Recent changes to Indonesia's revised Negative Investment List have largely been positive, with relaxation being the order of the day. In this briefing we look at some of the key changes and their likely impact on foreign investors.

Negative Investment List

Foreign investment in Indonesia is regulated by a negative investment list which is maintained by the Indonesian Investment Coordinating Board (BKPM). The list is regularly reviewed and updated to take into account policy reviews, legislative changes and the prevailing economic landscape, among other things.

On 18 May 2016, a revised negative list (the Negative Investment List), which was introduced by President Regulation Number 44 of 2016, became effective. The new Negative Investment List is the first since President Joko "Jokowi" Widodo took office late in 2014. It had been the subject of some anticipation in light of Jokowi's commitment to public spending and economic growth, which was set against the backdrop of the increasingly nationalistic sentiments that had pervaded the final years of President Susilo Bambang Yudhoyono's second term. This had resulted in largely negative law-making in relation to foreign investment.

On the whole, the new Negative Investment List is positive news. It appears to show an increasing willingness by the Indonesian government to allow foreign investment, and opens up the market somewhat in a number of areas.

Opening of sectors previously closed to foreign investors

A number of sectors in which no foreign investment was previously allowed have been opened up to foreign investment. Examples include:

Sector 2014 Negative List 2016 Negative List
Construction and installation of high voltage electricity No reference included 49% foreign investment now permitted
Crumb rubber industry Foreign investment expressly prohibited 100% foreign investment now permitted (provided that a special licence from the Minister of Industry is obtained)
Passenger transportation over land Foreign investment expressly prohibited 49% foreign investment now permitted
Biomass pellet producing industry Only permitted when in partnership with a local SME 100% foreign investment now permitted

Complete opening of certain sectors to foreign investment

Several sectors which were previously only partially open to foreign investment have now been completely opened up, such that foreign investors can enjoy 100 per cent ownership. Some of the sectors which are included are as follows:

Sector 2014 Negative List 2016 Negative List
Futures broking Limited at 95% foreign investment 100% foreign investment now permitted
Business related to toll roads Limited at 95% foreign investment 100% foreign investment now permitted
Salvage service and/or underwater work Limited at 49% foreign investment 100% foreign investment now permitted (provided that a special licence from the Ministry of Transportation is obtained)
Non-hazardous waste management and disposal Limited at 95% foreign investment 100% foreign investment now permitted

Relaxation of foreign investment requirements in certain sectors

Certain sectors have had the percentage of allowed foreign investment increased to allow majority foreign ownership for the first time – often regarded as a must-have by many investors. Examples of such increases include:

Sector 2014 Negative List 2016 Negative List
Provision of airport services Limited at 49% foreign investment 67% foreign investment now permitted
Provision of fixed and mobile telecommunications Limited at 65% foreign investment 67% foreign investment now permitted
Internet services Limited at 49% foreign investment 67% foreign investment now permitted

Infrastructure

It is interesting to note that a number of the sectors that have been opened up under the new Negative Investment List, either partially or wholly, are infrastructure related. This is no doubt a result of the commitment by the Jokowi government to spend US$22.5 million on building infrastructure in: (i) the outskirts of developed areas; (ii) villages outside Java; and (iii) other remote and border areas – a goal that can only be reached with significant foreign support.

Transportation

As demonstrated in the tables above, there is increased flexibility for foreign investors across the transportation sector. This ties in with the Jokowi government's commitment to increased spending on building infrastructure, as any infrastructure improvements are unlikely to have the desired effect if they are not backed up by the requisite transport links.

Energy and natural resources

The new Negative Investment List provides that large scale power plants (>10MW) can now have up to 100 per cent foreign investment compared with the previous 95 per cent. This is likely to encourage foreign investment in this sector, as full control over such investments can be paramount for many investors.

Marine and fishing industries

The new Negative Investment List opens up fishery, and the processing of specific fishery products, to 100 per cent foreign investment. However, sea sand quarrying is no longer open for foreign investment. Therefore, this is one of the sectors where there is both forward and backward movement.

Closure of business sectors

In further good news, only one activity has been added to the list of sectors which are closed for foreign investment – the collection of valuable objects from sunken ships.

The new Negative Investment List sets out 145 sectors which are reserved for SMEs or which require a partnership with them in order to invest. This effectively closes off these sectors to foreign investors as they are prohibited from owning SMEs.

Higher foreign ownership percentage for those from ASEAN member states

In accordance with the ASEAN Comprehensive Investment Agreement (2009), natural persons or juridical persons who are investors in Indonesia and from an ASEAN member state (ASEAN investors) can have the benefit of a higher foreign ownership percentage across categories within the following sectors: (i) manufacturing; (ii) tourism; (iii) agriculture; (iv) forestry; (v) tourism; (vi) trade; (vii) transportation; and (viii) health.

Where the percentage of ownership available to foreign investment has been increased as a result of the new Negative Investment List, the percentage available to ASEAN investors has also increased. For example, the unloading/loading of cargo is limited to 67 per cent foreign investment (previously 49 per cent) but this increases to 70 per cent (previously 51 per cent) for investors from ASEAN member states (however, this is limited to four ports only).

Grandfathering provisions

All existing investments are grandfathered, such that all prior approved investments are protected where there has been a subsequent reduction in the allowed level of foreign investment.

Conclusion

On the whole, the new Negative Investment List is to be welcomed, both generally - in that it signals a more permissive approach to foreign investment as a whole - and specifically in those sectors to which the changes primarily relate. It will be interesting to see how foreign investors react to the opportunities presented and whether this will lead to an influx of much needed capital.

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.