JAKARTA - In an unexpected lurch toward
more market protectionism, Indonesia last week
greatly expanded its "negative investment list" of
local industries to which foreign investment is
partially or wholly restricted in Southeast Asia's
largest economy. The new list, which does not
require parliamentary approval and is mandated
under the recently enacted 2007 Investment Law,
will affect at least 338 business sectors, up
substantially from 83 previously. The
foreign-investment restrictions are by far the most
maintained by any regional
government and ironically come at a time when
foreign direct investment (FDI) to Indonesia
trails regional rivals - not to mention China.
According to Trade Minister Mari Pangestu,
the ruling, which represents the first major
revision in more than seven years, is designed to
protect "national interests". As with the previous
list, the provisions appear to apply only to FDI,
and not to purchases of shares of companies listed
on the local stock exchange. The new list will be
in force for three years unless revised earlier by
a government team tasked with regularly assessing
the list. Business fields not covered by the
decrees are open to investment unless otherwise
closed by law.
Areas in which foreign
investment is subject to restriction include
armaments and so-called "high-polluting"
industries. Foreign investment will also be capped
at 49% and 20% respectively for transportation and
broadcasting ventures. New foreign investments in
the energy and plantation sectors, meanwhile, will
be capped at 95%, from 100% previously.
Foreign ownership in the lucrative mobile
and fixed-line telecommunications will be capped
at 65% and 49% respectively, down substantially
from the previous 95% cap for both sectors. The
new ruling takes immediate effect, although
existing foreign investments in the telecom sector
will apparently be unaffected. That's a concession
to incumbent Singaporean and Malaysian investors,
who already own large chunks of Indonesia's major
telecom operators.
Singapore's government
investment arm Temasek owns 35% and nearly 42%
respectively of local communication companies
Telkomsel and Indosat, Indonesia's largest and
second-largest mobile-telecom operators.
Meanwhile, Telekom Malaysia holds almost 70% of
Indonesia's third-largest mobile-telecom operator,
PT Excelcomindo Pratama, and another Malaysian
company, Maxis, maintains a 95% stake in the small
operator Natrindo.
All of these foreign
stakes transcend the new protectionist limits, but
officials have said there will be no retroactive
application of the ruling. According to market
analysts, Indonesia's mobile-telecom sector is
expected to soar to 100 million subscribers by
2010, from 70 million currently. Those bullish
predictions are based on Indonesia's comparatively
low mobile-phone penetration rate of 25%, which
lags neighboring Malaysia's 80% and Thailand's
60%. Currently, state-controlled Telkomsel and
Indosat together control more than four-fifths of
Indonesia's mobile-telecommunications traffic and
subscriber bases.
Also under the new list,
foreign investment will be capped at 80% in the
insurance sector, 75% for pharmaceuticals, 65% in
health services and 55% in the construction
sector. The banking, oil-and-gas,
power-generation, toll-road, water and agriculture
sectors all still allow for 99% foreign ownership.
And certain sectors, including travel agencies and
hospital and health-support services, allow for
more foreign ownership than previously.
Hard economic realities Despite
relative political stability and recent efforts to
improve the overall investment climate, President
Susilo Bambang Yudhoyono's government has failed
to attract major new foreign investments during
his three-year tenure. His administration had
earlier set a target of US$426 billion in both
foreign and domestic investment for the five-year
period spanning 2004-09, including $123 billion
for new infrastructure - the bulk of which was
expected to come from the private sector.
Yudhoyono has walked a policy tightrope in
trying to balance the interests of foreign
investors and nationalistic business groups averse
to foreigners taking controlling stakes in
strategic industries. Some analysts believe that
the new negative investment list reflects
Yudhoyono's need to shore up political support
from powerful business groups in the run-up to
what are expected to be hotly contested elections
in 2009. At the same time, the new nationalistic
measures against select foreign investments
threaten to undermine his government's broad
economic-reform strategy.
According to
Mohammad Lufti, head of the Investment
Coordinating Board (BKPM), such levels of
investment are necessary to achieve the
government's 6.6% annual economic growth for the
next three years. High economic growth is in turn
needed to reduce unemployment from its stubbornly
high level of 9.7% to a more manageable 5.5% and
reduce the number of people living in poverty from
36 million to 17 million.
To be sure,
there are recent statistical reasons for optimism.
Economic growth was higher than expected and on
government target at 6.6% in the first quarter of
this year. Inflation fell to a manageable 1.4% in
the first five months, benchmark interest rates
are down to 8.25%, the lowest level in two years,
and banks have recently increased their lending
targets.
But private investment remains
perilously low. Realized FDI in the first half of
this year was up 16.8% year on year, from Rp31.59
trillion ($3.5 billion) to Rp36.9 trillion.
Realized domestic investment for the same period
also rose to Rp18.62 trillion from Rp10.47
trillion.
However, both those increases
are up from substantially lower bases. Throughout
2006, actual foreign direct investment dropped to
$5.98 billion from $8.91 billion in 2005.
Confusing policy signals have caused a substantial
discrepancy in FDI approvals and actual realized
investments. Last year the government approved
$15.6 billion worth of investments, but actually
realized only 38% of those foreign commitments.
Those FDI figures could fall further on
the newly enacted foreign-investment restrictions.
One early response to the measures came from the
Indonesian Chamber of Commerce and Industry
(Kadin), whose chairman, Muhammad S Hidayat, was
quoted in the local media saying some of the
changes raised more questions than answers and
that the chamber would call a meeting this week
with representatives of foreign chambers of
commerce to seek foreign views on the new list.
Hidayat said Kadin had played an active
role in the drafting of the new tax-law package,
but the preliminary details it was provided on the
proposed negative investment list were very
different from the more restrictive list that was
recently announced. Under the new investment law,
tax incentives - including reductions, breaks, and
deferments - will be granted for investments in
labor-intensive industries and in projects related
to infrastructure, transfer of technology,
so-called "pioneering" and "environmentally
friendly" projects.
Both Kadin and
International Chamber of Commerce chairman Peter
Fanning played major roles in the 2007 Investment
Law draft. Enacted in April, the law mandates
equal treatment for domestic and foreign companies
in some areas and the right for foreign companies
to seek redress through binding arbitration using
international laws in cases of disputes with the
government.
Foreign companies are also
protected against nationalization by the
government, except in cases of corporate crime. In
addition, a new taxation and procedure law enacted
last month is widely seen as
foreign-investor-friendly, with greater legal
rights given to taxpayers and more oversight and
tougher penalties stipulated against tax officials
found guilty of misconduct - a perennial problem
for foreign investors in Indonesia.
Still,
the investment law was widely viewed as only one
part of a package of reforms needed to improve the
overall investment climate, including streamlined
investment-approval procedures, other tax reforms,
and amendments to the controversial 2003 labor
law.
The World Trade Organization in its
latest trade-policy review warned that further
delays in implementing these key areas could
further undermine investor confidence and crimp
economic growth. It's still unclear whether the
new list is in violation of the world body's trade
and investment protection regulations. What is
clear is that the new restrictions on FDI could
make the WTO's earlier warning a self-fulfilling
prophesy.
Bill Guerin, a Jakarta
correspondent for Asia Times Online since 2000,
has been in Indonesia for more than 20 years,
mostly in journalism and editorial positions. He
specializes in Indonesian political, business and
economic analysis, and hosts a weekly television
political talk show, Face to Face,
broadcast on two Indonesia-based satellite
channels. He can be reached at
softsell@prima.net.id.
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