Indonesia Govt raises foreign ownership limit

INDONESIA - After years of debate, the government has finally completed the revision of the negative investments list (DNI) and raised the level of foreign ownership in a number of business sectors including transportation terminals, seaports and power plants.

Under the new DNI, which is expected to be signed soon by President Susilo Bambang Yudhoyono, the maximum limit on foreign ownership in land transportation facilities such as bus terminals and train stations will be set at 49 per cent, up from the previous zero, Investment Coordinating Board (BKPM) chairman Mahendra Siregar told reporters on Tuesday.

With the new regulation, foreigners can now own up to 100 per cent of power plants built under public-private partnerships (PPPs), on the condition that the power plants have the capacity of at least 10 megawatts (MW). For power plants with capacities up to 10 MW, foreign ownership is limited to 49 per cent.

"For these PPP projects, we should have greater openness for foreigners because we really have a pressing need to develop our infrastructure," Mahendra said.

The new DNI would also allow foreign investors to own up to 95 per cent of shares in the management of toll roads and water utilities - relatively unchanged, but it was necessary to include the rule to provide legal certainty for foreign investors, he said.

However, the foreign ownership cap in airports, which had initially been expected to be relaxed to 100 per cent, had to be set at 49 per cent due to the conflicting Transportation Law that stipulates local investors must still be the majority shareholders in such businesses, according to the BKPM chief.

Meanwhile, the foreign ownership cap in the pharmaceutical industry will be raised to 85 per cent from the current 75 per cent; in the venture-capital financial sector it will be raised to 85 per cent from 80 per cent; while in the advertising sector it will be raised to 49 per cent from zero, specifically for ASEAN investors.

The DNI liberalization, however, was also complemented by tighter restrictions on foreign ownership in sectors such as farming and logistics, as the government aims to safeguard local firms from the influx of foreign competition.

In the farming sector, maximum foreign ownership will be capped at 30 per cent from the existing 95 per cent, while in the distribution and storage industry it will be set at 33 per cent.

"The guidance of the President in the Cabinet meeting held on Nov. 14, 2013, in which we all concurred, was that [the DNI revision] must prioritize national interests to boost the competitiveness of local industries," Coordinating Economic Minister Hatta Rajasa said.

Revision of the DNI was necessary to lure more foreign direct investment (FDI), the growth of which has decelerated to a three-year low, economists have said. More FDI will also be needed to strengthen the country's capital account, which is likely to face pressure due to limited portfolio inflows amid the prevailing global uncertainty in 2014.

However, the plan to revise the DNI, which had been on the table since 2010, was met with opposition due to growing nationalistic sentiments ahead of next year's elections, with critics calling on the government to safeguard Indonesia's strategic sectors from the influx of foreign competitors.

Indonesian Employers Association (Apindo) chairman Sofjan Wanandi said that local businesses were "quite satisfied" with the new DNI, which he argued was a win-win solution for both foreign and local investors.

"I believe this will improve our investment climate ahead of the upcoming political year," he said. "The DNI will provide certainty for them [foreign investors], so that they will not be hesitant about investing here."

The new negative list of investments (DNI)

1. Sectors that are more open to foreign investment

• Land transportation facilities (new foreign ownership cap 49 per cent from zero) • Regular vehicle inspection (49 per cent from zero) • Pharmaceutical (85 per cent from 75 per cent) • Venture capital financing (85 per cent from 80 per cent)

2. Sectors that are more restricted to foreign investment

• Distribution (33 per cent, from 100 per cent) • Storage (33 per cent, from 100 per cent) • Cold storage (Sumatra, Java, Bali maximum 33 per cent, for Kalimantan, Sulawesi, East Nusa Tenggara, Maluku and Papua maximum 67 per cent, from 100 per cent)

3. New regulation for telecommunication sector

• Fixed telecommunications (65 per cent, previously unregulated) • Multimedia-integrated telecommunication network (65 per cent, previously unregulated) • Multimedia service provider (49 per cent, previously unregulated)

4. Public-private partnerships (PPP) project

• Airports (49 per cent under concession period) • Seaports (95 per cent) • Land transportation terminals (49 per cent) • Water utilities (95 per cent) • Toll road facilities (95 per cent) • Power plants (49 per cent for 1-10 megawatt capacity, 100 per cent for capacity of 10 megawatts above) • Electricity transmission (100 per cent) • Electricity distribution (100 per cent)

5. Sectors that are adjusted according to the new law

• Farming (30 per cent from previously 95 per cent, adjusted according to the 2010 Law on horticulture)

Source: BKPM