Indonesia turns to new positive investment list amidst need to further stimulate and liberalise its investment environment

Singapore
This article is produced by CMS Holborn Asia, a Formal Law Alliance between CMS Singapore and Holborn Law LLC.

Introduction

Indonesia’s foreign investment framework is set to be substantially reformed upon implementation of the Presidential Regulation on Investment Business Fields, which is currently in draft form (“PR Draft”). The PR Draft represents a significant policy shift from the current Presidential Regulation No. 44 of 2016 (the “Negative Investment List”) which continued with a “negative list” of domestic business protections and carved out safe harbours particularly for micro, small and medium-sized enterprises (Usaha Mikro, Kecil, dan Menengah – “UMKMs”). Instead, the new PR Draft liberalises the current regulatory framework with the introduction of a new “positive investment list”, supplementing Law No. 11 of 2020 on Job Creation (the “Omnibus Law”) and further pivots the economy towards greater reception of foreign investment as a means to improve a sluggish economy.

Overview of the new “positive investment list”

The PR Draft simplifies foreign investment requirements by opening up nearly all of Indonesia’s industries and categorizing them under the following lines of business:

  1. Priority business fields;

  2. Business fields allocated to or open to partnerships with cooperatives and UMKMs;

  3. Business fields with certain requirements; and

  4. Business fields that do not fall under the above categories (and are therefore open to all investors without restrictions).

Under the Omnibus Law, only six business fields remain completely closed to investment: Class-I narcotics; gambling and/or casino activities; fishing of certain species listed in the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES); harvesting or utilization of certain corals to produce building materials, souvenirs, jewellery, etc.; manufacturing of chemical weapons; and businesses dealing in industrial chemicals and industrial ozone-depleting substances.

Priority Business Fields

The PR Draft provides that the following are classified as priority business fields:

  1. a national strategic program or priority;

  2. a capital-intensive business;

  3. a labor-intensive business;

  4. a high technology business;

  5. a pioneer industry business;

  6. an export or import substitution oriented business, and/or

  7. a business oriented in research, development, and innovation activities.

Under the PR Draft, investors in priority business fields will benefit from fiscal incentives (e.g. tax allowance, tax holidays or investment allowance) and/or non-fiscal incentives (e.g. ease of business licensing).

Business fields that are allocated to or open to partnerships with cooperatives and UMKMs

This second category applies to business fields allocated to cooperatives and UMKMs, and that are open to large-scale companies partnering with cooperatives and UMKMs.

Business fields which are allocated to cooperatives and UMKMs are subject to the following restrictions: they must not utilize advanced technologies; the business sector must be labour-intensive and be characterized by a special cultural heritage; and the capital required for such business activities must not exceed 10 billion Rupiah (approximately US $709,000) (excluding land and property value).

Business fields that involve large-scale companies in partnerships with cooperatives or UMKMs are subject to the following restrictions: they must be traditionally occupied by cooperatives or UMKMs, and/or the sector must have the potential to scale up to enter the larger supply chain. Foreign investors can only carry out business activities in the form of a foreign investment company (PT PMA) and must be large-scale companies that invest over 10 billion Rupiah (excluding land and property value).

The minimum investment threshold of 10 billion Rupiah, however, does not apply to activities in special economic zones or to companies engaging in technology-based start-ups, as the country aims to continue spearheading the growth of the digital economy in Southeast Asia. According to a report from Google, Temasek and Bain, the country's digital economy is worth US $44 billion and is by far the biggest in the region. Based on its current growth trajectory, Indonesia’s digital economy is projected to be valued at US $124 billion in 2025, led by its e-commerce and media sectors and its five unicorns (Tokopedia, Bukalapak, OVO, Traveloka and Gojek). UMKMs have been identified as the key drivers underpinning Indonesia’s digital economy, with solutions that fulfil the needs of the growing population of digital consumers. Enhanced access to foreign capital (by way of partnering) would boost the development of these high-value digital products and services and enable them to expand and compete in the international market but without the risks of foreign investors dominating these key supporting industries.

Business fields that stipulate specific requirements

Under the PR Draft, the number of business fields subject to foreign investment restrictions will be decreased to 48 from 350 (based on the current Negative Investment List). Business fields under this category are open to all investors but are subject to investment capital requirements for domestic investors; limited investment capital requirements for foreign investors; or investments that require special licenses.

Conclusion

The opening of new industries to foreign investment is a significant shift in the development of Indonesia’s foreign direct investment rules. In response to the PR Draft, foreign investors should consider future investment opportunities in newly opened and/or relaxed sectors. However, the deregulation of investment rules under the PR Draft stands at the intersection of other Government and Presidential Regulations to be implemented under the Omnibus Law. Investors should therefore be cognisant of the changes to related regulatory frameworks prior to making any “positive” decisions.