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The 2014 Negative Investment List

Background

The Government has issued Presidential Regulation No. 39 of 2014 (PR 39/2014), which sets out the new negative investment list containing the business sectors that are closed or are partially open to foreign and domestic investment. The new negative investment list will replace the previous list under PR 36/2010, with a view of integrating Indonesia’s economy to ASEAN, as well as accelerating development in the regions.

As background, with the exception of certain industries, foreign investment in Indonesia must be conducted through locally formed limited liability companies (Perseroan Terbatas or PT). The foreign investor’s interest is denominated in terms of percentage of the PT’s paid up capital. The negative investment list in turn sets out the limit on the share percentage that can be owned by foreign shareholders. All business sectors are open to foreign investment unless closed or restricted by the Negative Investment List. Consistent with PR 36/2010, all current investment structures that have been approved will be similarly grandfathered in against increased restriction under PR 39/2014.

 

Sectors Now Less Open to Foreign Investment

Onshore oil and gas service is now regulated more tightly. Services pertaining to onshore oil and gas facilities construction, such as onshore production facilities and distribution pipes are no longer open to foreign investment. Equally, onshore drilling is now closed to foreign investment. Previously, foreign investors could own up to 95% interest in these sectors.

 

Sectors Now More Open to Foreign Investment

Pharmaceuticals (medicine and medicinal ingredients) are now more open to foreign investment, with maximum foreign shareholding increased to 85%, from 75% under PR 36/2010.

The business of cultivation, seeding, as well as integrated production of staples and cash crops over lands larger than 25 hectares are open to foreign investment, but subject to recommendation from the Ministry of Agriculture. The permitted maximum foreign shareholding ranges between 49% and 95% depending on the crops.

 

Location-Based Capping

To accelerate development in areas that have not seen development, PR 39/2014 introduces foreign shareholding caps that are based on the location of the investment activities. For example, cold storage in Java, Sumatera and Bali are now capped at 33%, whereas in Kalimantan, Sulawesi, the Nusa Tenggara, Maluku and Papua are capped at 67%.

 

Increased Foreign Shareholding in PPP

The cap on foreign shareholding in two sectors, power (generation, transmission and distribution) and seaport facilities, may be increased if the investment is made as part of a PPP project.

PR 39/2014 is silent on whether such PPP must conform to the existing PPP Regulations (Presidential Regulation No. 67 of 2005 and Bappenas Regulation No. 3 of 2012, collectively “PPP Regulations”) or whether or not it can be done independently thereof. Another issue to consider is that PR 39/2014 does not set out in detail the criteria or process of granting the additional permitted shareholding percentage.

Based on our consultations with the Investment Coordination Board (BKPM), which is tasked with issuing foreign investment permits, BKPM will approve the increased foreign shareholding (100% in electricity and 95% in seaport facilities from 85% and 49% respectively), once the applicant has been appointed as the winning bidder, following a tender process mandated under the PPP Regulations. BKPM will also examine the project’s conformity with the applicable law, and one criterion is that the project’s assets must be transferred to the government contracting agency upon completion of the PPP term. BKPM also confirms that the cooperation agreement must set out the procedure of share transfer, noting that it will only approve future changes in shareholding composition if they conform to the agreement.

While the government has set out a comprehensive guideline on how government agencies and state-owned enterprises are to conduct PPP projects, in practice there are many infrastructure projects that do not strictly conform to the procedure specified therein, either owing to the contracting agency’s financial capacity or the need to expedite the start of the project.

 

Our Analysis

Investing in Indonesia involves conformity with national as well as regional regulations, both are heavily influenced by politics of the day. PR 39/2014 was issued just months before the Presidential Election, currently set for 9 July 2014, with swearing in expected to take place between late 2014 and early 2015. The presidential frontrunners have voiced nationalistic tendencies over strategic resources, such as food production and natural resources. This raises questions of whether or not the 2014 Negative Investment List will remain under the next administration.

It should also be noted that the process of investing in Indonesia is lengthy, partly owing to the bureaucratic process and permit issuance. With respect to infrastructure building done under PPP mechanism, it is unlikely that a new project could be initiated and tendered out between now and a next President being sworn in. Winning a tender, on the other hand, is the threshold that entitles a winning bidder to secure the shareholding structure.

In view of the political uncertainty surrounding the issuance of the 2014 Negative Investment List, it is unclear whether or not the list will result in increased investment, especially in complex infrastructure projects. On the other hand, more risk-tolerant investors may opt to take advantage of the opening-up before any post-election restrictions as implemented. The Investment Law grandfathers in investment structures that have already been approved while the government is treaty-bound to not take expropriation measures or provide fair compensation in the event thereof.

 

Source: Presidential Regulation No. 39 of 2014 on the List of Business Fields Closed to Investment and Business Fields Open, With Conditions, to Investment

[Last update: 2014-07-08 11:50:17]

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