1. Key Takeaways
Foreign Investment in Indonesia is now permitted in sectors previously limited or closed
Employment regulations for employers are favourable
Indonesia has a positive regulatory environment for foreign investors
3. Introduction and Summary Points
Foreign Direct Investment in Indonesia is a strategic priority for the current administration which has introduced regulatory changes facilitating greater openness and flexibility across the board. The Omnibus Law (an umbrella law for all Ministries) simplified arcane processes which will be further streamlined with the launch of the new OSS (launching 11/8/21). Recent manpower regulatory changes in favour of employers/investors have further contributed to a positive outlook for FDI.
There are still structural and systemic challenges in navigating the FDI landscape as not all licenses applications are available online and there are a number of overlapping regulations between central and local government.
The Negative Investment List of old makes for grim reading, a laundry list designed to put off even the most seasoned investors from looking into Indonesia. The New Investment List has opened up a swath of once “off-limits” sectors and now contains only six sectors which are limited from foreign investment.
4. Introduction to the New Investment List
Prior to 2021, rules governing foreign direct investment in Indonesia were largely governed by two government promulgations:
a) 2016’s Presidential Regulation No. 44 on List of Closed Business Fields and Open business Fields with Requirements in the Investment Sector – commonly referred to as the ‘Negative Investment List’, or the ‘2016 Negative List’, and
b) 2007’s Presidential Regulation No. 76 on criteria and Requirements for the Formulation of Closed and Conditionally Open Business Fields in the Investment Sector
Then, in 2020, FDI in Indonesia was shaken up by a piece of legislation which loosened the ties of the state over employment structures and eased investment into a variety of business sectors. This was the law No. 11 of 2020 regarding Job Creation, and is referred to as the ‘Omnibus Law’.
In February 2021 new rules based upon the Omnibus Law were introduced under the presidential Regulation No. 10 regarding Investment Sectors. These new rules governing foreign investment are commonly referred to as the ‘New Investment List’, or ‘Positive Investment List’. This became law on March 4th 2021.
While welcome, the relaxation of legal constraints needs to be taken in context; although elements of the market pace have opened up, older sector-specific legal requirements remain in place where they do not clash with the newer legislation. This is why any investors in the Indonesian marketplace need to tread carefully and rely upon trusted advice.
5. New and Updated Elements
a) Prioritised Sectors
245 prioritised sectors have been introduced by the New Investment List. They are eligible – with certain caveats – for tax incentives (both corporate and income), as well as customs incentives.
Other incentives are also on offer for businesses in prioritised sectors, from raw materials supply and employee provision to ease of licensing and infrastructure perks. Regulations governing immigration may also be relaxed.
Prioritised sectors are those that fulfil one of more of the following criteria:
of national significance
capital intensive
labour intensive
‘pioneering’
hi-tech
orientated toward:
research/development and innovation
export
b) Special Economic Zones
FDI in start-ups in the technology sector were previously compelled to invest a minimum of 10 billion IDR (barring buildings and land). Investors are now exempt from this requirement.
6. Sector Access
a) Sectors Fully Open to Foreign Investment
Telecoms
Airport services
Drinking Water
Mining
Sea Port services
Wholesale Distribution
Power (power plants, transmission and distribution)
b) Sectors Conditionally Open to Foreign Investment
Construction - high value/technology/risk
local partnerships are required for building construction
investment must involve a local business partnership
Power - installation consultancy
local partnerships are required
Power – projects providing under 1MW of energy
reserved for local companies
7. Sector-Specific Regulations
a) Construction
Indonesian law demarcates between construction efforts that involve high-level technology and/or are high risk, and those that do not satisfy these criteria. Each sub-sector is treated differently in law.
For the former business types (those that involve high-level technology and/or are high risk), the 2016 negative List stipulated a foreign ownership ceiling of 67%. For the latter type (not hi-tech or high risk), there were no such restrictions.
The New Investment List removes the 67% restriction so that all types of construction projects can now be fully foreign-owned.
However, other requirements continue to apply, in the context of business interaction with local entities:
it is mandated that building construction must occur in partnership with local CMSME companies (Cooperatives, Micro, Small and Medium Enterprises)
foreign investors must engage in the creation of a service company jointly owned by a local construction services provider
b) Mining
Mining for gold, coal, nickel and other resources, as well as mining services more generally, were already unrestricted by the 2016 Negative List. However, the New Investment List simplifies existing investment incentives. Also, a subset of mining industry elements have been categorised by the New Investment List as special sectors that qualify for a range of tax and other benefits.
It is worth noting, however, that pre-existing regulations will continue to require gradual divestment to local shareholders, whereby over a 10-year period a majority of shares will compulsorily be owned by Indonesians.
c) Sea Ports and Airports
Tourism has long been an economic driver for the Indonesian economy, and remains a sector where the government is keen to incentivise foreign involvement. Consequently, liberalisation of the travel sectors has been viewed as priority. Airport expansion has been a particular focus.
Previously, restrictions applied under the 2016 Negative List imposed a 49% ceiling of foreign ownership for both airport and sea port provision. Supporting services and businesses were also restricted to a maximum of 67%. These caveats no longer apply.
Furthermore, capital investment restrictions have been removed and financial obligations in this area have been simplified and distilled into a general compulsory capital investment entry point of IDR 10 billion.
d) Power
Power plants with a generating capacity over 1MW can now be wholly foreign-owned. This also applies to distribution and transmission of electricity. This was previously restricted to 95%.
e) Education
Education services have been open to 100% foreign investment under 2016’s Presidential Regulation No. 44 on List of Closed Business Fields and Open business Fields with Requirements in the Investment Sector. Investors will need the appropriate structure to support investment in this sector.
8. How ASK can help
ASK Consulting supports a number of investors across the region with Board advisory services:
Identifying your suitable local partners and investors
Government Liaison
Investment advisory
Structuring
Non-profit entity establishment
Agreement drafting
License and permit process
Initial Operational Support
We’re ready to assist you - please drop us a line for a free consultation.
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+62 811 1933 226
Phone
+62 21 515 7602
Email
collaborate@ask.consulting