Indonesia: Indonesia To Relax Foreign Investment Rules

Last Updated: 27 November 2018
Article by Anthony Woolley, Aston Goad and Indra Dwisatria

As part of its 16th economic package, the Government of Indonesia (GOI) announced on 16 November 2018 that in order to attract further foreign investment, it intends to relax the restrictions on foreign direct investment (FDI) in certain business sectors.

Reportedly1, 100 percent FDI will be allowed in 54 business sectors currently included in the 2016 negative list2 (2016 DNI) that up until now were closed or restricted for FDI. For certain sectors, the requirement for foreign investors to partner with a micro, small, and medium business or cooperative (MSMBC) and/or to obtain a recommendation from the relevant ministry will also be removed.

The exact business sectors for which the restrictions will be relaxed will be determined in the official new negative list, which is yet to be issued by the president. Reports indicate that the most important changes will be as per below. The actual relaxations in the new negative list may differ from the below.

This is an exciting development for foreign investors into Indonesia and promises to have far-reaching impact by creating a wealth of additional investment opportunities in this rapidly developing market of 260 million people. We will provide further updates when more details become available.

1. Energy and natural resources

Business sectors

Current FDI limitations

Geothermal drilling services

95 percent

Oil and gas construction services: platforms

75 percent

Offshore oil and gas drilling services

75 percent

Geothermal operating and maintenance

services

90 percent

Power generation beyond 10 MW

General: 95 percent

PPP: 100 percent during concession period

Geothermal surveying services

95 percent

Testing and analysis of electrical installation of high/extra-high voltage electrical power generating and utility installation

49 percent

In some sectors, such as power generation, this is not a huge shift as these dispensations already existed. However, it indicates an overall change of stance that sends a positive message to the market, which will in the long run make projects more bankable.

For offshore drilling, the increase of maximum FDI from 75 percent to 100 percent is substantial and seems to be driven by the GOI's desire to increase domestic oil production, especially in locations that are technically more challenging.

There is no change in respect of onshore and offshore drilling services (maximum of 49 percent FDI), construction of spherical tanks (maximum of 49 percent FDI), onshore oil and natural gas upstream production and pipeline installation (reserved for domestic investment), power generation of below 1 MW (reserved for domestic investment), 1 – 10 MW (maximum of 49 percent FDI), geothermal power generation of up to 10 MW (maximum of 67 percent FDI) and testing and analysis of electrical installation of low/medium voltage power generation and utility installation (reserved for domestic investment).

2. Technology, Media, and Telecommunications

Business sectors

Current FDI limitations

Retail sale via mail order and internet

Partnership

Internet cafés

Reserved for MSMBCs

Fixed/wired telecommunications services

67 percent

Wireless/satellite telecommunications services

 

Content telecommunications services (ringtone, premium short message services, etc)

 

Call centres and other added-value telephony services

 

Internet service providers

 

Data communications system services

 

Public internet telephony services

 

Internet interconnection services (network access point), other multimedia services

 

Previously, online retail sales to consumers required a partnership with an MSMBC. As such, this business line was not typical or popular to use. Internet retailing has boomed across the globe in recent years, and Indonesia is no exception. The relaxation in this sector opens the market to the world's existing leading players, such as Amazon and Alibaba.

The revision means that investment in almost all telecommunication and internet-based businesses in the 2016 DNI will be relaxed. It can be expected that it will create opportunities for a wide range of businesses in the technology, media, and telecommunications (TMT) sector, making it one of the more significant changes to the negative list. It reflects the ambitions of the GOI to accelerate the already rapid growth trajectory in this space, particularly in respect of mobile data.

