Foreign Direct Investment: Changes in Indonesia

Written by Nick Davies.

Have there been any recent changes to the Foreign Investment rules in Indonesia?

No. The rules governing FDI in Indonesia remain unchanged from 2016, when the Government's Negative List was last updated.  The Negative List details numerous sectors that are subject to caps on foreign ownership or are closed completely to foreign investors. Please note that:

1. additional FDI caps and restrictions are imposed under industry-specific laws and regulations (for example, laws and regulations governing the financial institutions, mining and aviation sectors), so the Negative List should not be considered to be a conclusive list; and
2. the application of the Negative List to a potential investment or M&A transaction is fact specific and often not straightforward or intuitive.

The Indonesian government has not introduced any additional FDI restrictions in response to COVID-19 but some temporary relief measures for existing foreign investors were announced and the Government has expressed positive sentiments towards attracting additional FDI to help counteract an economic downturn. Key developments in this regard include:

1. direct support measures, generally consisting of tax relief in particularly hard-hit sectors (such as hospitality, transportation, construction, mining, and wholesale);
2. Indonesia's Investment Coordinating Board (BKPM) opportunistically targeting companies from the US, Japan and South Korea that are moving production facilities from China and encouraging them to relocate to Indonesia;
3. some sectoral regulators welcoming foreign investors in the COVID-19 economic environment – e.g. to shore up the balance sheet of distressed financial institutions, or as key investors in future infrastructure projects; and
4. the establishment of a Task Force for the Recovery and Transformation of National Economy to supervise the implementation of strategic economic policies in response to COVID-19, reportedly to include addressing problems faced by business actors.

If yes, please provide a brief summary of the changes

Not applicable – there have been no recent changes to foreign investment rules in Indonesia per se.  This alert focuses on current FDI trends and possible changes to FDI rules.

What was the rationale for the changes?

General investment policy in Indonesia is undergoing a transformation as, although there is a recognition that the country is highly dependent on FDI (accounting for about one third of its GDP), the current regulatory regime is recognised as being cumbersome and suboptimal in promoting investment. Consequently, FDI rates have been falling over the past few years.

In November 2019, the BKPM announced a proposal to change the Negative List into a list that promotes priority industries that are open to both foreign and domestic investment. Sectors that have been proposed by the BKPM to be included in the priority list, include the coal gasification, automotive and electronics sectors.

Are these changes temporary and if yes, when are they likely to be reviewed again? If not, are they part of a bigger reform (ie have there been any other recent developments, and are you expecting any further changes)?

It is unclear whether or when these changes will be implemented, as the current Negative List system has been in place for a number of years.  It is possible that the economic fallout from COVID-19 may be a catalyst for these changes to be implemented sooner than might otherwise have been the case.

Are there any particular sectors that are affected the most?

Not applicable.

What is the outlook for foreign investment in Indonesia?

Indonesia's FDI restrictions apply to all foreign investors, and there are not currently any specific countries whose investors are subject to increased scrutiny or adverse treatment.

Countries that have an investment treaty in place with Indonesia benefit from certain enhanced rights set out in the treaty, whilst investors from ASEAN countries also benefit from slightly higher foreign ownership levels in some industry sectors under the Negative List.

1. For over 5 years, Singapore has been the largest foreign investor into Indonesia, largely as a conduit for investment originating elsewhere. In 2019, its total investment amounted to USD$6.5bn.
2. In 2019, China invested USD$4.7bn into Indonesia, overtaking Japan as the second largest investor into Indonesia. A significant portion of this Chinese investment relates to China's One Belt, One Road initiative. For instance, a key project is the Jakarta-Bandung high-speed railway, being built by a Chinese consortium and 75% funded by the China Development Bank.
3. Australia also remains a significant investment and trading partner, especially in the natural resources sector.  A new Indonesia-Australia Comprehensive Economic Partnership Agreement is due to enter into force on 5 July 2020, which builds on the existing ASEAN-Australia-New Zealand Free Trade Agreement and deepens Australia's economic and security cooperation with Indonesia.

What it is your advice to foreign investors in Indonesia?

Indonesia is an attractive destination for investment as it has a large and growing middle class and remains highly dependent on FDI to assist with its economic growth.

In spite of FDI caps across numerous sectors, the infrastructure, technology and financial services sectors present significant opportunities for foreign investors. 

The impact of COVID-19, if any, appears to have reinforced the Government's belief in the need for FDI to plug funding gaps in this fast-growing economy.

However, doing business in Indonesia remains challenging. Because of foreign shareholding limitations in some sectors, investors must usually take care in drawing up long-term joint venture arrangements with local partners that do not contravene FDI restrictions and associated anti-avoidance rules. Many local partners also have significant local influence, which can be helpful since there are a myriad of laws and regulations and government agencies to navigate but can also pose significant compliance and corporate governance challenges.

Cultural sensitivities are also important to take into consideration.  For instance, legal documents must be drawn up in Bahasa Indonesia to be valid (though they can be dual-language format).  Recently, there have also been protests in some areas of Indonesia over rising numbers of Chinese migrant workers, who are perceived as doing jobs that could be performed by Indonesian nationals.

Does Indonesia's FDI organisation coordinate with other government agencies, including the antitrust regulator?

The BKPM is the main regulatory body for foreign investment. Most foreign investment licenses and facilities are centralized at BKPM through the Online Single Submission business licensing. Some operational licenses required for specific business activities or sectors are processed by line ministries or regional governments. This can give rise to inconsistencies in treatment between regulators relating to the same FDI project.  That said, there is a strong Government initiative to cut through red tape in relation to FDI, with new initiatives recently launched to encourage production facilities to relocate to Indonesia from overseas and promises that the regulatory process will be streamlined. The Indonesian President in particular, is highly supportive of attracting supply chain investment being redirected from China.

This publication is intended to provide a high level overview of FDI trends and regulation in Indonesia. It is provided for general informational purposes only and should not be construed as legal advice. King & Wood Mallesons does not practice Indonesian law, and works closely with local lawyers to support our clients' needs in Indonesia. We are grateful to SSEK Indonesian Legal Consultants for their co-operation on this publication.