As Indonesia increases its push to attract foreign investment, its Government is preparing a draft Presidential Regulation on investment sectors, set to take effect in March 2020.
“The plan is to issue the business investment list in the form of a Presidential Decree [Perpres] instead of in the omnibus bill,” Investment Coordinating Board (BKPM) head Bahlil Lahadalia commented. “If the Perpres is issued in February, it will take effect in March,” he added.1
Dubbed as the Positive Investment List, the legislation will allow foreign investors to access industrial sectors which were previously restricted or forbidden to invest in Indonesia by reducing the number of industry sectors currently restricted to foreign investors.
The Positive Investment List will largely replace the current Negative Investment List. The Negative Investment List has seen criticism from foreign investors for its overly restrictive nature by stopping foreign investment in many industry sectors.
“We want to create a positive image because the Indonesian negative list was assessed to be less comforting [for investors],” Bahlil said. “We are building an image that will help build foreign investors’ trust in us.” 2
To rectify the Negative Investment List’s limitations, the Positive Investment List will simplify investment requirements, promote investment in priority industry sectors, and provide better protection for micro, small, and medium-sized enterprises (MSMEs).
- New Business Fields Open to Foreign Investment
- Business Fields that Remain Restricted to Foreign Investment
New Fields of Business for Foreign Investment
As it stands in the draft Presidential Regulation, most business fields are accessible to foreign investment, except for those that can only be carried out by the central government, or are declared closed by the government.
With that in mind, the Indonesian Government will classify four new business fields that will be open to foreign investment.
- Priority Business Fields
- Business fields that are allocated to or require partnerships with Small and medium-sized enterprises (SMEs)
- Business fields that demand specific requirements
- Business fields that do not fall under the above categories and are open to all foreign investment without any restrictions.
Priority Business Fields
As the classification suggests, priority business fields take precedence over all other sectors and meet specific criteria:
- Must be labour intensive
- Must be capital intensive
- Must involve a pioneer industry (renewables, metals, marine transportation, oil refining, etc.)
- Must be export-oriented
- Must be oriented towards research and development, or other innovation
- Must be included as a strategic national program/project
- Must utilise advanced technologies.
There will also be financial and non-financial incentives for those who invest in priority business fields, such as:
- Import duty exemptions
- Tax holidays
- Easier acquisition of work permits, business licences, and supporting infrastructure.
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Business Fields That Are Allocated to or Require Partnerships With SMEs
This business field is split into two categories, one, allocation to a local SME or cooperative or two, for investment that requires partnership with local SMEs:
- Allocation to a Local SME or Cooperative
- The business field must not utilise advanced technologies
- The capital required for business activities must not be more than 10 billion rupiah (US$709,000), excluding land and property
- The business sector must be labour-intensive and have a special cultural heritage.
- Investment That Requires Partnership With Local SMEs
- The business sector must be usually occupied by SMEs or cooperatives
- The industry has the potential to scale up to enter the larger supply chain.
At this point, the draft legislation dictates that foreign investors can only incorporate in the form of a foreign investment company (PT PMA), must be large scale in their operations, and be able to invest at least 10 billion rupiah (US$709,000).
For this reason, foreign investors will be required to establish partnerships with local SMEs as per the second category above. This obligation can be fulfilled in the form of market growth endorsements, easing access to financing, or human resource (HR) training. In general, the requirement is designed to enhance the competitiveness and profitability of the partnered SME.
Business Fields That Demand Specific Requirements
While this business category is open to all investment, there are some requirements:
- Investment capital requirements for domestic investors; or
- Limited investment capital requirements for foreign investors. These limitations may be exempt if:
- Investments are in the form of non-direct investments through the Indonesian stock exchange;
- The investments are made in special economic zones;
- Investors who have been given special rights based on agreements between their countries and Indonesia; and/or
- Investments carried out before the regulation goes into effect.
- Investments that require special licenses.
Business Activities That Will Remain Restricted in Indonesia
While the Positive Investment List will open up several industry sectors to foreign capital, there will, of course, be some remaining exceptions:
- All forms of gambling activities
- Class-I narcotics and cultivation
- The utilisation of natural corals for the production of jewellery, souvenirs, etc.
- Fishing of endangered species
- Industrial ozone-depleting substances industries and industrial chemicals
- Chemical weapons production.
While this is hugely positive news, foreign investors should be aware that this legislation is still in its draft stage, and maybe subject to change in the future.
1 Achmad Basjiruddin PT. NDT Instruments Indonesia Jln. Sirsak / Casamora Blok BB No. 01 Jagakarsa, Jakarta Selatan 12630
2 Achmad Basjiruddin PT. NDT Instruments Indonesia Jln. Sirsak / Casamora Blok BB No. 01 Jagakarsa, Jakarta Selatan 12630
- Local Company (PT): can only be owned by Indonesians, foreigners can set up a PT by leveraging local nominee services
Foreign Company (PT PMA): can be entirely owned by foreigners, but restrictions in business sectors may apply
Representative Office: a branch of overseas parent company whose purpose is to conduct marketing-related activities (income generating activities are strictly prohibited)
- Yes, in a foreign owned company (PT PMA).
- There are top 5 reasons: plenty of trade agreements including the currently signed Regional Comprehensive Economic Partnership (RCEP), ease of doing business (ranked 73 in 2020), various investment incentives for foreign investors, relaxed land ownership and last but not least, huge population, growing middle class and competitive labor costs.
- Yes. According to FocusEconomics, Indonesia’s GDP will increase by 5.0% in 2021, creating better opportunities for businesses to incorporate now.