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11 September, 2016
The difficulties faced by multinationals (including those in the consumer goods sector) in distributing their products in Indonesia are well known. The challenges of reaching a huge broken up archipelago, combined with outdated infrastructure and a complex regulatory environment, often result in time consuming and inefficient processes and logistics cost in Indonesia remains one of the highest in Asia. The recent advances made by the e-commerce sector in Indonesia have also increased the demand for more effective distribution and logistics services, as currently the benefits of transacting over the internet can be eroded by the difficulties in delivering goods purchased to customers.
Hence, in this context, the recent liberalization of the certain distribution and warehousing business lines (increasing permitted foreign ownership of businesses in the sector to a maximum of 67%), as well as certain logistics supporting and coordinating business activities in Indonesia (e.g., freight forwarding, also to a maximum of 67% foreign ownership), in the recently issued Indonesian foreign investment list (“2016 Negative List”)1 is much welcomed. This is a step in the right direction by a government which is trying to arrest declining economic growth rates by leveraging off the spending power of the growing Indonesian middle class.
However, despite the recent targeted liberalization in the 2016 Negative List, the regulatory landscape for the logistics sector as a whole remains complex. Broadly speaking, logistics activities involving actual “transportation” (e.g., courier activities), or ownership or operation of transportation-related infrastructure, remain subject to lower foreign ownership limits (typically, 49%). As such, the need for a case-by-case analysis of the specific activities of any proposed business in this area is still required to determine the exact extent of permitted foreign participation.
Distribution
1. Under the 2016 Negative List, the Indonesian Government has liberalized the distribution line of business. The 2016 Negative List appears to have introduced two variations to the former distribution line of business, namely:
- “distribution which is affiliated to manufacturing”; and
- “distribution which is not affiliated to manufacturing”.
This liberalization also applies to the warehousing line of business (see below).
Distribution which is affiliated to manufacturing is not listed in the 2016 Negative List and thus, should be open to 100% foreign ownership, while distribution which is not affiliated to manufacturing in now capped at 67% (previously the distribution line of business was capped at 33% foreign ownership).
A licence to engage in distribution activities does not permit the licensed entity to undertake retail activity.
General (wholesale) distribution
2. The foreign ownership level that applies to the wholesale distribution line of business has been the subject of numerous changes in recent years, mainly due to protectionist sentiment which resulted in the foreign ownership in this sector being severely curtailed (at a maximum of 33% at its most restrictive in the past).
3. In our experience, a foreign investor seeking to engage in the wholesale distribution line of business in Indonesia may carry out the following activities (subject to certain restrictions):
purchase the products to be distributed (in large quantities or wholesale) from local vendors or by way of import;
store the products in its own warehouse or in a leased third party warehouse; and
distribute the products without any modification to the original form (in large quantities or wholesale) to the domestic market via an intermediary local distribution company or agent.
Distribution affiliated with manufacturing
4. There is, at this stage, little guidance provided on the meaning of the new “affiliated to manufacturing” business line. In the past, foreign investors faced challenges when wishing to invest in both manufacturing and distribution businesses due to the different permitted foreign ownership levels which applied to those lines of business and the different types of importation licences required for each of these activities.
5. Our initial consultations with officials at the Capital Investment Coordinating Board (“BKPM”) indicate that a distribution company will be deemed to be affiliated with manufacturing, and therefore open to 100% foreign ownership, where:
- the principal manufacturer is an Indonesian entity; and
- the principal manufacturer and the distribution company have the same shareholder(s) or the principal manufacturer has a direct shareholding in the distribution company.
6. The details to this indicative interpretation, such as the nature of the relationship between the manufacturer and the affiliated distributor, the minimum shareholding required by the principal manufacturer in the distribution company or whether the common shareholder of the principal manufacturer and the distribution company must be a directshareholder in both entities, remains unclear and will likely evolve through policy practices as BKPM considers relevant applications over time.
7. It remains to be seen how this new category of “distribution affiliated to manufacturing” will be implemented in practice, but it is hoped that the changes introduced by the 2016 Negative List will assist foreign investors in having the same degree of control over manufacturing and distribution businesses, particularly where there is a linkage between the two businesses. At the present moment, investors will still need to test the “affiliated to manufacturing” category of distribution on a case-by-case basis.
Warehousing and Storage
8. The foreign ownership level for warehousing has also increased from a maximum of 33% to a maximum of 67% foreign ownership. The warehousing line of business is defined as “the temporary storage of commercial goods”. In practice, the warehousing line of business permits a company to own and operate a warehouse to store third party goods.
