As the Gulf Times reported this week, Indonesia is set to open more sectors to foreign investors. In this Q&A interview with Asia Law Portal, Denny Rahmansyah, Managing Partner of SSEK Legal Consultants in Jakarta, provides a detailed analysis of current opportunities and challenges for foreign investors in Indonesia.
What is the current overall climate for foreign investors looking for opportunities in Indonesia?
Indonesia has long favored foreign investment as a means to realize national economic development. Continual bureaucratic reform has always been listed as one of the main agenda items for every administration in every era of modern Indonesia. This was made clear by the current president, Joko Widodo, in a speech during the first semester of his administration in which he encouraged foreign investors to invest in Indonesia and pledged to create a more investor-friendly climate in the country.
His promise was translated into action with the release of 16 economic reform packages covering hundreds of regulations from more than 160 ministries and agencies, all aimed at deregulating and simplifying overlapping regulations hindering economic growth in Indonesia. This regulatory reform was meant to harmonize conflicting local and national regulations that often created difficulty for companies operating in different areas in Indonesia, hopefully facilitating new business development and leading to more investment in the regions.
Recently, Indonesia launched the ambitious Online Single Submission (“OSS”) system, which integrates business licensing systems, including licensing for foreign investment. Despite the sometimes difficult transition from the previous systems to the OSS system, the government has been praised for working toward a more transparent and efficient bureaucracy, which may lead to a more investor-friendly climate.
These efforts to improve the Indonesian investment climate have been noted, as shown by improvements in the international perception of Indonesia’s ease of doing business. Indonesia improved by 42 places, to 72nd, between 2014 and 2018 in the World Bank’s Ease of Doing Business Index, the largest and most consistent overall improvement among the five leading countries in the Association of Southeast Asian Nations (ASEAN).
What overall trends do you see in foreign investment into Indonesia?
Based on the latest Foreign Direct Investment Realization report issued by the Indonesian Capital Investment Coordinating Board (Badan Koordinasi Penanaman Modal or “BKPM”), on August 14, 2018, the following sectors are seeing the most foreign investment in Indonesia: (i) real estate, (ii) metal, machinery and electronics industry, (iii) electricity, gas and water supply, (iv) mining, and the (v) chemical and pharmaceutical industry.
We also note that the Indonesian government under President Joko Widodo has made a large push for infrastructure development, from power infrastructure to transportation infrastructure, including construction of the Jakarta Mass Rapid Transit (MRT) system and the 1,167-kilometer Trans-Java toll road. The Indonesian government has also programmed more than US$87 billion for infrastructure projects related to China’s Belt and Road Initiative.
What countries are the prime sources of foreign investment you’re seeing?
According to data from the BKPM, the top five sources of foreign investment in Indonesia are Singapore, Japan, South Korea, China and Hong Kong. In previous years, European Union countries were always among the top five sources of foreign investment, but they were eclipsed by the massive investments made by South Korea and China in 2018. The United States was in the top five sources of foreign investment in Indonesia from 2013 to 2015 but has fallen off some, though it is still in the top 10.
What about Indonesian real estate? Is it undervalued and is their growing interest?
With the infrastructure development push, there is also a growing interest in the Indonesian real estate sector. President Joko Widodo has opened major parts of the real estate sector to full foreign ownership, allowing foreign property developers to operate in Indonesia as wholly foreign-owned companies without the need for a local partner.
The president has also substantially reduced taxes in the real estate market, especially on real estate investment trusts (REITs), in an attempt to attract more investors to the real estate sector.
Mr. Muliaman Hadad, chairman of the Indonesian Financial Services Authority (Otoritas Jasa Keuangan or “OJK”), was quoted by the Global Property Guide (hyperlink: https://www.globalpropertyguide.com/Asia/indonesia/Price-History) as saying that numerous property developers had shown an interest in the Indonesian sector in response to the government’s policy on REITs, and that the Indonesian real estate market had the potential to be bigger than the Singapore market. This policy is also expected to increase transparency in the real estate market.
Many investors view the property market in Indonesia as undervalued and having great growth potential.
What makes Indonesia so attractive for foreign investment? What sectors and opportunities are of most significance for foreign investors looking to Indonesia?
Indonesia has always been attractive to international investors for a number of reasons, which include:
a. Indonesia has the fourth largest population in the world. About half the population is below the age of 30 and the population tends toward consumerist, offering investors a large, promising and productive market.
b. Indonesia is one of the richest countries in Southeast Asia in terms of natural resources, but does not possess sufficient technology and financial means to support such potential. This creates opportunities for investors to take part in the processing of natural resources.
c. There are numerous remote areas across Indonesia that have not been fully developed, particularly in terms of energy and infrastructure.
d. Compared to neighboring countries, wages in Indonesia are relatively low, as are wage expectations in the workforce.
The Indonesian government continues to try and make Indonesia more attractive to foreign investors by regularly reviewing the effectiveness of regulations and amending regulations and policies that are seen as disadvantageous to foreign investors. One example of this is the introduction of the OSS licensing system to unify all the licensing processes from various ministries and governmental bodies. The change to online submissions was aimed at making the licensing process easier and faster than the time-consuming manual method, where investors had to physically go to the relevant governmental bodies to apply for the necessary licenses.
