KADI N I NDONESI A
Kadin Indonesia Report on Business Concerns with the DNI
16 July 2007
Background
Representatives of the Indonesian and foreign business community met at two meetings at Menara Kadin on 11 July chaired by the President of Kadin Indonesia, Mr MS Hidayat, to discuss the Daftar Negatif Investasi (DNI).
The meetings included members of Kadin Indonesia and its Industry Associations and representatives of foreign chambers and business associations. Both groups raised questions and points of concern from their membership about Presidential Decrees 76 and 77 released by the Government on 4 July.
The meetings were called to prepare for a follow-up meeting with Ministers and Senior Officials on 16 July aimed at clarifying concerns and questions of business on the DNI. The meetings were also attended by three senior representatives of the Government who informally provided some immediate points of clarification.
Four Areas of Concern
Four general sets of concerns about the DNI were raised:
1. Grey areas where more specified information was needed on both general issues and sectoral applications.
2. Perceptions of decisions and changes that may be misleading or misappropriate and therefore needed clarification
3. Questions about the rationale or philosophy behind some decisions, especially those that were considered to have a wider economic impact.
4. Uncertainty about the process of change and transition and how changes in the DNI would be applied in the future.
Positive and Clearer Signals Needed for Investors
Representatives of foreign chambers recognized that the two Presidential Decrees were designed to provide greater certainty, definition and transparency for investors, especially with the use of industry classifications provided by BPS. A clear negative list was therefore a step forward in providing a better investment environment in Indonesia.
However, the representatives were concerned that the lack of clarity evident in the DNI could undermine the positive changes that had already been made in the package of measures to improve the investment climate.
There was an urgent need to redress this lack of clarity so that more positive signals could be provided to current and potential investors about Indonesia’s approach to investment, especially foreign investors who drew on a range of substantive and media reports to form their decisions.
While it was hoped that the next meeting with Ministers on 16 July could resolve many of these key issues from business, it was recognized that an ongoing consultation process was needed.
Closer Consultation between Government and Business
The meeting stressed the importance and benefits of consultations between the government and business on key issues before final decisions were made and announced. While socialization about policy changes was a vital part of the process, constructive and systematic consultation during the formulation of policy would help to iron out difficulties and identify grey areas, and result in a more positive policy impact.
For this reason, it was suggested that a working group be established under the umbrella of Kadin that could work with a government counterpart to undertake consultations. Rationale for Wide Array of Percentages Applied in DNI
The meeting expressed particular concern about the wide array of percentages used in the DNI to determine the level of participation allowed in different sectors.
Specific Questions and Concerns of the Foreign Chambers
Many specific questions and concerns were raised during the meeting and others were submitted in writing. These have been consolidated into overall and sector-specific concerns.
These questions reflect the four areas of concern noted above and include many specific concerns about grey areas.
Specific Questions and Issues
General Regulatory and Procedural Matters
1. This new DNI is limited to three years. Will there be revisions after that period (only
through a similar level law, i.e. Presidential Regulation)? Will the review be conducted by the National Team for Export and Investment Improvement – under the Coordinating Ministry for Economic Affairs? Will they receive inputs from relevant Ministries and will BKPM will be the executor of the laws?
2. Recently, Head of Investment Coordinating Board (BKPM) M. Lutfi said that with
this new regulation, all permit related to investment will conducted through two doors, either at the central or at the provincial level. Since it is not yet explained in the Perpres, will the Government issue regulations related to Law No. 27/2007 on Capital Investment by end of July. Will these apply nationwide and will they regulate, among others, permit requirements, time period and cost?
3. Please clarify the definition of “51% Domestic Investment”. For example, is foreign
investment with any Indonesia Entity appropriate? If not, what qualification will be appropriate?
4. Under the Investment Law, do the new land-usage periods apply only in respect of
FDI or do they also apply to a foreigner who wishes to build a home under Hak Pakai title outside of an FDI?
5. According to the new law on Investment, it is stipulated that there will be equal
treatment of all companies, whether they are formed with 100% Indonesian ownership , or whether they are formed partly ( or totally ) with foreign capital , once they have been approved by the Indonesian Administration. Therefore , once a JV company A ( with foreign ownership ) has been approved by BKPM , according to the regulation , procedures and negative list , this company is authorized , in the course of its development , to take a participation in another Indonesian company B , whatever its sector and whatever the amount of the participation. The JV company A is therefore considered as a domestic Indonesian company. Is this understanding of the investment regulation correct?
that? Will it just need to be an Indonesian citizen or company? Will the local shareholder be required to have expertise in the field in which it is a major investor? And if not, can such an Indonesian shareholder be rejected in any manner? Is there such screening required? If yes, shouldn’t this be disclosed in the negative restricted list?