9. We note that cold storage has been removed from the 2016 Negative List, and should therefore now be open to 100% foreign ownership.
Logistics
10. Logistics activities involving actual transportation are typically restricted to a maximum of 49% foreign ownership under the 2016 Negative List. For example, courier activities and business lines related to the transportation of goods on land, sea and air remain subject to a 49% foreign ownership limit. The 49% foreign ownership restriction also applies to the ownership and operation of transportation related infrastructure (e.g., airports, trains, ports, harbours), with the exception of toll-roads (which is 100% open to foreign ownership).
11. However, the 2016 Negative List has liberalized foreign investment thresholds for certain logistics related
supporting and coordinating activities, as set out below:
- Freight forwarding. The foreign ownership level for the freight forwarding line of business has increased to 67% (previously 49%). A foreign investment company engaged in freight forwarding does not carry out the activity of transporting the goods itself, but rather coordinates local transport operators in order to ensure the delivery of goods.2
- Maritime cargo handling services. The Indonesian Government has been focused recently on reducing port handling times to improve the efficiency goods transportation by sea within Indonesia. In practice, improvements in the relevant port-related sectors have been hampered to date by a maximum 49% foreign ownership cap which has not always encouraged foreign investors to introduce the latest technological advances into Indonesian companies that they cannot control. The Indonesian Government appears to have recognized this issue to an extent by increasing the foreign ownership cap to 67% for ‘maritime cargo handling services’, a port-related supporting activity. Actual port and shipping infrastructure ownership or operation related business lines are still limited to 49% foreign ownership.
- Air transportation supporting business. Consistent with the plans of the Indonesian government to upgrade and develop numerous new and existing airports in Indonesia, the 2016 Negative List has sought to encourage further foreign investment by increasing the maximum foreign ownership of air transportation supporting business to 67% (up from 49% previously). These air transportation supporting businesses include for example terminal support services, computer based reservation system services, ground handling services and aircraft leasing. Note, however, that while foreign ownership for air transportation supporting business has been relaxed, the air transportation business itself remains subject to maximum 49% foreign ownership restriction.
Complimentary business lines
12. It is possible for a foreign investment company in Indonesia to conduct several different lines of business (where such business lines are considered to be ‘complimentary’ to the main approved line of business by BKPM); however, in such circumstances, the lowest relevant permitted maximum foreign ownership level amongst the various activities will apply to the entire company. For instance, a foreign investment distribution company (open to maximum 67% foreign ownership) wishing to carry out other business lines with lower foreign ownership limits is not be able to enjoy the 67% threshold as the lowest maximum ownership limit of the complimentary business line(s) would apply.
13. Further, certain business activities are not considered ‘complimentary’ with other business activities and cannot be carried out with any (or certain) other business lines. For example, a foreign investment company engaging in freight forwarding is not permitted to hold or carry out any other business lines under its business license.3
Conclusion
14. While the issuance of the 2016 Negative List represents a welcome relaxation of foreign investment limits for some distribution, warehousing and certain logistics-related supporting and coordinating activities, the regulatory picture remains complex as certain other related activities (e.g., transportation and ownership or operation of transportation related infrastructure) remain subject to lower foreign ownership limits. Accordingly, any proposed business in this sector will need to be assessed on a case-by-case basis to determine the applicable permitted foreign ownership levels.
15. Despite the regulatory challenges that remain in the logistics space, we expect more interest from foreign
investors in this sector in the years ahead, particularly for the lines of businesses which are now subject to increased foreign ownership limits of 67% (i.e., distribution, warehousing and certain logistics related supporting and coordinating activities) under the 2016 Negative List. Existing foreign investors currently with minority stakes in such businesses may also consider reviewing their existing joint venture arrangements to consider restructuring their shareholding arrangements in order to gain control over existing business operations.
1 Presidential Regulation No. 44 of 2016 regarding Lists of Business Fields That Are Closed to Investment and Business Fields That Are Conditionally Open for Investment was signed by President Joko Widodo on 12 May 2016 and officially came into force on 18 May 2016.
2 This understanding is based on our recent informal consultations with BKPM. See also Article 1(15) and Article 2 of Ministry of Transportation Regulation No. 74 of 2015 as amended.
3 Article 2(2) of Ministry of Transportation Regulation No. 74 of 2015 as amended.
For further information, please contact:
David Dawborn, Partner, Herbert Smith Freehills
david.dawborn@hbtlaw.com