What are the most significant challenges and concessions for foreign investors in Indonesia?
Indonesia is sometimes perceived to be challenging due to its bureaucracy and licensing requirements. Government regulations and policies can change from time to time, creating legal uncertainty that may hinder the operations of foreign investors in Indonesia. Acknowledging these difficulties, the government makes a continual effort to address these problems in order to improve the ease of doing business here.
Despite these efforts, however, foreign investors in Indonesia can still run into the following challenges:
- Transfer of Licenses and Authorizations to the OSS
The unification of licensing requires coordination among the relevant ministries and governmental bodies to fully transfer their authority to the OSS system. Even after months of the OSS system’s operation, this transfer has not been fully completed.
We have experienced instances where ministries are not fully informed of the authority of the OSS to handle matters that were previously under the ministries. We have also noted a lack of coordination between the OSS system and ministries, where the OSS system introduces additional requirements that were not previously required by the ministry in charge of a particular license. In this regard, OSS officials have set a timeline to complete the coordination with the technical ministries and called for governmental bodies to meet the deadline set by President Joko Widodo for the transfer of authority to the OSS by the end of 2018.
- Foreign Ownership Limitations
Indonesia restricts foreign investment in some sectors through a Negative Investment List, the latest version of which was issued in 2016. The Negative Investment List sets out foreign equity limits which restrict foreign ownership in several sectors. The government is always trying to make investment in Indonesia more attractive, and to that end, the 2016 Negative Investment List is now being reviewed and is expected to be revised in the near future. There is talk that the next Negative Investment List will be more relaxed in terms of foreign ownership rules in numerous sectors, such as education and health.
- Lengthy Land Acquisition Process
Although land acquisition demands are particularly high in light of the major infrastructure development push, the land acquisition process in Indonesia is still notoriously complicated and time-consuming. This often results in long delays in projects, which in turn results in cost overruns.
- Corruption and Bribery
Corruption and bribery are major deterrents to business and investment in Indonesia. The government, along with the Corruption Eradication Commission (KPK), has made the eradication of corruption and bribery a priority in recent years. It is believed that the effort to streamline licensing through the OSS system was also an effort to combat potential illegal payments by business actors to governmental officials, by taking the licensing process online. The KPK plays a key role in terms of monitoring governance compliance in Indonesia in terms of combatting corruption and bribery among the government apparatus.
The bureaucracy in Indonesia is known to be complicated, thus effectively resisting efforts toward reform. As an example, licensing in Indonesia tends to be tangled, the result of the performance of the government agencies authorized to issue such licenses. There are also unwritten policies at government agencies that make things more complicated. President Joko Widodo is trying to overcome this obstacle by reducing or eliminating government power in certain sectors.
What legal considerations should foreign investors be most aware of and concerned about in Indonesia?
As we said before, government regulations and policies in Indonesia change from time to time, which could directly affect the position and business plans of companies. In light of this, we advise and help our clients to monitor changes in regulations and policies that are relevant to their businesses. Investors are also encouraged to confirm directly with the relevant ministries or governmental agencies matters related to their business activities, even for matters that have been set out in written regulations. This is because it is possible that ministries or governmental agencies will have a different position on or view of a regulation than what is actually written in the regulation, based on their internal policies, which are not made known to the public.
Are there capital requirements?
There are capital requirements set out for foreign investment companies in Indonesia. Previously, the BKPM, as the body overseeing investment activities in Indonesia, required foreign investment companies to have more than IDR 10 billion in issued and paid-up capitals. With the shift to the OSS system, as announced through the OSS website and confirmed by relevant officials, a minimum of IDR 2.5 billion in issued and paid-up capitals, and more than IDR 10 billion of total investment are required for the establishment of a foreign investment company (PMA). The total investment may consist of equity (issued and paid-up capitals) and loans. This is because a PMA company is considered a large-scale business, and according to Law No. 20 of 2008 regarding Micro, Small and Medium Businesses, a large-scale business must have more than IDR 10 billion in net assets, or net annual revenues of greater than IDR 50 billion.
Tell me about your firm and how you help foreign investors
SSEK was formed in 1992 by experienced lawyers and is one of the largest and most highly regarded independent law firms in Indonesia. We are a full-service corporate law firm and our practice includes foreign investment, corporate and commercial matters, real estate, banking, finance and insurance, capital markets and securities, dispute resolution, mergers and acquisitions, oil and gas, energy, mining and natural resources, infrastructure and project finance, labor law, IT, telecoms and e-commerce, antitrust, and corporate debt restructuring. With our extensive network of contacts in government ministries and agencies, we are able to advise clients on laws and regulations as well as unwritten administrative policies and decisions in many sectors of Indonesian law.
The majority of our clients are foreign investors. We are experienced in assisting foreign investors with company establishment, including representative offices, providing advice on the relevant business activities and any foreign equity restrictions applicable to those activities, obtaining business licenses, and providing advice and assistance with their daily operational activities.
Denny Rahmansyah would like to thank Ms. Farah Nabila, an associate at SSEK Legal Consultants, who helped with the research.