Grandfathering and Company expansion, Clarification on Joint Venture Companies, Share Compositions and Share Transfers (some of these questions are similar and interrelated)
7. Can an existing company expand to double its annual production at the same site?
Can the construction time of the new expanded production facility be extended from two years to four years due to delays in land acquisition? Can the second production line be built 10 km away on a reserve which has been bought for the same project, or 30 km away or in another part of Java? (ie does the Grandfather clause cover all that).
8. Will there be a clear grandfathering of existing companies or will there have to be
divestment / challenges in renewing licenses?
9. When current investor would like to expand its investment, will the new negative list
be applied to all cases? If yes, no one would like to extend its investment on the fields where regulation on foreign capital has become stricter.
10. Will an existing approval/licence (which contradicts the new List) will be allowed to
remain unamended (in respect of compliance with the new List vis a vis specific areas of discrepancy) upon an application being made to the BKPM for amendment / the Company amending its Articles in areas contrary to what is stated in the current AOA (depending on the process for amendment as/to be set out in the implementing regulations)? Connected with the above, the issue of whether , assuming the Company is not required to amend its original approval/licence , which regulatory environment will apply to amendments(to include expansion) effected by the Company i.e will there be 2 regimes applicable to the Company – the ‘old’ List /regulations in respect of the unamended areas and the ‘new’ List /regulations in respect of the amendments/expansion or will the Company be allowed henceforth to retain subservience only to the old List/regulations.
11. Suppose there is a company with 85% foreign capital that has reached an agreement
with the partner to increase its foreign share in the future. However, the new negative list imposes max 49% foreign capital regulation on this field. Should the foreign share be downsized to 49% when the company changes its ownership share? Can’t the foreign partner keep its 85% share until present business license expires?
12. Article 5.2 respects prior approvals given by the Government as regards the foreign
and local shareholder composition - however:
a) Are new foreign investors permitted to invest in an existing approved project
There is concern that the Government is not intending to give effect to the "grandfathering provisions" in article 5.2 that would allow a new investor into a project although the Indonesian percentage shareholding would be retained. b) Please confirm that there can be a transfer amongst foreigners in respect of a
project that has received a prior approval and not that an existing foreigner upon any sale must transfer shares to an Indonesian party to meet the new foreign shareholding limitation (i.e. the permitted percentage shareholding for foreigners is fixed);
c) Please confirm that upon any expansion by the existing shareholders (foreign and
Indonesian) an expansion approval will be given provided that the foreign/Indonesian shareholding percentages in the existing approval are maintained (i.e. not increased for a foreigner).
d) Is it correct that if there had been an expansion approval there should have been
an IUT in place on 6 July (notwithstanding the PMA approval was still valid and the investment realization period had not expired)? It has been recently indicated by BKPM staff that instead of following the SP for grandfathering, they may also require the IUT to be in place. This goes against what is written in the decree, and would seem unreasonable given that it can take many years after making an investment before a firm can get it’s IUT from BKPM. Can you clarify if this will be the case or not?
13. According to the new law on Investment, it is stipulated that there will be equal
treatment of all companies, whether they are formed with 100% Indonesian ownership, or whether they are formed partly ( or totally ) with foreign capital , once they have been approved by the Indonesian Administration . Therefore , once a JV company A ( with foreign ownership ) has been approved by BKPM , according to the regulation , procedures and negative list , this company is authorized, in the course of its development , to take a participation in another Indonesian company B , whatever its sector and whatever the amount of the participation. The JV company A is therefore considered as a domestic Indonesian company. Is this understanding of the investment regulation correct?
14. Application of PR77 to new investments? (i.e., or in the case of capital increase?)
15. Article 5 unclear whether current foreign investors need to sell down their stake. If
so, what is the time requirement?
16. If there is no requirement for changes in existing shareholding structures, what is then
the treatment for when divestment takes place? Do they need to sell down if they company is incorporated prior to PR 77?
17. Application of PR77 on indirect parents?
18. Can the political background behind the capital percentage restrictions for Category
D of the Negative List be expressed in clear terms?
19. To the extent that that background includes the empowerment of the Indonesian
partner in the pertinent required joint venture, is that empowerment to be seen from the point of view of legal share ownership or for financial/economic, technical/operational or management control, or any combination of these?
