New Negative List Fails to Excite

Overview

The latest edition of the Negative Investment List (“NIL”) was released to the public on 2 May 2014 (although the presidential regulation incorporating the NIL was issued and entered into effect on 24 April 2014i). In line with the treaties on the ASEAN Economic Community, the revised NIL allows higher caps for foreign direct investment (“FDI”) from ASEAN-based investors in certain sectors, this time including a number of business lines in the healthcare sector.

As with previous incarnations of the NIL, the latest version stipulates that certain sectors are fully closed to FDI, while others are partly or conditionally open based on a system of permitted ownership limits, reserved sectors and licensing requirements.  Significantly, the NIL expressly provides that any sector not stated to be closed or partly closed will in fact be 100% open to FDI (Article 3). While this needs to be taken with a pinch of salt (as explained below), it is nevertheless an important step forward as this question was the subject of much debate and conjecture in the past.

The NIL expressly repeals the previous version of the NIL, as incorporated in Presidential Regulation No. 36 of 2010, but its ancillary regulations remain in effect in so far as they do not conflict with the revised NIL, which entered into effect on the date of its issuance, namely, 24 April 2014.

Negative List Caveats

i. Lack of Definition

The NIL sets out a long list of business sectors that are either completely closed, completely open or conditionally open to foreign investment. This list of business sectors is based on the comprehensive classification of sectors set out in the 2009 Indonesian Business Sector Classification (“KBLI”), drawn up by the Central Statistics Bureau. However, the classifications are very general in nature, with no definitions being given. This leaves the BKPM with a significant discretion in determining what exactly is covered by each business sector. Thus, even where a particular sector is not specifically mentioned in the NIL (which, having regard to Article 3, would lead one to believe that it is 100% open to foreign investment, as explained in the Overview above), the BKPM may still decide that that sector in question comes within the ambit of another sector. For example, Engineering Procurement (EPC) Services were regulated in the previous NILii but are not mentioned in the new one, and should therefore, at first sight, be 100% open to FDI. However this is not necessarily the case as there is nothing to stop the BKPM from deciding that they fall under, say, construction services (67% FDI cap) or construction consultancy services (55% FDI cap). Thus, potential investors will need to test the waters first by consulting with the BKPM before taking the plunge.

ii. Portfolio Investments

The revised NIL once again specifically confirms (Article 5) the exemption from foreign ownership restrictions in the case of portfolio investments (i.e., indirect investments made through share purchases). In doing so, it is merely reiterating the same exemption in the previous incarnation of the NIL and in the Elucidation on Article 2 of the Investment Act (No. 25 of 2007). However, it should be borne in mind that future changes in the political or economic climate could result in corresponding policy changes on the portfolio investment issue, as has happened in the past.

General Provisions

Article 6 of the revised NIL echoes Article 5 of the previous NIL, but is worth repeating here given its importance. It addresses changes in foreign ownership resulting from a merger, takeover or consolidation involving foreign direct investment companies (“PMA”) operating in the same sector, and provides as follows:

1. Maximum foreign ownership of the surviving PMA after its merger with another PMA must not exceed the limit stated in its FDI license.
2. Maximum foreign ownership of a PMA that acquires another PMA must not exceed the limit stated in its FDI license.
3. Maximum foreign ownership of a new company created as the result of a consolidation must be in accordance with the regulations prevailing at the time of the new company’s establishment.

Similarly, Article 7 repeats the provisions of Article 6 of the previous NIL. Once again, it is an important provision and is worth reiterating here. It provides that if a PMA wishes to expand in the same sector as it currently operates and conducts a rights issue to fund such expansion, and local investors subsequently fail to exercise their rights, then the foreign investor will have a pre-emptive right in accordance with normal company law rules.

