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2 June, 2016
The Indonesian Government has recently issued the much anticipated new negative investment list through Presidential Regulation No. 44 of 2016 on 18 May 2016 which sets out the business sectors which are completely closed or partially open to foreign investment (the “New Negative List”). The New Negative List comes following a press release issued by the Coordinating Ministry of Economic Affairs of the Republic of Indonesia on 15 February 2016 which has provided early indications of the changes to be introduced by the New Negative List.
The negative list is a series of Presidential Regulations issued over time by the Indonesian Government which sets out an evolving list of sectors that are either completely closed or partially open to foreign direct investment where the foreign ownership level in the entity licensed by the Capital Investment Coordinating Board (“BKPM”) is capped at a certain percentage.
The list of sectors described follow the classification set out in the 2015 Indonesian Standard Business Classification (or “KBLI”).
The New Negative List is not retrospective. Investments approved prior to the New Negative List coming into force are not affected by the revised rules. The New Negative List seeks to encourage partnerships between foreign investment (PMA) companies and local Micro, Small, and Medium Scale Enterprises as well as Cooperatives (“MSMEC”) by increasing the lines of business which require partnerships with MSMEC.
The New Negative List also allows higher foreign ownership levels for investors from ASEAN member States in relation to certain lines of business.
Please see below for our observations on the key opportunities and challenges for foreign investors in certain targeted sectors, which have been liberalised by the New Negative List.
The Indonesian Government has recently issued the much anticipated new negative investment list through Presidential Regulation No. 44 of 2016 on 18 May 2016 which sets out the business sectors which are completely closed or partially open to foreign investment (the “New Negative List”). The New Negative List comes following a press release issued by the Coordinating Ministry of Economic Affairs of the Republic of Indonesia on 15 February 2016 which has provided early indications of the changes to be introduced by the New Negative List.
The negative list is a series of Presidential Regulations issued over time by the Indonesian Government which sets out an evolving list of sectors that are either completely closed or partially open to foreign direct investment where the foreign ownership level in the entity licensed by the Capital Investment Coordinating Board (“BKPM”) is capped at a certain percentage.
The list of sectors described follow the classification set out in the 2015 Indonesian Standard Business Classification (or “KBLI”).
The New Negative List is not retrospective. Investments approved prior to the New Negative List coming into force are not affected by the revised rules. The New Negative List seeks to encourage partnerships between foreign investment (PMA) companies and local Micro, Small, and Medium Scale Enterprises as well as Cooperatives (“MSMEC”) by increasing the lines of business which require partnerships with MSMEC.
The New Negative List also allows higher foreign ownership levels for investors from ASEAN member States in relation to certain lines of business.
Please click here to see our observations on the key opportunities and challenges for foreign investors in certain targeted sectors, which have been liberalised by the New Negative List.
1. Background
As a response to economic challenges over 2015 and 2016, the Indonesian Government has issued a series economic stimulus (deregulation) packages with the broader goal to boost economic growth amid a highly uncertain global context, including by promoting foreign direct investment and simplifying administrative procedures. Along with the launch of a tenth economic policy package, the Indonesian Government has now made changes to the investment negative list which was previously set out in Presidential Regulation No. 39 of 2014 regarding List of Lines of Business that are Closed to Investment and Lines of Business that are Conditionally Open to Investment (“2014 Negative List”).
The 2014 Negative List was influenced by strong nationalistic protections which were politically viable in the commodity-boom atmosphere prior to 2014 but which have become increasingly damaging to Indonesia’s economy. As part of the deregulation effort and in light of the government’s attempt to promote foreign direct investment, the Coordinating Minister of Economic Affairs and BKPM have worked together with relevant governmental agencies to identify and re-assess some of the protectionist foreign ownership restrictions in various sectors, including, forestry, healthcare, finance, technology and communication, tourism and creative economy, public works, trading, transportation, plantation and employment.
2. Highlights of Key Sectors in the New Negative List
The changes to the 2014 Negative List do not apply to investments approved by BKPM prior to the New Negative List being issued, unless such provisions are of more benefit to the relevant investment.
As under previous negative list, indirect or portfolio investments by foreign parties made through Indonesia’s domestic Stock Exchange continue to be permitted.
The New Negative List has introduced a new concept of “special economic area” (without however, defining, or providing guidance on the meaning of, such term) whereby lines of business which are partially open to foreign investment and not reserved for MSMEC may be completely open to foreign investment if the relevant business activities are conducted within the “special economic area”. Further guidance is expected to be issued from the Indonesian Government as to the meaning of “special economic area”.
Certain lines of business in sectors targeted by the Indonesian Government, such as, e-commerce, pharmaceutical, technology media and telecommunications (“TMT”), film industry, tourism and creative economy have opened up to increased foreign ownership levels.
