Winners, losers as Indonesia opens doors to foreign investors

Business sectors that are open to 100 per cent foreign investment will see the most benefit. Offshore investors may want to consider taking advantage of the new negative list quickly to gain a foothold ahead of impending new regulation. E-commerce, technology and infrastructure sectors will be ripe for foreign investment and development.

The principles adopted in the new negative list, outlined in the government’s 10th economic policy package, focus on rolling out the welcome mat to foreign investors while at the same time affording protections for small and medium-size enterprises (SMEs) in various sectors. 

The lifting of restrictions on foreign investment was immediately hit by criticism and protest from locals engaged in the 35 “opened” sectors. 

They accuse Joko “Jokowi” Widodo’s administration of forging irrelevant policies, misunderstanding the economy, neglecting local businesses and “selling out” the country to foreigners. However, the protections that are simultaneously being put in place for local SMEs may help dampen opposition to the move. 

Business sectors that are open for 100 per cent foreign investment will see the most benefit from the new negative list. These include the film and cinema industry, toll roads, e-commerce (for stakes of more than 100 billion rupiah, or Bt270 million) and cold storage. 

The opening of these sectors is expected to increase competition and thereby offer more value to customers. The film and cinema industry is one example. Currently there are only three major players operating cinemas in Indonesia – XXI, Lippo/Cinemaxx and CGV Blitz. Since each player already enjoys a sizeable income, they are less incentivised to innovate and expand into more cities. As a result, 87 per cent of all cinema screens are in Java and an astonishing 35 per cent are within Jakarta alone. 

With more competitors, existing companies will be forced to open branches in more cities to maintain their profit margins, hence more people will be able to enjoy the cinema experience. More foreign investors will trigger a more competitive labour market as well. At the end of the day, consumers will reap the benefits.

Another example is the e-commerce business. Jokowi sees the technology industry as a potential economic driver, insisting that Indonesia can become Southeast Asia’s largest digital economy by 2020. To realise that ambition he took a fact-finding mission to Silicon Valley last month and has stated he wants to produce 1,000 technology entrepreneurs by 2020. The lifting of foreign ownership restrictions in this sector is praised by many in the market, who say e-commerce should always have been exempt from investment controls to boost the injection of “smart money” from people with experience of the more developed digital landscape overseas. 

Some sectors will be subject to more protection for the benefit of locally owned micro, small, medium and cooperative businesses. Nineteen lines of business related to construction services utilising low-medium technology with a certain maximum project value are to be reserved for local SMEs. 

Also, project value thresholds in 39 lines of the construction business that are reserved for local SMEs will be increased significantly, from 1 billion to 50 billion rupiah. This means that foreign construction companies can only qualify for projects with a value of more than 50 billion rupiah. 

A requirement that foreign investors partner with a local SME is to be imposed on three new lines of business – plantation seeding (for an area of more than 25 hectares), the sugar industry and retail trading through mail order or the Internet. 

As Indonesia develops, toll-road infrastructure is increasingly required to ensure economy productivity, especially in underdeveloped areas beyond the main islands. 

Accordingly, the government plans to launch the construction of 1,000km of toll roads over the next five years, with an average construction rate of 200km per year until 2019. The National Development Planning Board (Bappenas) estimates that the construction of these new roads will require an investment of 128.7 trillion rupiah. 

When one considers that the number of vehicles on Indonesian roads is growing by 17 per cent every year, while road length grows by one per cent annually, it’s no surprise that the toll-road business is attracting attention after being removed from the negative list. 

Offshore investors may also want to consider taking advantage of the new list quickly in order to gain a foothold in industries that are not yet heavily regulated. Take the e-commerce sector, which has long been a question mark for foreign investors: Early birds had previously managed to obtain approval from the Investment Coordinating Board to invest in this sector, but that privilege has recently been squeezed, with the Investment Board taking a view that e-commence space is closed for foreign investment. 

Rumour has it that the opening of e-commerce to foreigners investing more than 100 billion rupiah will be followed by the launch of an e-commerce industry road map by the government. Investors who arrive early at the party could benefit from an absence of the detailed regulation contained in the road map. 

Another example is the film and cinema industry. Indonesia’s cinema business is dominated by two or three key players. The government has signalled its intention to stimulate more investment in this sector by allowing foreigners to invest in developing alternative cinemas that cater for a wider audience. As a result, the government will put in place regulations relating to this business – including the minimum distance between a foreign-owned cinema and a local one – in a bid to protect local investors. 

Hence, timing is key when entering the market, particularly as local players are lobbying the government to develop and enforce protective regulations. 

 

Harun Reksodiputro is a partner of  Allen & Overy, in association with Indonesian law firm Ginting & Reksodiputro. He specialises in business law.