Coordinating Economic Affairs Minister Darmin Nasution speaking during the announcement of the government's 16th economic policy package at the Presidential Palace in Central Jakarta on Friday last week. (Antara Photo/Puspa Perwitasari)

Minister Seeks to Justify Easing of Foreign Ownership Restrictions Amid Business Outcry

NOVEMBER 28, 2018

Jakarta. The government's announcement last week of a plan to relax restrictions on foreign direct investment in several sectors of the Indonesian economy drew fire from the business community over concerns that it will threaten micro, small and medium enterprises and give foreigners too much control over some of the nation's vital industries.

Hariyadi Sukamdani, chairman of the Indonesian Employers Association (Apindo) – an influential business lobby – said the government had done little to inform its members about the plan and that the organization was not asked for any input.

"Overall, it is also not really urgent" to revise the negative investment list for foreigners, said the businessman, who also leads the Sahid Group, a local hospitality chain. He added that tax incentives are more likely to lure foreign investors.

Coordinating Economic Affairs Minister Darmin Nasution announced a plan last week to revise the country's so-called negative investment list as part of the current administration's 16th economic policy package.

Under the plan, the government will permit full foreign ownership in 25 industries to attract more overseas investment and prop up a weakening rupiah.

The policy package also offers an extended tax holiday scheme for companies, while incentivizing exporters to keep their earnings in domestic banks. President Joko "Jokowi" Widodo has yet to sign the regulation.

Indonesia is struggling to narrow its current-account deficit, which has widened recently and contributed to the rupiah's slump. Foreign direct investment ensures a sustainable supply of dollars, which, coupled with incentives to persuade companies to repatriate their export earnings, is expected to narrow the gap.

The country's current-account deficit widened to $8.8 billion, or 3.7 percent of gross domestic product in the third quarter this year – its biggest since the second quarter of 2014 – from $8 billion, or 3.02 percent of GDP, in the second quarter.

Opening the Fortress?

The government currently sets different maximum limits on foreign direct investment in the 25 industries, which include oil and gas construction, power plants with a capacity of more than 10 megawatts, fixed and mobile telecommunication networks and content services, internet service providers, internet telephony services for public purposes and internet interconnection services. Foreigners are not allowed to have 100 percent ownership of companies in these industries to protect local players.

Rosan P. Roeslani, chairman of the Indonesian Chamber of Commerce and Industry (Kadin), said they too were not consulted on the planned revision of the negative investment list, and called for a halt on its implementation.

Besides removing foreign ownership caps on the 25 industries, the government also plans to fully open several sectors, including surveying services, leasing of construction machinery and leasing of other machinery, such as for power plants and textile, metalwork or woodwork processing, which are off limits to foreigners.

There are also sectors currently restricted to small and medium enterprises, such as fabric printing services, and stripping and cleaning of tubers, which will be fully opened. Meanwhile, internet- or postal-based retail trade services will not require partnerships with local entities anymore.

Sectors that will no longer require special recommendations are the cigarette industry, including clove cigarettes, wood processing operations such as wood-pellet, paper, pulp, plywood, veneer and wood-chip factories, and medical equipment, including producers of surgical masks, syringes and high-tech equipment such as CT scanners and MRI machines. This applies to both domestic and foreign investment.

To take advantage of the new rules, foreigners must invest the equivalent of Rp 10 billion ($690,000), which the government feels is reasonable to protect small businesses against overseas rivals.

However, Bahlil Lahadalia, chairman of the Indonesian Young Entrepreneurs Association (Hipmi), refuted the government's argument, saying it should target the bigger players if it is looking for foreign investment.

"Why bother giving room to, let's say Rp 15 billion worth of foreign investment? That's only a made-up excuse," he said.

The Indonesian Internet Service Providers Association (APJII) echoed a similar sentiment. APJII secretary general Henri Kasyfi Soemartono said the association was never asked to be involved in the discussions and that a relaxation of the restrictions would pose a threat to some of its 400 members, most of them small and medium companies.

Likely to Proceed

Minister Darmin appeared in limbo on Friday last week, when he was quoted by several media outlets, including CNN Indonesia, as saying that the government may postpone the implementation of the negative investment list revision until it can better inform the public and the business community.

However, he appeared to have made a U-turn this week, when he gave an assurance that the revision of Presidential Regulation No. 44 on the negative investment list would reach Jokowi by the end of this week.

Darmin told reporters on Saturday that the government had met with some of the major associations last week and started to gather their input. "Because there are many [sectors] on the list, we have to explain it one by one. This is not about winning or losing, it is about sharing. If you have ideas, give it to us and let's discuss it, so we can review it," he said.

"At present, the current-account deficit has not yet improved. Under the current conditions, it is unlikely to get any narrower," the minister said.