20. The question above is relevant because of the following. Article 46 of the Indonesian
Company Law allows for the creation of, amongst others, preference and priority shares, in addition to ordinary shares. Essentially this distinction entails that both in respect of economic return and management control, the shareholders in a company can choose to deviate from the result that would follow from applying the number of shares owned. Article 46 even allows for the creation of non-voting shares. Are the Negative List restrictions intending to limit the options allowed under the Company Law?
21. As happened during the financial crisis in the late nineties, foreign investment joint
ventures may in times of financial disarray require recapitalization. The Indonesian partner may at that point of time not be prepared or capable to join in the recapitalization, and from a commercial point of view not only be prepared but also contractually committed to the dilution resulting from the foreign partner alone putting up the additional capital. Would this be prohibited if the dilution breached the relevant maximum foreign investment percentage?
Transport, Logistics and Distribution and related Services
22. It can be understood that from the perspective of national and public benefit, some
restriction should be imposed on industry fields involving infrastructure development, such as harbor, sea transport, air transport, etc. But restriction should not be imposed on sea transport for export-import, domestic transport, Freight Forwarding, Storage, Non Vessel Owned Common Carrier (NVOCC) such as warehouse and distribution process, etc. They are soft-service providers closely attached to industries and are not supposed to be perceived as part of transportation. To attract more investment and industries and to improve and expand domestic market based on efficient distribution, logistic service field should keep its availability to foreign investment. Even in neighboring countries, there are no such restrictions. In China, logistic service field is open to 100% foreign investment.
Ports and Harbors
23. The negative list mention that almost all sector related to transport and Logistics are
now restricted to foreign investments to 49%, whereas it used to be opened to 95% in the past. Does this mean that Indonesian maritime transport capabilities are now considered by the government as sufficient to carry all Indonesian goods within and or outside of Indonesia?
24. The restriction of investment to 49% for Foreigners in this maritime activities sector
presented during the infrastructure summit, project under BOT, still under discussions, like Bojonegara port, for which Pelindo II recently sent an invitation for tender registration?
25. Port infrastructure is vital for Indonesia’s economic future. If ports are not built to
accommodate the very large vessels that are now needed for cost efficient shipping, export industries will not see Indonesia as an attractive destination for investment or expansion. By restricting foreign investment up to 49%, decision-making power shifts to local companies, and as a result, not only global expansion slows down but global competitiveness, industry efficiency, development and employment may worsen as well. At present, in Tanjung Priok harbor, many local CFS companies exist under heavy protection. In spite of taking expensive tariffs exceeding the legal level, they operate in bad environment and with poor equipment. Improvement can hardly be seen.
26. If the new restriction is confirmed in port infrastructure and operation, who does the
Indonesian Government think will invest in this sector beside foreign investment? The return on investment being generally very long, more than 25 years, is the government going to invest in (subsidize) these investments? How does the GOI see the future development of port infrastructure in Indonesia, which is a key domain of development for Indonesian Economy?
Shipping and Overland Transport
27. For shipping the negative list states 49% foreign equity, however, it also states
international AND domestic. Does that mean domestic shipping is opening up (currently requires 100% local ownership)? Does this include domestic overland distribution as well?
28. Why is 51:49 in the negative list now when the Impress No. 2005 on cabotage
(transport policy) has timetables of some years in the future before certain products are to be transported within Indonesia by cabotage compliant companies 51:49 Indonesian foreign owned? (2009, 2010, 2011 etc)
Engine Production, Cars and Maintenance
29. Engine production is open under the condition of partnership and this reflects the
government’s wish to have technology transferred to national industry. As compensation for this, will there be incentives such as an exemption/reduction of import duty for components that cannot be produced in Indonesia?
30. Suppose there is a company that sells cars as its main business and performs
Pharmaceuticals
31. As many companies in the pharmaceutical sector (likely also in other sectors) are
growing, sooner or later the limited business license (IUT) will need to be altered in order to reflect new maximum capacities. This, however, is only the result of a company's own organic growth and is not due to new investment. How will this be addressed under the new decree? Will the license renewal trigger a mandatory change in the company's shareholding or will such extensions be permitted under the existing shareholder structure? How does the minister's statement that the new provisions will not be retrospective, apply in these circumstances.
32. The negative list classifies business in different categories depending on the size.
"Big pharmaceutical companies" for instance may not be financed by foreigners at all, while other Pharma companies are only limited to 75% foreign share. A definition of "big" in this case is missing.