Please see the Appendix to this e-bulletin for the list of lines of business in key sectors for which foreign ownership levels have been increased, or where regulatory requirements have been relaxed, by the New Negative List.
We also set out below the impact of some of the changes to certain key sectors: A. TMT and E-commerce TMT Consistent with previous announcements made by President Joko Widodo, the Indonesian Government has now partially liberalised the telecommunication sector, particularly the telecommunications services sector where foreign investors can now become majority shareholders of telecommunication services companies. Under the New Negative List, foreign ownership allowed in the telecommunication services sector has increased from a maximum of 49% to a maximum of 67%. Investment opportunities exist with telecommunication services providers such as, Internet Service Providers (ISP), Network Access Providers (NAP) and Data Communication Services Providers (DCS).
In addition to the above, telecommunication kiosks (warung telekomunikasi) and telecommunication equipment testing facilities (laboratory test equipment) have now been removed from the New Negative List and are open to 100% foreign ownership. Telecommunication kiosks were previously reserved for MSMEC.
Other lines of telecommunication business remain completely closed to foreign investment, such as, the management and operation of radio frequency spectrum and satellite orbit monitoring stations. The foreign ownership level for telecommunication network providers has only slightly increased from a maximum of 65% to a maximum of 67% (allowing control of special company resolutions).
E-commerce
Online Retail Trading Significant liberalisation has been made in the e-commerce sector with the re-opening of online retail trading lines of business which are now available for 100% foreign ownership provided the foreign investment (PMA) company partners with MSMEC. There is, however, an exception for online retail trading of “other goods” 1 which remains completely closed to foreign ownership.
TTTES Operators
The New Negative List also clarifies the foreign ownership position in relation to the lines of business that apply to “Operators of Trading Transactions Through Electronic System” (e.g., “platform-based marketplace”, “daily deals”, “price grabber”, and “online classified advertisement”) (“TTTES Operators”)2. Under the New Negative List, TTTES Operators’ lines of business with an investment value of at least IDR100 billion are completely open to foreign ownership, but the foreign ownership level for those with an investment value of less than IDR100 billion are subject to a 49% cap.
B. Pharmaceutical and Healthcare
Under the New Negative List, foreign ownership restrictions on pharmaceutical raw materials production has been removed from the Negative List and is now 100% open for foreign investment – a relaxation from the previous 85% foreign ownership cap. The domestic pharmaceutical industry currently lacks the capability to develop raw materials and more than 90% of the raw materials used to manufacture drugs in Indonesia have to be imported, mainly from China and India. The excessive reliance by local drug manufacturing companies on imported content for pharmaceuticals is one of the key reasons for high drug prices. It appears that the Government is now seeking to curb high drug prices in Indonesia by boosting the domestic industry by encouraging foreign investment.
It is unclear whether the distribution of finished pharmaceutical products remains closed to foreign investment as the New Negative List has now removed the reference to such line of business which was previously in the 2014 Negative List. Interestingly, the New Negative List introduced two variations to the traditional distribution line of business by referring to “distribution which is affiliated to manufacturing” and “distribution which is not affiliated to manufacturing” (see paragraph C below). It remains to be seen whether foreign investors wishing to distribute finished pharmaceutical products (without producing them) could now rely on the “distribution which is not affiliated to manufacturing” line of business which is now open to 67% foreign ownership. The foreign ownership limitation for the industry of finished pharmaceutical products remains capped at 85% and the industry of traditional medicine remains closed to foreign ownership.
Another lucrative and growing sector being targeted by the Government is the health industry. Recent social security and healthcare reforms which mandate universal healthcare coverage for all Indonesians, expanding middle class and changing lifestyles are key factors which contribute to rising demand for healthcare in Indonesia. Due to the relatively small investment in the past, existing healthcare facilities need to be upgraded or replaced and new ones added, particularly outside the main urban centres. Attractive opportunities also exist in the upper-end of the market with the more privileged Indonesians flying overseas for high-quality healthcare. To boost the healthcare sector, business and management consultancy for hospitals, hospital management services and healthcare support services (such as, rental of medical devices, clinical laboratories and medical check-up clinics) are now open for 100% foreign investment noting that certain clinical laboratories require an additional permit from the Ministry of Health.
