Global Business Guide Indonesia

Sign up for the GBG Indonesia Quarterly Business Intelligence Report for the latest news on your sector.
Sign Up
Business Updates | Changes to the Negative Investment List Tabled; Approval Expected Shortly – Updated

Indonesia formally announced its plan to lift limits on foreign investor involvement in several key industries as well as open up areas of business previously reserved in their entirety for local companies. Headlining the action is the easing of barriers to entry in the port management industry – previously closed to non-Indonesians but now open to 100% foreign ownership. This presents lucrative opportunities in sea and airport management in light of the numerous infrastructure projects currently on offer. Other areas with eased restrictions include the pharmaceutical industry, in anticipation of increased local demand with the introduction of social security, as well as ecotourism, where foreign investors have had demonstrated success in the past.

Restrictions Relaxed

The most significant change put forward in the proposed revisions to the negative investment list allows foreign investors to control a 100% stake in companies that manage seaports, airports, land terminals and dry docks. This arrangement only holds true if the project abides by the requirements put forth in Indonesia’s Public Private Partnership (PPP) agreement. Foreign parties are allowed to be sole stakeholders in a port management business only if the port to be managed is developed by formal cooperation between private companies and state owned enterprises; thereby guaranteeing that even if the port is managed by a foreign company, the majority if its physical assets are owned by a local party.

Investors should view this amended regulation as an added incentive to partner up with SOEs in developing Indonesia’s ports; taking up to a 49% stake in this type of project (See Public Private Partnerships) with the knowledge that they will soon be afforded with the opportunity to control and profit from the port’s day to day operations and management. In an industry dominated by state owned companies such as Angkasa Pura and Pelindo presently undertaking rapid expansion, PPP tenders for air and sea port construction projects are plentiful.

As per the 2013 National Development Planning Agency (BAPPENAS) PPP Book, projects currently on offer to private companies include the development of a new airport in Bali to accommodate passengers destined for northern parts of the island as well as to lessen the flow of traffic through Bali’s already overcapacity Ngurah Rai Airport. With bidding expected to commence in the latter half of 2015, this 510 million USD project presents a considerable opportunity to investors with the capital needed to fund construction who are also interested in accruing long term revenue by managing the airport when completed. Another future development open to private companies is the Maloy International Port in East Kalimantan, to be built with the goal of expediting the export of bulk commodities including CPO and coal, and scheduled for bidding in late 2015.

The rush to act upon relaxed regulation is readily apparent; Indian based GVK Power & Infrastructure recently made public its plans on partnering with Angkasa Pura I in building a 700 million USD second airport in Yogyakarta, Central Java. Several specialists in airport operations are expected to follow quickly on the heels of the South Asian company, with Incheon International Airport Corporation of South Korea and TAV Havalimanlari of Turkey having expressed serious interest in managing the country’s airports.

Other Opportunities & Outlook

Other changes to the negative investment list reflect Indonesia’s effort to attract investment in areas that complement government policies. Coinciding with the upcoming implementation of a universal healthcare program in 2014, maximum foreign ownership in pharmaceutical companies is to be increased by 10% up to 85%, providing investors with greater control thus incentivising further research and development spending.

International investors will also be allowed to have a majority stake in companies in the ecotourism industry, with the cap on foreign ownership to be lifted from 49% to 70%. Lucrative openings in this field are especially apparent in small islands off the coast of South Sulawesi, Central Sulawesi, West Nusa Tenggara and East Java; many of which have been identified as priority tourism investment areas by the Ministry of Maritime Affairs and Fisheries.

Also open to foreign investors are the film distribution, bus terminal and vehicle testing industries, which move from being closed off to non-Indonesian companies to now having a 49% foreign ownership limit (see table below for a comprehensive list of proposed revisions).

With all this said, the substantial impact of the revised negative investment list is largely attributable to the decision to open up the port management industry. Facilitating the entry of foreign companies into this industry should prove to be a boon for all businesses that rely upon the country’s still inefficient logistics sector as well as for companies in tourism and hospitality that stand to gain considerably from more efficiently run, visitor friendly airport services. The spill over effect of this proposed change is thus substantial and worth keeping in mind as an encouraging sign of long term prospects for foreign investment in Indonesia.

Negative Investment List 2013 Proposed Revisions

Table detailing the revised 2013 Negative Investment List

Updated 2nd January 2014

On 24th December 2013, the Indonesian government made public its final version of the amended negative investment list (DNI) following several weeks of intense speculation brought to a boil by previous reports of an easing of foreign ownership restrictions in several key industries. Many of the changes first proposed in earlier drafts of the revised DNI and discussed in the initial publication of this article on 29th November 2013 remain unaltered in the final version, such as the increase in maximum foreign ownership in pharmaceuticals from 75% to 85% and in venture capital financing from 80% to 85%. Moreover, land transportation facilities (bus terminals) and vehicle testing are now confirmed as being open to 49% foreign investment having previously been closed to non-local companies.

However, the easing of restrictions limiting foreign ownership in airport management – previously the marquee revision to the new DNI – has been drastically scaled back. Instead of allowing for 100% foreign ownership in this industry, the government plans to allow foreign investors to control a maximum 49% stake in airport management companies. Though many believe that the government’s course of action can be attributed to mounting nationalistic pressure, the official explanation from BKPM cites a conflicting Transportation Law that requires local investors to be the majority shareholder in this line of work.

Furthermore, the final version of the revised DNI also provides information on industries now more restrictive to the involvement of foreign companies. Businesses in the distribution and storage industry that currently have no cap on international involvement are soon to be limited to 33% foreign ownership. This stricter regulation fully applies to cold storage companies based in Sumatra, Bali and Java. Cold storage operations in the less developed islands of Kalimantan, Sulawesi, East Nusa Tenggara, Maluku and Papua can still have majority foreign ownership, with a limit to be set at 67%.

The final version of the amended DNI also stipulates that foreign ownership in the farming sector will now be limited to 30%; a substantial decrease from its current cap of 95% and in accordance with guidelines put forward in Law No. 13 of 2010 on Horticulture, which stipulates that foreign horticultural companies must cut their shares down to 30% by 2014. When this revised negative investment list is to come into effect has yet to be determined though it is expected that, in addition to more specific details on the finalised changes, this will be made clear when the president formally signs the decree.

Global Business Guide Indonesia - 29th November 2013

icone share

Indonesia Snapshot

Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)