Should the increase in capital resulting from the rights issue result in the FDI component of the venture exceeding the maximum permitted under the approval issued by the BPKM, then the excess must be divested within a period of 2 years. Such divestment may be carried out in the following ways:

1. Sale to a local investor
2. Public offering by the PMA
3. The PMA repurchases the excess shares from the foreign investor and treats them as treasury stock in accordance with Article 37 of the Companies Act.

Sector by Sector

• ASEAN Provisions – The NIL relaxes the FDI caps on a number of sectors for ASEAN investors. However, these are primarily confined to the tourism, cultural/media and healthcare arenas. For example, motion picture advertising (including the production of such things as posters, stills, banners, etc) was previously closed to FDI, but is now 51% open if the investor is a natural or legal person from another ASEAN country. While there are rules in place for determining what exactly is an ASEAN investor, the question inevitably arises as to precisely how far the BKPM will, or even has to capacity to, enquire into the bona fides of ASEAN ownership.
• Power Sector Public Private Partnerships (“PPP”) – as with the previous NIL, the latest version takes cognizance of Indonesia’s chronic infrastructure deficit by allowing up to 95% foreign ownership in certain key infrastructure sectors, such as power generation (more than 10MW), transmission and distribution. In a further positive move, the ownership restrictions have now been abolished for PPP schemes. Of course, if the investor wishes to maintain an interest after the end of the PPP period, it will be subject to the normal ownership caps.
• Port Infrastructure PPPs – In an effort to improve the country’s port infrastructure (wharfs, port buildings, container terminals, bulk terminals, dry bulk terminals and Ro-Ro terminals) – the foreign ownership limit has been raised to 95% for PPP projects, compared with 49% for non-PPP projects.

Given the abysmal state of the country’s highway infrastructure and the snail’s pace of development over the last decade, one may well question why the PPP relaxation has not been applied to this sector also. Or indeed the sanitation sector, were the situation is even worse.

One Step Forward, One Back

While a number of sectors have been liberalized, the revised NIL also contains many regressive moves, including:

• Distribution, warehousing – previously regulated for a few specific business lines, but generally open to 100% foreign ownership; now subject to 33% FDI limit.
• Cold storage – previously unregulated, now subject to 33% FDI limit in Sumatra, Java and Bali, and 67% in other provinces.
• Online retailing – previously unregulated, now 100% closed.
• Operation of a telecommunications network integrated with a telecommunications service – previously not regulated, now subject to 65% FDI cap.
• Horticulture – previously unregulated, now subject to 30% cap.
• Alternative trading, including alternative trading system providers and members – previously unregulated, now 100% closed.
• Electrical installations and testing and analysis thereof – previously 95% FDI cap, now 100% closed.
• Certain oil and gas construction and support services – previously unregulated, now 100% closed.
• Futures brokerages – previously unregulated, now subject to 95% cap.

(For more detailed information on the key changes under the 2014 NIL, see matrix at the end of this Client Alert)

Conclusion
The reaction of business leaders to the revised NIL, as reported in the media the following morning, pretty much sums up the situation – Indonesian business leaders reacted favorably, while those from the multinational sector reacted negatively. In other words, the revised NIL continues to provide the protection demanded by Indonesian firms in their home market against the perceived threats to their interests posed by FDI. As would be expected, the revised NIL has come as a disappointment to many foreign investors and potential investors as it had been widely expected that it would do more to boost FDI flows and so shield the economy against the current economic headwinds. That these hopes were in vain would seem to indicate that once again the pressure from domestic business outweighed macroeconomic interests.

Key Changes in 2014 Revised NIL

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AHP Client Alert is a publication of Assegaf Hamzah & Partners. It brings an overview of selected Indonesian laws and regulations to the attention of clients but is not intended to be viewed or relied upon as legal advice. Clients should seek advice of qualified Indonesian legal practitioners with respect to the precise effect of the laws and regulations referred to in AHP Client Alert. Whilst care has been taken in the preparation of  AHP  Client Alert, no warranty is given as to the accuracy of the information it contains and no liability is accepted for any statement, opinion, error or omission.

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