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            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

            No.

            Business Lines

            KBLI No.

            2010 NIL

            2014

            NIL

            Remarks

            Agriculture

            1.        

            Horticultural seed production

            –        Seasonal fruit crops

            –        Grapes

            –        Tropical fruits

            –        Oranges

            –        Apple, pome and stone fruit seed production

            –        Berries

            –        Seasonal vegetables

            –        Annual vegetables

            –        Medicinal plants

            –        Mushrooms

            –        Floriculture crops

            01139

            01210

            01220

            01230

            01240

            01251

            01139

            01253

             

            01285

            01286

            01139

            01194

            01302

            Unregulated

            30%

            Revised in compliance with Law No. 13 of 2010 on Horticulture

            2.        

            Growing of horticultural crops

            –        Annual fruits

            –        Grapes

            –        Tropical fruits

            –        Oranges

            –        Apples, pome and stone fruits

            –        Berries

            –        Leafy vegetables (i.e., cabbages, collard, scallion, celery)

            –        Root vegetables (i.e., onion, garlic, potatoes, carrots)

            –        Fruit vegetables (i.e., tomatoes, cucumbers)

            –        Chili peppers, paprika

            –        Mushrooms

            –        Ornamental plants

            –        Non-flower ornamental plants

             

             

            01132

             

            01210

             

            01220

             

            01230

             

            01240

             

             

            01251

             

            01131

             

             

             

             

            01134

            01133

             

             

            01283

             

             

            01136

            01193

             

            01301

            Unregulated

            30%

            Revised in compliance with Law No. 13 of 2010 on Horticulture

            3.        

            Horticultural processing industry (post-harvest of fruits and vegetables)

            10311

            10320

            10313

            10314

            10330

            Unregulated

            30%

            Revised in compliance with Law No. 13 of 2010 on Horticulture

            4.        

            Horticultural research and quality testing laboratories

            72102

            Unregulated

            30%

            Revised in compliance with Law No. 13 of 2010 on Horticulture

            5.        

            Horticultural agrotourism

            93231

            Unregulated

            30%

            Revised in compliance with Law No. 13 of 2010 on Horticulture

            6.        

            Other horticultural services:

            –        Post–harvest services

            –        Flower  arrangement florists /decorators

            –        Horticultural development consultants

            –        Landscaping

            –        Horticulture  courses

            01630

            47761

             

            70209

            43305

            71100

            81300

            85499

            Unregulated

            30%

            Revised in compliance with Law No. 13 of 2010 on Horticulture

            Marine Affairs and Fisheries

            1.        

            Capture fisheries using vessels of 100 GT and/or more in capture areas on high seas.

            03111

            Unregulated

            100% but subject to conditions set by the Minister of Marine Affairs and Fisheries

            Energy and Mineral Resources

            1.        

            Power plants < 1 MW

            35101

            Reserved for micro, small, medium businesses and cooperative

            Closed

            2.        

            Small Scale Power plants 1 – 10 MW

            35101

            100% open subject to partnership requirement

             

            49%

            3.        

            Power plants > 10 MW

            35101

            95%

            100% for PPPs during period of concession, otherwise 95%

            4.        

            Power transmission

            35102

            95%

            100% for PPPs during period of concession, otherwise 95%

            5.        

            Electricity distribution

            35103

            95%

            100% for PPPs during period of concession, otherwise 95%

            6.        

            Oil and gas construction services:

            –        Platforms

            –        Spherical Tanks

            –        Onshore oil and natural gas upstream production installations

            –        Onshore pipeline Installations

            –        Offshore pipeline installations

            –        Horisontal / vertikal tanks

            –        Onshore oil and natural gas storage and marketing installations

             

             

            09100

            09100

            09100

             

             

             

             

            42219

             

            42219

             

            42914

             

            42914

            Unregulated

             

             

            75%

            49%

            Closed

             

             

            Closed

            49%

            Closed

            Closed

             

             

            7.        

            Surveying services:

            –        Oil and gas surveying

            –        Geologic and geophysical surveying

            –        Geothermal surveying

             

             

            71100

             

            71100

             

             

            71100

            Unregulated

             

             

             

             

            49%

            49%

             

            95%

             

            8.        

            Drilling services:

            –        Onshore oil and gas drilling

            –        Offshore oil and gas drilling

            –        Geothermal drilling

            09100

            09100

            09900

             

             

            95%

             

            Closed

            75%

            95%

             

            9.        

            Oil and gas supporting services:

            –        Well operation and maintenance services;

            –        Oil and gas design and engineering services;

            –        Technical inspection services

            09100

            71100

            71204

            Unregulated

            Closed.

             

            10.    

            Manufacture of biomass pellets for energy

            16295

            Unregulated

            100% with partnership requirement

             

            11.    

            Technology development for electric power supply equipment

            72102

            95%

            100%

            Deleted from 2014 Negative Investment List.

            12.    

            Radioactive mineral mining

            07210

            Open with recommendation from BATAN

            100%

            Deleted from 2014 Negative Investment List.

            13.    

            Electrical installations

            43211

            95%

            Closed

            14.    

            Testing and analysis of electrical installations

            71204

            95%

            Closed

            Industry

            1.        

            Manufacture of crumb rubber

            22123

            95%

            Closed

            Trade

            1.        

            Retail sales via mail order houses or internet

            47911

            47912

            47913

            47914

            47919

            Unregulated

            Closed

            This restriction on online retailing may affect the operations of the web portal industry in Indonesia. Web portal companies will need to ensure that their businesses cannot be categorized as retailing in order to comply with the revised NIL

            2.        

