain issues and sectors and the result of these deliberations will be reflected in the New Negative List.

What the Announcement Says

  1. The Government intends that the New Negative List is clearer for investors, namely it will include the following provisions:

    1. defining the term of "partnership" which is a requirement for approximately 51 business lines;
    2. ensuring business certainty by keeping the concept of "grandfathering" prior approvals;
    3. ensuring that the relevant Ministries and Regional Governments comply with the provisions of the New Negative List; and
    4. establishing a task force to accelerate investment and the export market (which will also be tasked to resolve quickly implementation issues when the New Negative List is issued).
  2. The New Negative List will cover the same business sectors as the Current Negative List, i.e. 16 business sectors.
  3. 35 business lines will be removed from the New Negative List, resulting in these business lines being open for 100% foreign ownership (please see Attachment 1).
  4. The New Negative List will add 1 business line that will be closed for any investment for environmental preservation reasons, i.e. extraction and distribution of coral.
  5. The New Negative List will provide more protection for micro, small, medium and cooperative businesses - small medium enterprises, which must be Indonesian owned ("Local SME"), by among other things:

    1. reserving additional 19 business lines for Local SMEs - these business lines are generally related to construction consultancy with low or medium technology and project values of less than IDR10 billion -- for example, predesign and architecture consultancy services, architecture design services and contract administration services; previously foreign investment was permitted up to 55%;
    2. increasing the project values of 39 business lines in the construction sector that are reserved for Local SMEs from IDR1 billion to IDR50 billion - essentially, this means foreign owned construction services companies can only qualify for projects with a value of over IDR50 billion; and
    3. adding 3 business lines that require a partnership with a Local SME, i.e., plantation seeding with an area of more than 25 ha, sugar industry (white sugar, refined sugar, raw sugar) and retail trading through mail order or the internet;
  6. The Announcement requires that certain investment processes be simplified by:

    1. removing, for 82 business lines, the need for specific recommendation requirements from the relevant Ministries - for example, accommodation services (hotels and motels), billiard halls, bowling alleys, golf courses, staple food plantation, plantation seeding and plantations above 25 ha; and
    2. simplifying business lines categories. For example, there are 39 business lines for construction services (e.g., warehouse construction, building construction, building reparation) which will be combined into 1 business line of "construction services".
  7. The New Negative List will increase the permitted foreign investment in certain business lines:

    1. 3 business lines will be increased from 33% to 67%;
    2. 23 business lines will be increased from 49% to 67%;
    3. 11 business lines will be increased from 51% to 67%;
    4. 2 business lines will be increased from 65% to 67%;
    5. 1 business line will be increased from 85% to 100%;
    6. 5 business lines will be increased from 95% to 100%; and
    7. 20 business lines currently not open to foreign investment will be opened in varying percentages.

Please see:

  1. Attachment 1, for the business lines that may be open completely for foreign investment (namely removing the business lines from the New Negative List); and
  2. Attachment 2 for the business lines where increased foreign investment may be permitted.

Please note that the Announcement does not necessarily cover all areas that may be liberalized, nor should the Announcement nor the Attachments to this Client Alert be read as being definitive, until the New Negative List is issued.

We have highlighted matters which are not specifically referred to in the Announcement. We have collated the information in the Attachments based on the broad categories referred to in the Announcement and also from various other sources and draft position papers however there are ongoing deliberations within Government. Consequently the information in the Attachments needs to be read accordingly and is caveated that the information may well change.

Conclusion

Only time will tell whether the New Negative List will reflect fully the substance in the Attachments to this Client Alert.

However domestic investors should consider whether, as a result of the proposed foreign investment liberalization, there are:

  1. any threats that may arise given increase in competition;
  2. any call options under which foreign shareholders may be entitled to exercise to increase their shareholdings in joint ventures.

As a result of the proposed foreign investment liberalization, foreign investors:

  1. may identify opportunities to invest in Indonesia given the additional liberalized sectors;
  2. may consider increasing their shareholdings in existing joint ventures (and for certain business lines this will allow consolidation), whether through negotiation or the exercise of call options;
  3. may consider it appropriate to remove the small shareholdings currently held by Indonesian investors (e.g. where foreign investment is open 100%).

The Government is targeting to issue the New Negative List in March or April 2016, however, given the Announcement, the issue of the New Negative List could be sooner rather than later.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.