C. Trading
Distributor (wholesale)
The foreign ownership level that applies to the wholesale distribution line of business has been the subject of numerous changes in the past mainly because the previous protectionist sentiment was to reserve distribution for local companies generally. The New Negative List appears to have introduced two variations to the traditional distribution line of business, namely “distribution which is affiliated to manufacturing” and “distribution which is not affiliated to manufacturing”. Distribution which is affiliated to manufacturing is not in the New Negative List and thus, open to 100% foreign ownership while distribution which is not affiliated to manufacturing in now capped at 67% (previously the traditional distribution line of business was capped at 33%). There is unfortunately no guidance provided on the meaning of “affiliated to manufacturing”. 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. It remains to be seen how this will be implemented in practice but it is hoped that the changes introduced by the New Negative List will assist foreign investors in having the same degree of control over manufacturing and distribution businesses particularly whether there is a linkage between those two lines of business.
In relation to the distribution of alcohol, the 2014 Negative List provided that the following lines of business were only open to local investment only and required a special permit: (i) wholesale of alcohol beverages (importers, distributors, and sub-distributors), (ii) retail of alcohol beverages, and (iii) retail of alcohol beverages by street vendors. It is unclear whether these lines of business remain entirely closed to foreign investment as the New Negative List no longer refers to these lines of business being open to local investors only – it merely states that they require an alcoholic beverages trading licence and a distribution network with specific areas for distribution.
Warehousing and Cold Storage
In relation warehousing, the foreign ownership level has been increased from a maximum of 33% to a maximum of 67%. Cold storage has been removed from the New Negative List, and should therefore be open to 100% foreign ownership.
Retail and Department Stores
Traditional retail trading under the New Negative List remains generally closed to foreign investment except retail trading by department stores. Previously, department stores with less than 2,000 square meters floor space were completely closed to foreign ownership. Under the New Negative List, foreign ownership level department stores with floor space of between 400 square meters to 2,000 square meters are now open but capped at 67% provided that (i) the department store is located within a mall and is not a stand-alone building, and (ii) any additional outlet store is based on export performance (pay performance). Department stores with at least 2,000 square meters floor space remain open to 100% foreign ownership.
D. Geothermal and Power
As a country with approximately 40% of the world’s geothermal reserves, the Indonesian Government has been actively seeking to support the growth of the Indonesian geothermal sector. Continuing the mostly positive developments from the issuance of the new Geothermal Law in 2014, the New Negative List further encourages foreign investment into Indonesian geothermal projects. Previously, all power plants (including geothermal power plants) with capacity of less than 1 MW were closed to foreign ownership and those with capacity of between 1 and 10 MW were subject to a 49% maximum foreign ownership restriction.
However, the New Negative List creates a special category of foreign ownership restrictions for geothermal power plants, whereby all geothermal power plants with a capacity of less than or equal to 10 MW are subject to an increased maximum foreign ownership level of 67%. While foreign ownership of power plants with capacity of more than 10 MW retains a maximum foreign ownership level of 95%, we are optimistic that the New Negative List will encourage foreign investment into small-scale geothermal projects in an industry which remains very much in its infancy.
As a related development, in a sector that was previously completely closed to foreign investment, the New Negative List now allows up to 49% foreign ownership in companies involved in the testing, analysis, construction and installation of high/extra high voltage facilities. High voltage transmission lines are specialized engineering projects which are critical for the efficient transmission of electricity over long distances, which is often necessary for renewable energy projects (such as geothermal projects) where the best places to generate electricity are located far from the markets where the power is needed. As a result, the opening up of the high/extra high voltage services industry to foreign investment is a positive development for the renewable energy industry in Indonesia.
E. Tourism and Creative Economy
Key changes have been introduced by the New Negative List in the tourism and creative economy sectors which encompass, among others, the film industry, food and beverage, and sports and recreational facilities.
The Indonesian Government has sought to increase the production and distribution of films and the number of movie theatres in Indonesia by liberalising various lines of business which are now open to 100% foreign ownership such as, film technique services (e.g., film voice dubbing facility, film processing laboratory, etc.), film production, movie theatre and distribution of film.
The New Negative List has also removed foreign ownership restrictions for recording studio facilities (cassette, VCD, DVD, etc.).
In the food and beverages sector, restaurants, bars and cafés are now open to 100% foreign ownership. The maximum foreign ownership in catering services has also increased from 51% to 67%.
The Indonesian Government has also relaxed foreign ownership limitations in the accommodation sector to help increase the quality of services provided by hotels for the purpose of attracting foreign tourists to Indonesia. The foreign ownership levels for one-starred and two-starred hotels, non-starred hotels and motels have been increased to a maximum of 67%.
Sports and recreational facilities have also been liberalised by the New Negative List. Sports facilities for swimming, soccer, tennis, fitness, sport centres and other sport activities have been removed from the New Negative List, and thus are open to 100% foreign ownership. Sports stadiums for billiards, bowling and golf course are now open to a maximum of 67% foreign ownership. Foreign ownership limits for karaoke, privately managed historical and ancient heritage sites, management of museum, tourism travel bureaus, eco-tourism outside conservation areas and convention and exhibition (MICE) have also been increased from 51% to a maximum of 67%.
