NEWS DETAIL

24 Feb 2021
Major Liberalization of FDI Rules Heralds New Paradigm in Indonesia

 

Acting on the mandate provided by Law No. 25 of 2007 on Investment (the “Investment Law”), as amended by Law No. 11 of 2020 on Job Creation (the “Job Creation Law”), the Government of Indonesia has issued a new implementing regulation for the Investment Law: Presidential Regulation No. 10 of 2021 on Investment and Business Lines (the “New List”).

 

This New List replaces the previous implementing regulation (colloquially, the “Negative List”), which had been in effect since 2016. Although the New List was officially promulgated on 2 February 2021, it was only made available to the public at the end of the 3rd week of February and is effective per 4 March 2021.

 

In line with the principles enshrined in the amended Investment Law, the New List represents an almost revolutionary change from the previous restrictive foreign-investment paradigm to one that is essentially permissive.

 

Open Sesame!

 

In a rather surprising move that will be welcomed by many multinational companies (“MNCs”), the government has re-opened the wholesale/distribution sector to 100% foreign ownership. In 2014, FDI in this sector was limited to 33%, and from 2016, to 67%.

 

Further, as anticipated, the government has opened up the pharmaceuticals sector to 100% foreign ownership. The industry has been a key government focus since at least the onset of Covid-19, as Indonesia attempts to shake off its dependence on imported medicines. Pharma manufacturing (previously limited to 85% foreign ownership) and wholesale/distribution (previously local-only) are now 100% open to foreign ownership. Pharma is also listed as a priority sector.

 

There is also good news for foreign investors wishing to get in on the country’s digital boom. Whereas an investor who wished to establish a 100% self-owned e-commerce business would have had to stump up IDR 100 billion (approx. USD 7 million) in issued and paid-up capital previously for the privilege, the field is now 100% open to foreign ownership and the IDR 100 billion investment requirement has been abolished.

 

Independent power plant companies (typically referred as IPPs) can also now be 100% foreign owned, compared with a maximum of 49% for plants with a generating capacity of 1 to 10 MW previously, and a maximum of 95% for plants with a capacity of 10 MW or more.

 

Similarly, the plantation sector is now 100% open to foreign ownership, from a maximum of 95% previously. Also in the agricultural sector, producers of vegetables, fruit and seeds (that are subject to the Horticulture Law) are now 100% open to FDI, from a maximum of 30% previously.

 

In the medical sector, the klinik utama category (specialized medical clinics that provide such services as dental, nursing and rehabilitation services) is now 100% open to foreign ownership from 67% previously. By contrast, however, the klinik pratama category (which includes general medical clinics, basic medical facilities, and private maternity clinics) continues to be 100% reserved to micro, small and medium enterprise and thus is off-limits to FDI.

 

In addition to a dramatic shift in favor of FDI, the New List identifies 245 business fields as priority sectors to be assisted by fiscal and non-fiscal incentives. Fiscal incentives comprise tax holidays and allowances, plus investment and customs & excise facilities. Non-fiscal incentives include licensing, infrastructure, energy, raw-material, immigration, labor and other facilities. However, to give effect to these incentives and facilities, further implementing regulations will be required.

 

But Check the Small Print

 

It needs to be remembered that not every business that is not specifically referred to in the New List will be automatically 100% open to foreign ownership. There is always the possibility that it could be subject to other restrictions contained in sectoral regulations.

 

Also, the New List continues to impose certain restrictions itself. Whereas 350 business fields were previously subject to specific restrictions, the situation under the New List is as follows:

 

  1. 46 business fields are subject specific requirements, which may be classified as (a) open to FDI but subject to maximum foreign shareholding limit; (b) open to FDI but subject to special approval from the relevant ministry; (c) only open for greenfield FDI in specific provinces; and (d) 100% reserved for domestic investors;
  2. 6 business fields are completely prohibited to FDI under the Job Creation Law (narcotics, gambling/casinos, harvesting of fish listed in the Convention on International Trade in Endangered Species of Wild Fauna and Flora, utilization or harvesting of coral, chemical weapons, and chemicals that might damage the ozone layer);
  3. 51 business fields are reserved for cooperatives (co-ops) and SMEs; and
  4. 38 business fields are open to FDI if in partnership with co-ops and SMEs.

 

FDI Technicalities

 

As at present, FDI can only be made through an Indonesian limited liability company (perseroan terbatas / PT), unless an exemption is provided by the relevant sectoral regulations (mainly oil & gas and construction). FDI is also only permitted  in what are defined as large-scale businesses by Law No. 20 of 2008 on Micro, Small and Medium Enterprises, with the investment value amounting to more than IDR 10 billion or approx. USD 700 thousand (excluding land and buildings) and issued paid up capital of at least IDR 2.5 billion (approx. USD 178 thousand).

 

As a sweetener for foreign investors in tech-based startups, the New List reduces the required value of investments in such companies that are located in special economic zones[1] to less than IDR 10 billion (excluding land and buildings). However, an implementing regulation will need to be issued to establish the ground rules for FDI in the startup sector.

 

ABNR Commentary

 

Coming hot on the heels of the Job Creation Law’s enactment late last year, the New List clearly demonstrates the Government’s commitment to facilitating foreign investment so as to boost economic growth and create jobs. It opens up a wide range of previously restricted sectors to foreign ownership to an extent that would have seemed unimaginable just a year ago. This should help establish a more level playing field for all investors, whether Indonesian or foreign. Of course, the Government’s departure from a protectionist stance will inevitably force local companies to up their game as foreign players increasingly close in on their erstwhile protected markets.

 

The next item on the list for the Government will be to continue its reform of the bureaucracy and elimination of long-standing obstacles to conducting business. For this, the Government has issued Government Regulation No. 5 of 2021 on Risk-based Licensing, which aims to simplify licensing processes and improve ease of doing business. We will be publishing an ABNR Legal Update on this regulation in the near future.

 

By partner Mr. Giffy Pardede (gpardede@abnrlaw.com) and senior associate Mr. Adri Yudistira Dharma (adharma@abnrlaw.com).

 

[1] Although the New List does not provide a definition of “Special Economic Zone”, we may assume that it refers to those established under Law No. 39 of 2009 on Special Economic Zone. As per 11 February 2021, 15 special economic zones had been established around Indonesia.

 

This ABNR News and its contents are intended solely to provide a general overview, for informational purposes, of selected recent developments in Indonesian law. They do not constitute legal advice and should not be relied upon as such. Accordingly, ABNR accepts no liability of any kind in respect of any statement, opinion, view, error, or omission that may be contained in this legal update. In all circumstances, you are strongly advised to consult a licensed Indonesian legal practitioner before taking any action that could adversely affect your rights and obligations under Indonesian law.