Certain restrictions will remain, most notably the limitations on FDI for constructing, operating, and providing telecommunication towers (services) (100 percent domestic capital) and online marketplace business (i.e. e-commerce and other web portals/platforms) with an investment below IDR100 billion (maximum of 49 percent FDI). As it currently stands, it appears to also keep in place the limitations on wired/wireless/satellite telecommunications services that are integrated with telecommunications services (maximum of 67 percent FDI). The current limitations on media (television, radio, printed press, and broadcasting), as well as on postal services, would also remain.

3. Life sciences and health care

Business sectors

Current FDI limitations

Manufacture of patented medicines

85 percent

Manufacture of Class B medical devices: (surgical masks, hypodermic needles, patient monitors, condoms, surgical gloves, haemodialysis liquid, PACS, scalpels)

100 percent - requires special permit from the Ministry of Health

Manufacture of Class C medical devices: (IV catheters, x-rays, ECGs, patient monitors, orthopaedic implants, contact lenses, oximeters, densitometers)

 

Manufacture of Class D medical devices: (CT scanners, MRIs, cardiac catheters, cardiac stents, HIV tests, pacemakers, dermal fillers, ablation catheters)

 

The changes are an important relaxation of the requirements for pharmaceutical and medical device manufacturers. The measures seem to be aimed at promoting larger domestic production and increasing onshore life sciences know-how.

The manufacture of Class A medical devices (e.g. wadding, bandages, gauze, canes, infusion stands, sanitary napkins, adult diapers, hospital beds, and wheelchairs) remains limited to a maximum of 33 percent FDI and requires a special permit from the Ministry of Health.

The restrictions for distribution of pharmaceuticals and life science products will remain in place. Life science businesses will still need to take into account any FDI limitations and requirements to cooperate with domestic players in respect of their distribution channels.

Health care providers may have been anxiously awaiting the relaxation of FDI in their sector, however the current revision of the negative list does not contain any changes in this respect.

4. Diversified industrials (Manufacturing)

Business sectors

Current FDI limitations

Manufacture of clove cigarettes

For new investment, only for a small to medium scale cigarette manufacturer in partnership with a large-scale manufacturer holding an industrial business licence in a similar business sector

Manufacture of non-clove cigarettes

Manufacture of other cigarettes

Manufacture of paper wood pulp

100 percent domestic. Importation of raw materials permitted only in case of domestic insufficiency

Manufacture of crumb rubber

100 percent - subject to a special permit from the Minister of Industry only if integrated into the development of rubber estates

Destructive/non-destructive testing

100 percent domestic

Quantity surveying

100 percent domestic

Quality surveying

100 percent domestic

Supervisory surveys

100 percent domestic

Public opinion polling and market research

General: reserved for domestics. Investors from Association of Southeast Asian Nations (ASEAN) nations: FDI of up to 70 percent

 

 

The existing restrictions have not hampered foreign players from making headway in the Indonesian tobacco market - HM Sampoerna is 92.5 percent owned by the New York-based tobacco giant Philip Morris, and controls 35 percent of the country's tobacco market. British American Tobacco acquired a majority share in another large tobacco company, Bentoel, in 2009. However, the further relaxations will still be welcomed by investors.

Another relevant amendment is lifting the FDI restrictions for testing, surveying, and market research activities. Especially in this space, there are several companies that operate internationally for whom the relaxation of restrictions will create opportunities.

5. Transportation

Business sectors

Current FDI limitations

Passenger land transport on non-scheduled routes for tourism transport and specific destination transport

49 percent

International passenger sea transport

General: 49 percent

ASEAN investors: 70 perce

The relaxation here has more limited impact, and air transportation is notable for its absence. Passenger land transport on non-scheduled routes for taxi and specific area transport remains limited to 49 percent FDI, whilst international passenger sea transport remains limited to 49 percent FDI (or 70 percent for ASEAN investors).

Footnotes

1 Source: Ini Daftar 54 Bidang Usaha yang Bisa Dimiliki Asing 100%

2 Presidential regulation 44/2016 on the list of business sectors that are closed or conditionally open for investment, enacted on 12 May 2016.

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.

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