Global Business Guide Indonesia

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Business Updates | Indonesia’s New Negative Investment List; A Big Bang?

On Thursday, 11th February 2016, the Jokowi government unveiled the much anticipated revised version of the Negative Investment List which was last subject to changes in 2014. Rounding off the previous nine economic reform packages, President Jokowi touted the government’s tenth package as a ‘big bang’ in liberalising foreign investment in Indonesia. Some 35 sectors have now been opened to up to 100% foreign share ownership while a further 20 sectors were added to the list of those industries closed to foreign involvement and reserved for small and medium enterprises. As expected, the new Negative Investment List has garnered mixed reviews and a healthy dose of skepticism towards the government’s proclamation of it being the boldest reform in the past decade. Boldness aside, the real question is whether the sectors that have now been opened up for international investment present significant and scalable opportunities that can really stimulate foreign investment at a time when Indonesia’s GDP growth has been on the slide.

On & Off the List in 2016

The industry sectors now open to 100% foreign ownership are cold storage, toll roads, cinemas and film distribution, rubber production, restaurants and bars, raw materials for medicines as well as non-toxic waste management. Those now subject to a majority foreign stake are healthcare facilities, warehousing, consulting services for the construction industry (with minimum requirements on project scope) and telecommunication services. Industries now open to a certain degree of foreign involvement for the first time are healthcare facilities such as medical implements (67%), land transport services (49%), film distribution (100%) and installation of high voltage utilisation (49%).

Added to the list in 2016 are sectors designed to protect local Indonesian small and medium enterprises from unfair competition. Particularly focused on the construction sector, these include consultation services, such as pre-design, contract administration services, design services by architects and other architecture-related services. As Indonesia continues on its infrastructure development drive, the government is clearly seeking to involve local players as much as possible through measures such as these.

Land of Opportunity

Taking stock of the new fields now open to foreign investors in Indonesia, it is the logistics and healthcare-related industries that arguably stand out as the most significant opportunities. Indonesia’s logistics sector remains one of the most challenging elements of doing business in the country, an issue that has been brought more sharply into focus by the commencement of the ASEAN Economic Community. The opening up of cold storage services and warehousing was a strategic move by the Jokowi government to support its efforts in stimulating the country’s fisheries and aquaculture sectors under the colourful Minister of Maritime Affairs and Fisheries, Ms Susi Pudjiastuti.

The distinct lack of cold storage, particularly within the MP3EI designated corridors for fishery and aquaculture development throughout Sulawesi, the Moluccas and Papua, has been a major obstacle for fishermen as it forces them to sell to traders below the market value of their catch to avoid it spoling (See Indonesia’s Aquaculture & Fisheries Sector). The measures introduced to combat illegal fishing have also led to a higher availability of fresh fish for the processing industry, however the lack of cold storage has meant that much fresh fish has gone to waste prior to processing due to lack of suitable storage. Cold storage, warehousing and land transportation are also central in addressing the country’s reliance on imports for much of its fresh produce. Investors will therefore find opportunities in the east of Indonesia, within the main hubs for seafood processing and fresh agricultural goods production.

The introduction of BPJS, the universal healthcare and insurance system, has highlighted Indonesia’s shortcomings in terms of healthcare facilities and the comparatively high price of drugs due to the reliance on imported materials (See Overview of Indonesia’s Pharmaceutical Sector). The sharp drop in the value of the rupiah over the course of 2014-2015 has made Indonesia’s dependence on imports of raw pharmaceutical materials untenable. Some 90-98% of raw materials for pharmaceutical products are imported from markets such as China and the USA, which in turn makes Indonesian generic and ethical medicines 25-30% higher than the global average. Major pharmaceutical players such as Kimia Farma and Kalbe Farma have already announced their plans to construct plants for the production of bulk raw materials in order to reduce their import reliance from 2018 onwards. Opportunities are therefore abundant to serve smaller players in Indonesia’s highly fragmented pharmaceutical sector as they seek to compete on price, especially as BPJS’ role and weight in the market expands.

The 2016 Negative Investment List is unlikely to lead to a surge in foreign investment in Indonesia in a fashion that the Jokowi government is hoping for; for the short term at least given the depressed global economic climate. To stimulate foreign investor interest, issues pertaining to legal certainty, bureaucracy and corruption would have to be approached in a similarly bold fashion; that would create the big bang that the President is looking for.

Global Business Guide Indonesia - 16th February 2016

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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)