Attitude toward Foreign Direct Investment
While Indonesia’s GDP growth slowed to just under 5 percent in 2015, Indonesia’s young population, growing middle class, strong domestic demand, stable political situation, and conservative macroeconomic policy make Indonesia an attractive destination for Foreign Direct Investment (FDI). Indonesian government officials welcome increased FDI, aiming to create jobs and spur economic growth, and court foreign investors, notably focusing on infrastructure development and export-oriented manufacturing. However, vague and conflicting regulations, poor existing infrastructure, rigid labor laws, sanctity of contract issues and corruption continued to be significant concerns for foreign investors. U.S. firms have expressed hope that better coordination under Indonesia’s current administration will help to improve the investment climate.
Other Investment Policy Reviews
The April 2013 World Trade Organization (WTO) Investment Policy Review (IPR) of Indonesia can be found here: http://www.wto.org/english/tratop_e/tpr_e/tp378_e.htm
The most recent OECD Investment Policy Review (IPR) of Indonesia can be found here: http://www.oecd.org/daf/inv/investmentfordevelopment/indonesia-investmentpolicyreview-oecd.htm
UNCTADs report on ASEAN Investment can be found here: http://unctad.org/en/PublicationsLibrary/unctad_asean_air2015d1.pdf
Laws/Regulations on Foreign Direct Investment
Foreign Direct Investment in Indonesia is regulated by Law 25/2007 (the Investment Law). Under the law, any form of FDI in Indonesia must be in the form of a limited liability company, with the foreign investor holding shares in the company. In addition, the government outlines restrictions on FDI in presidential decree 39/2014, commonly referred to as the Negative Investment List. The Negative Investment List aims to consolidate FDI restrictions in certain sectors from numerous decrees and regulations to create greater certainty for foreign and domestic investors. In May 2016 the Indonesian government announced a major revision to the Negative Investment List which opened e-commerce, film, tourism, and other sectors to foreign investment. A number of sectors remain closed to investment or are otherwise restricted.
The Investment Coordination Board or BKPM serves as an investment promotion agency, a regulatory body and the agency in charge of approving planned investments in Indonesia. As such, it is the first point of contact for foreign investors, particularly in manufacturing, industrial, and non-financial services sector. Some industries (e.g. financial services, oil and gas, and mining) require specific licenses from other relevant ministries or regulatory authorities. BKPM’s website is here: http://www2.bkpm.go.id/.
In order to conduct business in Indonesia, foreign investors must be incorporated as a foreign-owned limited liability company in Indonesia (PMA) To apply for a principle license investors must provide: a company deed legalized by a notary; clearance for the Indonesian company’s name from the Ministry of Law and Human Rights; the company’s certificate of domicile; a tax identification number; and proof of registration with either the Ministry of Industry or Ministry of Trade. Investors are also required to participate in the Workers Social Security Program or BPJS. Once an investor has obtained a principle license he may apply for a business license. At this stage, investors must: document their legal claim to the proposed project land/location; provide an environmental impact statement (AMDAL); show proof of submission of an “investment realization report”; and provide a recommendation from relevant ministries as necessary. Previously the business registration process averaged 260 days. Following the January 2015 establishment of a one stop shop (OSS) Center by the BKPM, which includes representatives of 21 ministries/agencies, the process has purportedly been reduced to 90 days. Special expedited licensing services are available for investors making investments in excess of approximately USD 7 million and meeting certain other criteria.
Foreign investors are generally prohibited from investing in Micro, Small and Medium Enterprises (MSMEs) in Indonesia, although a proposed revision to the Negative Investment List may open some opportunities for partnerships in farming, catalog and online retail. In accordance with the Indonesian SMEs Law No. 20/2008, MSMEs are defined as enterprises with net assets less than IDR10 billion (about $7 million) or with a total annual sales under IDR 50 billion ($35 million). However, the Indonesian Central Bureau of Statistics defines MSMEs as enterprises with fewer than 99 employees. The GOI provides assistance to SMEs, including expanded access to business credit for SMEs in farming, fishery, manufacturing, creative business, trading and services sectors, a tax exemption for MSMEs with annual sales under IDR 200 million, and assistance with international promotion.