33. Does the restriction only apply to distribution? Is it intended to prevent further
penetration of the market by the large traders, because most of them are already in the market? Is it designed to stop pharmaceutical companies entering the market without manufacturing locally and importing finished products under a trading license? 34. Why is pharmaceutical manufacturing investment now reduced to 75% FDI (what is
the concern or justification as to why this is in the national interest to do so?) and why is pharmaceutical distribution required now to be 100% local. Distribution was only opened to FDI a few years ago after a long 20 year effort to open up.
Cigarette Production: Negative List not an effective tool against illicit production 35. One of the main reasons why cigarette manufacturing and other tobacco related
industries are included within the DNI is to reduce the growing production and distribution of illicit cigarettes (white and kretek) in the market which mostly done by small cigarette manufacturers. The main source of the illicit cigarettes is produced and distributed by illegitimate (small and about 4000) manufacturers and it has nothing to do with cigarettes produced by legitimate businesses. In fact, legitimate businesses are the victims of those illegal activities.
36. Existing manufacturers support government initiatives to eliminate production and
distribution of illicit products but not at the expense of the growth and expansion of legitimate manufacturers in the very competitive domestic and international market. 37. Existing manufacturers are concerned that the inclusion of cigarette making activities
Advertising: Changes in Treatment of Shares of Nominees of Overseas Advertising Companies
38. Has there been a change in the treatment of shares held by nominees on behalf of
overseas advertising agencies? Global multinational brands have preferred agencies (already employing bright young Indonesia talent) who understand their products and brand communication rules and have been asked by their clients to act on a global or regional basis.
39. Accepted practice in the past has been for international advertising agencies to have a
technical service agreement with local advertising companies. To preserve the integrity of their clients, there have been local approved nominees selected to hold majority shares in these companies acting for the interests of the international agency to ensure the multinational client is well looked after.
40. Does the law now state that the nominee is now legally the owner of such shares in
their own right, thereby nullifying any obligation or agreement to look after the interests of the international agency in servicing the multinational brand in Indonesia? 41. There is concern that this, combined with requirement to insist on local talent and
local production in all advertising, is pushing back the development of Indonesian advertising. It adds additional costs for companies which shoot one regional commercial redubbed in several different languages. This may serve to give multinational brands reason to doubt the attractiveness of the Indonesian market for their expansion plans. The ‘local’ production rule is already driving media campaign money away from local TV stations - thereby impacting the ability of local TV companies to finance new content.
42. There is concern that the net result of these measures over time will be to deny the
Indonesian consumer the benefits of global communications on products and consumer choices, to stifle Indonesian talent – because a localised ad industry will be smaller and have less jobs available and to discourage the global advertising industry from investing in building the necessary skills in Indonesia in the art and science of media communications.
Health, Education and Social Security Services
43. What is the overall philosophy behind restrictions in the health and education sectors
given the need for Indonesia to expand the provision of these services and improve their quality and given the fact that millions of dollars each year is spent by Indonesians consuming health and education services in neighboring countries?
44. For Hospital investments, the change is from a requirement to build at least 200 beds
(with 100% ownership) to what appears to be 65% of anything. Why has this change been made? Are there other impediment regarding the use of foreign doctors, despite the ASEAN free trade regulations?
45. Has the DNI closed the door on private sector involvement in the Social
Tourism Services
46. What is the philosophy behind restrictions in the tourism sector given the importance
of expanding this sector with high quality services? Specifically, what is the rationale behind requiring hotels to have 50% domestic ownership? How will this improve the tourism industry for areas that have not enough hotels, and no local capital interested in investing in them?
Oil and Gas Sector
47. For the oil and gas sector, maximum foreign ownership is 95%. With only 5%
domestic ownership, does the government believe that nationalism related issues could occur and thereby cause the limit to be reconsidered?
48. Confirm that the 95% restrictions for oil and gas only apply to services companies,
not to upstream oil and gas concessionaires that have a Production Sharing Contract with BP Migas. Confirm that the latter can (i) still participate in the market as a foreign entity (permanent establishment), and are not required to establish a PT and (ii) there is no need to partner with an Indonesian company when bidding for new blocks etc
Mining Sector
49. The 2002 BKPM Technical Guidelines provided for “General Mining Support
Services”, covering mine construction, cutting, peeling/excavation, mining and transportation of minerals and mine reclamation. Foreign investment was allowed up to 100% in such service companies. Under the current DNI, the only similar services mentioned are “mine construction” and “excavation”, both being limited to 55%. Is it the Government’s intention to limit the contract mining operations in Indonesia to maximum 45% foreign ownership? Or will general mining support services” continue to be treated as a separate line of business on its own, and 100% foreign ownership will be permitted.
Construction
50. One of the most common forms of construction contract for large industrial projects
