Indonesia has nixed part of a recent plan to ease foreign ownership in a bid to protect its domestic small and medium-sized enterprises (SMEs),
The about-face affects foreign ownership in five specific industry sectors. Addressing a media conference on November 29, Ministry of Economic Affairs secretary Susiwijono Moegiarso said foreign investment in cleaning of tubers, fabric printing, weaving, Internet cafes, and Internet-based retail trade had been scrapped. “The goal is to protect the businesses of the small and medium enterprises”, Mr Susiwijono said.
The general relaxation of foreign ownership rules still applies to 49 business sectors, with 100 per cent foreign investment available in geothermal and telecommunications network enterprises, he said.
The changes came after the Indonesian Employers Association (Apindo) called for a review of the Negative Investment List (DNI) stipulated in the government’s 16th economic policy package on November 21. The DNI specifies which industry sectors allow foreign ownership and the percentage allowed. Originally 54 business sectors were removed from the DNI, with almost half of these, or 25 business sectors, allowing full foreign ownership.
In the wake of the announcement, Indonesia business groups raised fears such relaxed restrictions not only threatened micro, small, and medium enterprises, but also gave foreigners excessive privileges over key industries.
Peak industry bodies were also concerned by the lack of consultation. Indonesian Employers Association (Apindo) chairman, Hariyadi Sukamdani ,said the government had made little or no effort to consult the group before proceeding with its plan. Similarly, Indonesian Chamber of Commerce and Industry (Kadin) chairman Rosan P. Roeslani said they had been unaware of the planned revisions to the DNI, and called for a stop on its implementation.
Government banks on more investment
By permitting full foreign ownership in 25 industries the government planned to attract more overseas investment, strengthen the economy, especially the rupiah, and reduce the country’s widening current account and trade deficits. Foreigners choosing to leverage on opportunities the new rules offered must invest the equivalent of Rp10 billion (about US$700,000), in line with the government’s idea to protect small businesses against foreign monopoly.
Indonesia has struggled to contain its growing current account deficit to aid the rupiah. The country’s current account deficit is at its highest since the second quarter of 2014, increasing to Rp128 billion ($8.8 billion), about 3.7 per cent of gross domestic product (GDP), in the third quarter (Q3) of this year, from Rp116 billion ($8 billion) or 3.02 per cent of GDP in Q2.
The 16th economic policy package, which aims to boost industrialisation, offers an extended tax holiday programme for companies and provides tax incentives for exporters to keep their earnings in domestic banks.
Since President Jokowi Widodo assumed office in 2014 Indonesia has made considerable effort to encourage foreign investment. These have included tax holidays and tax allowances in several “pioneering” sectors such as downstream metal production, oil refining, telecommunication, agricultural processing, maritime transport, and manufacturing industries operating in special economic zones.
However a recent report shows these reforms have made little headway.
The World Bank ‘2019 Ease of Doing Business‘ report released on October 31 shows Indonesia has slipped one place to rank 73, far below Mr Widodo’s ambitious index target of 40. The country scored 67.96 out of 100 in the report’s aggregate measurement, an increase of just 1.46 points on last year.
While the main aim of the revision to Indonesia’s DNI was meant to allow full foreign ownership in 25 industries and attract more direct investment into the country, the change has rolled back the carpet with foreign direct investment (FDI) into the country declining.
Investors stymied by regulatory hurdles
This was reflected in a report from the annual US-Indonesia Investment Summit on September 27. While recognising that the business climate in Indonesia is moving in the right direction, economic reforms still needed to be facilitated, it said.
According to a joint report from the U.S. Chamber of Commerce and the American Chamber of Commerce (AmCham), investment programmes are being held back by infrastructure development and impediments, budgetary pressures, the government’s over-reliance on state-owned enterprises, and limited success with public-private partnerships (PPP).
“The U.S. Chamber and American business see great opportunities in Indonesia because of recent regulatory reforms undertaken by President Widodo”, said Charles Freeman, U.S. Chamber senior vice president for Asia. “The government has rightly focused on reducing regulations to encourage new investment opportunities. However, too many of those opportunities will remain unrealised unless the government moves expeditiously to create a more welcoming environment for foreign investment by establishing regulatory certainty”, he said.
Issues related to permits, licenses, and land acquisition were also inhibiting the preparation of financially feasible infrastructure projects, the report said.
“We have been impressed with the openness of the Widodo government to dialogue with the private sector and look for common solutions to regulatory challenges. But there are major sectors where we think foreign investment could do more and is still held back by regulatory hurdles”, AmCham Managing Director A. Lin Neumann said.
Foreign direct investment to Indonesia has seen three consecutive quarterly declines. Based on the latest data from the Investment Coordinating Board (BKPM) FDI has dropped from Rp112.0 trillion ($7.9 bln) in the fourth quarter of 2017 to Rp106 trillion (about $7.5 bln) in Q1 this year. In the second quarter of this year the country registered yet another decline of Rp95.7 trillion ($6.7 bln) to record further decrease of RP89.1 trillion ($6.3)in Q3.
Related:
- Indonesia cancels part of plan to relax rules on foreign business role (Bangkok Post)
- Indonesia cancels part of plan to relax rules on foreign business role (Reuters)
- UPDATE 1-Indonesia promises more easing of rules to attract foreign investors (Reuters)
- Minister Seeks to Justify Easing of Foreign Ownership Restrictions Amid Business Outcry (Jakarta Globe)
Indonesia backflips on plans to relax some foreign investment caps added by Stella-maris Ewudolu on
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Stella-maris Ewudolu
Between November 2010 and February 2012 she was a staff writer at Daylight Online, Nigeria writing on health, fashion, and relationships. From 2010 – 2017 she worked as a freelance screen writer for ‘Nollywood’, Nigeria.
She joined AEC News Today in December 2016.
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