Indonesia’s vast natural resource wealth has attracted significant foreign investment over the last century and continues to offer significant prospects. But a variety of government regulations have made doing business in the resources sector increasingly difficult, and Indonesia now ranks near the bottom (91st) among the world’s 109 mining countries in the Fraser Institute’s Mining Policy Perception Index. In 2012, the Government of Indonesia (GOI) banned the export of raw minerals, dramatically increased the divestment requirements for foreign mining companies, and required major mining companies to renegotiate their contracts of work with the government. The ban on the export of raw minerals went into effect in January 2014. In July 2014, the government issued regulations that allow, until 2017, the export of copper and several other mineral concentrates with export duties, but only by companies that meet specified requirements toward developing refining facilities. The 2009 mining law devolved the authority to issue mining licenses to local governments, who have responded by issuing more than 10,000 licenses, many of which overlap or are unclearly mapped. In the oil and gas sector, Indonesia’s Constitutional Court disbanded the upstream regulator in 2012, injecting confusion and more uncertainty into the natural resources sector. Until a new oil and gas law is enacted, upstream activities are supervised by the Special Working Unit on Upstream Oil and Gas (SKK Migas).
Since taking office in October 2014, President Jokowi and his Administration have made infrastructure development a top priority. The government announced plans to add 35,000 megawatts of electricity capacity and create a maritime nexus, to include the development and/or expansion of 24 ports and other transportation infrastructure. The current institutional arrangement for infrastructure development still suffers from overlap of functions, lack of capacity for public-private partnership (PPP) projects in regional governments, lack of solid value-for-money methodologies, crowding out of the private sector from SOEs, legal uncertainty, lack of a solid land-acquisition framework, long-term operational risks for the private sector, unwillingness from stakeholders to be the first ones to step in the new and fragile system, and especially, lack of an institutional champion. Currently infrastructure development is largely taking place through SOEs, with PPPs having only a marginal share of infrastructure projects.
Limits on Foreign Control and Right to Private Ownership and Establishment
Restrictions on FDI are, for the most part, outlined in presidential decree 39/2014, commonly referred to as the Negative Investment List. The Negative Investment List aims to consolidate FDI restrictions from numerous decrees and regulations, in order to create greater certainty for foreign and domestic investors. In 2014, the share of foreign ownership permitted was increased in pharmaceutical manufacturing, venture capital companies, land transportation facilities, certain agricultural activities larger than 25 hectares, and certain power sector investments, but decreased in warehousing, distribution and cold storage, certain oil and gas services, telecommunication network services, e-commerce, certain retail sales, and power plants with less than 10 megawatts of installed capacity. For investment in certain sectors, such as mining and higher education, the Negative Investment List is useful only as a starting point, as additional licenses and permits are required by individual ministries. In May2016 the Indonesian government announced a major revision to the Negative Investment List which opened e-commerce, film, tourism, and other sectors to foreign investment. A number of sectors remain closed to foreign investment or are otherwise restricted. Foreigners may purchase equity in state-owned firms through initial public offerings. Capital investments in publicly listed companies through the stock exchange are not subject to Indonesia's Negative List unless an investor is buying a controlling interest.
The Ministry of Law and Human Rights’ implementation of an electronic business registration filing and notification system has dramatically reduced the number of days needed to register a company. Foreign firms are not required to disclose proprietary information to the government before investing.
While some state-owned enterprises have offered shares on the stock market, Indonesia does not have an active privatization program.
Screening of FDI
The Investment Coordinating Board (BKPM) is responsible for issuing investment licenses to foreign entities and has taken steps to simplify the application process through better coordination between various government institutions. BKPM has launched an online portal for its National Single Window for Investment which allows foreign investors to apply for and track the status of licenses and other services online. In an effort to streamline the investment licensing and permitting process, BKPM launched a national one-stop shop to coordinate many of the permits issued by more than a dozen ministries and agencies required for investment approval. While the BKPM one-stop shop’s goal is to help ease investment approvals, investments in the mining, oil and gas, plantation, and most other sectors still require multiple licenses from related ministries and authorities. Likewise, certain tax and land permits, among others, typically must be obtained from local government authorities. Though Indonesian companies only require one approval at the local level, businesses report that foreign companies often must obtain both administrative and de facto legislative approval in order to establish a business. In January, 2016, BKPM also launched a three-hour shop for investments in excess of IDR 100 billion (approximately USD 7 million) which meet certain other requirements.
The Coordinating Ministry of Home Affairs, Ministry of Administrative Reform and Bureaucracy Reform, and BKPM issued a circulating letter on September 15, 2010, to clarify investment that crosses provincial and regional boundaries. Investment in a regency (a sub-provincial level of government) is managed by the regency government; investment that lies in two or more regencies is managed by the provincial government; and investment that lies in two or more provinces is managed by central government, or central BKPM. BKPM has plans to roll out its one-stop shop structure to the provincial and regency level to streamline local permitting processes at more than 500 sites around the country.
The Indonesian Competition Authority (KPPU) implements and enforces the 1999 Indonesia Competition Law. The KPPU reviews agreements, business practices and mergers that may be deemed anti-competitive, advises the government on policies that may affect competition, and issues guidelines relating to the Competition Law.