F. Transportation
Consistent with the plans of various regional Indonesian governments to upgrade and develop numerous new and existing airports, the New 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 terminal support services, computer based reservation system services, ground handling services and aircraft leasing. While foreign ownership for air transportation supporting business has been relaxed, the air transportation business itself remains open to 49% foreign ownership.
The Indonesian Government has also recently been focused on reducing port handling times and generally attempting to improve the efficiency for the transportation of goods within Indonesia. In practice, improvements in the relevant sectors have been hampered to date by a maximum of 49% foreign ownership cap which has not always encouraged foreign investors to introduce the latest technological advances into Indonesian companies that they cannot control. However, the Indonesian Government appears to have recognized this issue by increasing the foreign ownership cap to 67% for maritime cargo handling services, transportation management services and air cargo expedition services. Further, the New Negative List also specifically increases the foreign ownership cap to 70% for foreign investors from ASEAN countries who are willing to perform maritime cargo handling services in Bitung, Ambon, Kupang or Sorong in the east of Indonesia.
Related to port businesses, the 2014 Negative List introduced several exemptions with higher foreign ownership levels (typically up to 95%) for projects (including port projects) that were developed through a public private partnership. This was consistent with the Indonesian Government’s drive to support public private partnerships. However, curiously, the New Negative List removes this exemption for port facility businesses so that all port facility businesses (including those developed through a public private partnership) are now subject to a maximum foreign ownership of 49%. This change may be reflective of the fact that the Government has not, to date, been successful in encouraging public private partnerships in the port sector.
Further, the Indonesian Government has supported its recent focus on public transportation by allowing foreign ownership of up to 49% in land transportation businesses (including for buses, taxis and tourism transportation). This sector was previously closed to foreign investment.
Courier businesses were divided into two classifications: (i) Courier Activities; and (ii) Courier Agent Activities. Previously there was only one classification for courier businesses, which was restricted to a maximum of 49% foreign ownership under the 2014 Negative List. Under the New Negative List, Courier Agent Activities are limited to a maximum of 49% foreign ownership; however, Courier Activities are not included in the New Negative List. Thus, it is possible that Courier Activities may now be open for 100% foreign ownership – however, in practice, it remains to be seen how BKPM will interpret the New Negative List in relation to Courier Activities which have been regarded as sensitive in the past. In addition, the New Negative List has increased the foreign ownership cap for freight forwarding business to 67% (up from 49%).
G. Construction and Infrastructure
Construction services activities in Indonesia are categorized into construction planning services, construction supervision services and construction performance services. Previously, construction planning services and construction supervision services were subject to a maximum foreign ownership of 55% while construction performance services were subject to maximum foreign ownership of 67%. The New Negative List simplifies this structure by providing that all construction services activities (including construction planning services and construction supervision services) are subject to a maximum foreign ownership of 67%.
However, the New Negative List dramatically increases the minimum works value of construction projects open for foreign investment to IDR 50 billion for construction performance services (up from IDR 1 billion) and to IDR 10 billion for construction planning services and construction supervision services (also up from IDR 1 billion). We expect that this development will effectively shut-out new foreign investment in small to medium construction work in Indonesia. We also note that the New Negative List creates an apparent inconsistency with the recently issued Minister of Public Works Regulation No. 03/PRT/M/2016 which even further increased the minimum works value of construction projects open for foreign investment to IDR 100 billion. It remains to be seen how this inconsistency will be resolved in practice.
The New Negative List also further liberalises the toll road industry by increasing the maximum foreign ownership for the operation of toll roads from 95% to 100%. We expect that this will be a welcome change to the various international toll road operators who will no longer be legally required to co-operate with MSMEC.
3. Conclusion
The terms of the New Negative List are generally consistent with the announcement made by the Indonesian Government when it issued the tenth economic policy package in February 2016.
Foreign investors seeking to invest in Indonesia should seize the momentum and take advantage of the lines of business that are now either, open to 100% foreign ownership, or the subject of increased foreign ownership levels, under the New Negative List. Existing foreign investors with minority stakes may consider reviewing their existing joint venture arrangements to consider possible benefits from the liberalisation introduced by the New Negative List and gain control over existing business operations.
Please click here for the appendix with the new negative list – Key sectors (page 10).
1 Goods that fall outside the categories of goods referred to under KBLI codes 47911, 47912, and 47913 such as alcoholic beverages, are excluded.
2 There is not yet a KBLI code for this line of business (see No.58 of the Appendix).
For further information, please contact:
Iril Hiswara, Partner, Herbert Smith Freehills
iril.hiswara@hbtlaw.com
