Indonesian Insights

Written by Deni Sri Anjayani and Winnie Yamashita Rolindrawan

With a population of over 240 million people and a rich supply of natural resources, Indonesia is increasingly an attractive market for domestic and foreign investment.  Based on the Capital Investment Coordinating Board’s (“BKPM”) third quarterly report of 2011, total investment was 14.3 billion US  dollars during the first nine months of 2011 with more than 3,500 projects across Indonesia.

Investment continues to concentrate in the mining sector, with an approximate total investment of 3.3 billion US dollars, followed by investments in food, crops and plantations. Metal, machinery and the electronics industry are also leading secondary sectors while investment in transportation, storage and telecommunications totaled more than 2 billion US dollars. While investment in the fields of electricity, gas and water supply continue, there remains a notable lack of infrastructure development across Indonesia.

The Investment Law

Since its enactment in 2007, Law No. 25 of 2007 (April 26, 2007) regarding Capital Investment (the “Investment Law”) remains the principle source of legislation governing investment and has not been changed or amended in 2011.  The investment procedures and framework under several BKPM regulations also remain the same since early 2010, with the notable exception that the List of Business Fields that are Closed or Open to Foreign Investment (the “2010 Negative Investment List”) were amended by Presidential Regulation No. 36 of 2010.  There were no changes to the Negative Investment List during 2011.

Presently Mr. Gita Wirjawan is still the Chairman of the BKPM, in addition to being recently appointed as the new Minister of Trade in October 2011, replacing Mrs. Mari Elka Pangestu.

Changes in the Negative Investment List

While no new changes to the Negative Investment List were introduced in 2011, the 2010 changes continue to shape the investment environment.  Notably, the cyclamate and saccharine industry (i.e. artificial sweetener) is now open to capital investment which requires a specific license.  The 2010 Negative Investment List also increased the limit for foreign capital ownership in certain business fields, such as construction services (from 55% to 67%) and hospitals (from 65% up to 67%), and also reduced the permitted limit for foreign capital ownership in other business fields, such as primary food and crop cultivation industries (from 95% to 49%).  The advertising business, which is a quite attractive for investment, remains closed to foreign investment.

Another notable change in the 2010 Negative Investment List is the special treatment for companies from the Association of South East Asia Nations (ASEAN) member states. For example, ASEAN investors are allowed up to 60% foreign ownership in maritime cargo handling services, while non-ASEAN foreign investors are only permitted 49% foreign ownership.  The 2010 Negative Investment List also attempts to clarify its applicability to publicly-listed companies.  While there are promising features in the 2010 Negative Investment List, in practice, the BKPM has not yet fully implemented the 2010 Negative List.  On a couple of occasions that we know of, the BKPM has rejected proposals for investment by foreign investors even though the relevant lines of business were not deemed “closed” on the 2010 list.

The Implementation of One-Stop Integrated Service (Pelayanan Terpadu Satu Pintu or “PTSP”)

PTSP is considered one of the most important improvements in enhancing public service for investment administration, and was initially outlined in Presidential Decree No. 27 of 2009 (June 23, 2009). In theory, investors only need to go to one government agency to process all business license applications.  PTSP is intended to cut the bureaucratic and complicated procedures and allow investors to process business licenses faster.

According to a recent nationwide survey, the implementation of PTSP has unfortunately not yet been effective because (i) a number of local administrations had not set up the PTSP centers; (ii) a number of the licensing centers established by local administrations have yet to handle most of the licenses; (iii) the centers’ still have difficulty eliminating “unofficial fees” raised from licensing processes; (iv) some centers have yet to separate the front office – designed to handle information and document submission and selection – from the back office, which processes documents and issues licenses; and (v) some business sectors for foreign investors still need a recommendation or an approval letter from a related technical ministry or local government.

Investment Challenges

Despite Indonesia’s positive investment growth, Indonesia still faces many challenges.  These challenges are among others (i) the lack of infrastructure (i.e  sea transportation, ports, railways and roads) of which development must be accelerated to support investment, (ii) regulatory and policy uncertainty, which must be stabilized to attract and support domestic and foreign investment; (iii) the lack of trained and skilled human resources, required to support investment and (iv) tax incentives that are only applicable for certain sectors rather than applying to all industries.

This article is part of our 2011 Indonesian Law Review series, in which our attorneys discuss recent legal developments over the past year and track the main trends in each industry.