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Indonesia – New Negative List.

17 June, 2014

 


Introduction

 

On 23 April 2014, the Indonesian government revised the negative investment list (the “Negative List“), which contains the full list of Indonesian business sectors that are subject to foreign ownership restrictions or closed to foreign investment altogether.

 

This is the first major revision of the Negative List since 2010 and its ostensible purpose is to promote foreign investment in Indonesia, particularly in anticipation of the advent of the ASEAN Economic Community which is expected to be implemented in 2015.

 
As expected, whilst some business sectors have, as a result of the recent revision, become more open to foreign investment, others are now subject to increased foreign ownership limits and still others have become entirely closed to foreign investment. That said, the overall trend is one of liberalisation and although there have been mixed reviews among observers, general feedback has been positive with organisations such as KADIN (the Indonesian Chamber of Commerce and Industry) and APINDO (the Indonesian Employers Association) welcoming the revisions.

 

Effects Of New Negative List

 
The effects of the new Negative List are summarised as follows:

 

1. The new Negative List takes effect from 24 April 2014.

 

2. The new Negative List clarifies that any businesses not specifically set out in the Negative List are entirely open to foreign investment.

3. Existing foreign investors in newly liberalised business sectors will now be able to increase their shareholdings in the relevant investee companies with the approval of BKPM (or the relevant sector regulator, as the case may be).

 

4. On the other hand, foreign investors who are currently invested in Indonesian businesses that have, as a result of the recent revision become: (i) subject to more stringent foreign ownership restrictions; or (ii) closed to foreign investment altogether, will be grandfathered over to the new regime. In other words, whilst such foreign investors are not required to sell down their interests in order to bring them in line with the more stringent restrictions under the new Negative List, they may not following any divestment increase their interests to pre-24 April 2014 levels.

 

5. As the Negative List is subject to revision every three years, the recent changes to the Negative List will apply until at least 2017, subject to any policy changes made in the interim.

 

Key Changes

 

Some of the key changes to the Negative List are summarised below:

 

Oil & Gas And Related Activities

 

Perhaps the most regressive changes to the new Negative List are those that apply to the oil & gas sector, with several business activities (including installation of pipelines, onshore drilling, construction and maintenance of storage facilities, as well as the provision of design, engineering and technical inspection services) now completely closed to foreign investment.

 

Business Activity Maximum Permitted Foreign Investment under Previous Negative List Maximum Permitted Foreign Investment under New Negative List
Construction of oil & gas platforms No previous restriction although certain specific activities were restricted to 95% foreign ownership. 75%

 

Construction of spherical tanks As above 49%
Installation of inland pipeline for oil & gas business No previous restriction Closed to foreign investment
Construction of horizontal and vertical tanks No previous restriction Closed to foreign investment
Construction, maintenance and repair of oil & gas storage No previous restriction Closed to foreign investment 
Onshore oil & gas drilling 95% Closed to foreign investment
Offshore oil & gas drilling 95% 75%
Oil & gas surveying No previous restriction 49%
Design and engineering services No previous restriction Closed to foreign investment
Technical inspection services 55% Closed to foreign investment

 

Technology, Media And Telecommunications

 

Possibly the most significant development in the TMT space is the long-awaited opening of the advertising industry to foreign investment.

 

The advertising sector was previously completely closed to foreign investment, an unhappy state of affairs which has resulted in unusually low levels of M&A activity in an industry traditionally characterised by consolidation. The exclusion of foreign investors had also given rise to the prolific use of nominee/trust arrangements and, in recent years, the use of awkward intermediate holding structures in dubious (and likely unlawful) attempts to circumvent the previous foreign ownership restrictions.

 

The liberalisation of the advertising industry has been lauded by stakeholders and observers alike and is the likely result of tireless lobbying by the global advertising networks coupled with a gradual (but significant) recognition by the Indonesian government of the advertising industry’s role as a corollary of commerce rather than a force for promoting socio-political ideology.

 

Additionally, the new Negative List also clarifies the permissible levels of foreign investment in radio and television broadcasting as well as the provision of various media and communications-related services.

 

Business Activity

 

Maximum Permitted Foreign Investment under Previous Negative List Maximum Permitted Foreign Investment under New Negative List
Advertising Previously closed to foreign investment 51%
Broadcasting Previously closed to foreign investment 20%
Provision of content services (such as ring tones and paid text messages) and operation of call centres 100% although foreign investors are required to enter into commercial partnerships with micro, small and/or middle scale business. 49%
Data communication system services 95% 49%
Internet service provider 49% 49%
Fixed telecommunication network provider services 65% 65%

 

Energy

 
The changes to the Negative List also include liberalisation of the power generation sector, so that large powerplants and electricity distribution businesses structured as public-private partnerships may now be 100% foreign-owned during the concession period.

 

Business Activity

 

Maximum Permitted Foreign Investment under Previous Negative List Maximum Permitted Foreign Investment under New Negative List
Electric powerplants generating in excess of 10MW 95%

 

100% through PPP’s during concession period. Without PPP maximum 95%
Electric powerplants generating 1 – 10MW

 

100% although foreign investors are required to enter into commercial partnerships with micro, small and/or middle scale business. 49%
Electricity distribution 95% 100% through PPP’s during concession period. Without PPP maximum 95%.
Electrical power utilization installation services 95% Closed to foreign investment
Electrical power provision installation services No previous restriction 95%

 

Healthcare And Pharmaceutical

 

The marginal increase in permitted foreign participation for pharmaceutical companies from 75% to 85% was greeted with lukewarm response by industry participants and observers, with trade bodies claiming the revisions would do little to attract further foreign investment as the need for Indonesian partners would entail the assumption of various commercial risks by foreign pharmaceutical groups such as misappropriation of intellectual property, as well as illicit diversion and trade.

 
Slightly more encouraging were the changes in foreign ownership limits for the healthcare services sector (in particular for ASEAN investors), and the new Negative List now allows majority foreign ownership in various sub-sectors.

 

Business Activity

 

Maximum Permitted Foreign Investment under Previous Negative List Maximum Permitted Foreign Investment under New Negative List
Manufacture of drugs, raw pharmaceutical materials and finished drugs 75% 85%
Provision of sub-specialised hospital services and operation of specialised medical and dental clinics 67%

 

67% throughout Indonesia; 70% in certain regions in East Indonesia for ASEAN investors only
Specialist nursing treatment services

 

49% throughout Indonesia; 51% in certain regions in East Indonesia for ASEAN investors only 49% throughout Indonesia; 70% and 51% in certain regions in East Indonesia for ASEAN investors only

 

The recent amendments to the Negative List are the latest attempt by the Indonesian government to balance competing interests and priorities. Whilst no major changes to the Negative List are expected until 2017, the Indonesian government will no doubt continue to monitor market conditions and foreign investment levels and make such adjustments as may be necessary.

 

As with any change in regulation, the devil is in the detail, and all investors are strongly advised to seek professional legal advice from legal advisers and, where necessary, seek further clarification from the regulators.

 

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For further information, please contact:

 

Matthew Gorman, Partner, Stephenson Harwood
matthew.gorman@shlegal.com

 
Tom Platts, Partner, Stephenson Harwood
tom.platts@shlegal.com

 
International Trade Law Firms in Indonesia

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