Indonesia’s New Investment Stance: a Confusing Step Forward?

JAKARTA ~ Indonesia’s new list of foreign investment limits by sector has caused head-scratching among investors. But analysts and the government say that despite confusion, it is a step towards untangling the infamous bureaucracy of Southeast Asia’s largest economy.

Indonesia is seeking to court foreign investment, with leaders insisting they are addressing concerns about entrenched corruption, red tape and legal uncertainty so the sprawling and unclear list immediately raised eyebrows.

The 61-page regulation, purportedly aimed at protecting the national interest and bolstering the development of domestic small and medium-sized enterprises, was unveiled early this month and replaces a 2001 list.

It compiles a dizzying array of sectors and sub-sectors and their level of protection: for instance, foreign ownership of a karaoke bar is set at a maximum of 50 percent, landscape architectural services at 55 percent and hospital services at 65 percent.

But Anton Gunawan, a Citibank investment analyst, praised the list for its relative clarity.

“In general, this list is much clearer than previous ones, which were not so transparent and contained a lot more grey areas. The current list is much more detailed,” he said.

What remained puzzling, however, were the criteria that were used to determine the size of permissible foreign share ownership, he said.

“If we want to talk majority, minority, then it is a simple 49-51-percent thing … But what people want to know is, for example, what does it mean to have a 95-percent ceiling compared to a 65-percent ceiling?”

Chamber of Commerce and Industry (Kadin) chairman Muhammad Hidayat has been meeting with members who are similarly baffled.

“What is the philosophy behind the choice of divisions for foreign ownership?” he asked.

Hidayat declined to comment further ahead of a meeting with Coordinating Economy Minister Budiono this week but said Kadin would seek a series of explanations.

“We would like to convince the government not to reject the DNI (negative investment regulation) but to make the DNI more complete and more simple in business terms … There are several grey areas,” he said.

Among the controversial changes are tighter limits on foreign ownership of cellular operators, from 95 percent to 65 percent; of insurance companies, from 99 to 80 percent; and pharmaceutical companies, which have an upper limit now of 75 percent, down from 100.

Other sectors, however, have been opened to foreign competition, including health and education.

Muhammad Ikhsan, a special adviser to Budiono, said this was the first time an array of sector regulations had been put into one umbrella list.

While some sectors on paper now appear more closed than previously, he said in practice they were never actually open – if a foreign company approached a ministry seeking permission to invest in a sector, they were rebuffed.

“This is the first time we have synchronized all regulations. In the past, there were a lot of conflicting regulations,” he said.

“We are still open to discussion about what sectors we make more open.”

Ikhsan said about 111 sub-sectors were now more open, but 32 could be considered more restrictive, with others basically keeping their status quo.

“What we want to do is to make it transparent, fully clear and also give certainty for old and new investors,” he said, noting that the changed levels of investment were not retroactive.

Ikhsan said general guidelines to accompany the regulation would be drafted based on Kadin’s questions.

“This is not final. It’s still open for evaluation,” he said.

“They deserve to complain because we need to explain it more – even among ourselves we need explanations about how to interpret the regulation,” he conceded.

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