            Retail sale of motorcycles and commercial vehicles

            45103

            45104

            45403

            45404

            Unregulated (but in practice closed)

            Closed

            3.        

            Trade:

            –        Distribution

            –        Warehousing

            –        Cold Storage

            00000

            52101

            52102

            Unregulated

            33%

            33%

            33% for investments in Sumatra, Java and Bali or

            67% for investments in other provinces

            –        Distribution was previously 100% open to FDI and was categorized as “Large Scale Trade”.

            –        Warehousing was previously closed to FDI.

            4.        

            Alternative trading:

            1.       Alternative trading system

            2.       Alternative trading system members

             

            00000

            Unregulated

            Closed

            Adjusted to comply with PERKA BAPPEBTI No. 103/BAPPEBTI/PER/03/2013

            5.        

            Futures brokerages

            00000

            Unregulated

            95%

            Adjusted to comply with PERKA BAPPEBTI No. 74/BAPPEBTI/PER/12/2009

             

            6.        

            Public opinion polling and market research

            73200

            Unregulated (but in practice closed)

            51%

            Tourism and Creative Economy

            1.        

            Motion picture advertising, advertisements, posters, stills, photographs, slides, negatives, banners, pamphlets, folders, etc.

            73100

            Unregulated (but in practice closed)

            51%

            Only if the shareholders are from ASEAN member state

            2.        

            Restaurants

            56101

            49% or 51% with partnership

            51%

             

            3.        

            Motel and lodging services

            55199

            49% or 51% if in collaboration with Indonesian SME

            51% for ASEAN investors if located in eastern Indonesia (Sulawesi, Nusa Tenggara, Maluku and Papua).

            70% for ASEAN investors if located in Java or Bali.

            For other regions, 49%, or 51% if in collaboration with Indonesian SME

             

            4.        

            Golf courses

            93112

            49%, or 51% if in collaboration with Indonesian SME

            100% for ASEAN investors if located outside Java and Bali.

            70% for ASEAN investors in Java and Bali.

            For other regions, 49%, or 51% if in collaboration with an Indonesian SME

             

            Transportation

            1.        

            Construction of terminals:

            –        Passenger land transport terminals (public facilities only)

            –        General cargo terminal

             

            52211

            Closed

            49%

            Requires recommendation from Minister of Transportation.

            2.        

            Multimode transport terminals

            00000

            Unregulated

            49%

            3.        

            Port facilities (wharfs, port buildings, container terminals, bulk terminals, dry bulk terminals and Ro-Ro terminals)

             

            52221

            52222

            52223

            49%

            49% or

            95% for PPP during the concession period.

            4.        

            Periodic testing of motor vehicles

            71203

            Closed

            49%

            Requires recommendation from Minister of Transportation.

            Communications and Information

            1.        

            Telecommunications network services:

             

            –        Fixed network operation

            –        Movable network operation

             

             

             

             

            61100

            61200

            61300

            49% for fixed network operation by:

            –        Local cable basis, with circuit switched technology or packet switched

            –        Radio basis with circuit switched technology or packed switched

            65% for closed fixed network operation

            65% for movable network operation by cellular and satellite.

            65%

            The rules have been simplified.

            2.        

            Telecommunications network operation integrated with telecommunications services

             

            61100

            61200

            61300

            61921

            61922

            61923

            61929

            Unregulated

            65%

            3.        

            Telecommunications services operation:

             

            –        Content services (ringtone, SMS premium, etc)

             

             

            –        Call centers and other added value telephony services

             

             

            –        Internet access services

             

            –        Data communications system services

             

            –        Telephony internet services for public

             

            –        Internet interconnection (NAP) services and other multimedia services

             

            61911

            61919

            61921

            61922

            61923

            61929

            100% open with partnership requirement

            100% open with partnership requirement

            49%

            95%

            49%

            65% for internet interconnection services and 49% for other multimedia services

            49%

            4.        

            Broadcasting

            60102

            Closed

            Maximum 20%, only for business

            expansion

            and

            development.

             

             

            5.        

            Subscription broadcasting

            60202

            Closed

            Maximum 20%, only for business

            expansion

            and

            development.

             

             

            Public Works

            1.        

            Treatment and dispousal of non-hazardous waste

             

            38211

            Unregulated

            95%

             

            Finance

            1.        

            Venture Capital

            64991

            80%

            85%

            Adjusted to comply with Presidential Regulation No. 9 of 2009 on Financial Institutions

            Health

            1.        

            Manufacture of pharmaceuticals

            –        Manufacture of drug raw materials

            –        Manufacture of medical products

            21011

            21012

            75%

            85%

            2.        

            –        Specialist/ subspecialist hospital services

            –        Medical specialist clinics

            –        Dental clinics

            86103

            86104

            86203

            67%

            67% in all regions.

            70% for ASEAN investors if located in eastern Indonesia, except Makassar and Manado.

            For specialist/ subspecialist hospital services, the requirement that the facility have at least 200 beds has been deleted.

            3.        

            Specialist nursing services

            86901

            49% in all Indonesian regions.

            51% for ASEAN investors in Medan and Surabaya.

            51% for ASEAN investors if located in Makassar and Manado

            70% for ASEAN investors if located in capitals of provinces in eastern Indonesia.

            49% for Non ASEAN investors in all Indonesian provinces.

            Defense and Security

            1.        

            Security services:

            –        Security consulting;

            –        Security guard provision;

            –        Cash and valuables escort;

            –        Provision of security services with animals;

            –        Security system devices;

            –        Security education and training.

            74909

            80100

            80100

            80100

            80200

            85499

            100%

            49%, subject to an operations permit from the national police.

            ***

            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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