Indonesia's investment law may backfire

The Straits Times, April 24, 2007
By Azhar Ghani, Indonesia Bureau Chief


Goal of attracting foreign investors may be undermined by more curbs


JAKARTA - A NEW Indonesian law meant to attract overseas investment by putting foreign and domestic businessmen on an equal footing could instead be used to make life even harder for foreigners.

The law, passed on March 29, abolishes two-tier rules providing domestic investors with a less stringent investment approval process than the one faced by foreigners, and offers a raft of incentives to overseas businessmen, including tax breaks and duty cuts.

At the time, analysts said it could help Indonesia, which saw foreign direct investment plummet by a third last year, achieve its growth target of 6 per cent a year until 2009.

But, potentially fatally, the law does not set in stone the current absence of caps on foreign investment in some sectors or the 95 per cent caps in others - and now various ministries are proposing massive increases in restrictions.

At the same time, there are calls for an expansion of the 'negative list' of sectors barred to foreign investors.

And as Indonesian Employers Association chairman Sofyan Wanandi puts it: 'Investors are confused. The new law is supposed to demonstrate the government's commitment to promoting investment, but some ministries are lobbying for more curbs.'

The revisions to a law explicitly stating that the government will treat all investors equally are possible because, like most Indonesian laws, it merely provides a general framework of policy intent without spelling out the details, which are left to individual ministries to decide.

And so far, various ministries have proposed new foreign-ownership limits in sectors they oversee.

More than half of the proposals call for drastic cuts that would see foreigners allowed to own less than half the stakes in businesses in sectors including medical services and air and sea transport.

The telecoms sector, now subject to a 95 per cent cap, could be one of the hardest hit, as the Communications and Information Ministry has proposed a cap of 35 per cent for foreign investors from outside Asean, and 49 per cent for those within the grouping.

And while Communications and Information Minister Sofyan Djalil has said any changes to ownership caps would not be introduced retroactively, it remains far from clear whether that is the case.

The proposals for the new limits are now in the hands of the Investment Coordinating Board, while a series of inter-ministerial meetings, chaired by chief economics minister Budiono, will decide which sectors should be out of bounds to foreigners.

Decisions on both issues are expected to take a few months, and it is impossible to predict the outcome.

As economist Umar Juoro points out: 'The principle of the law is equal treatment for all investors, but subject to Indonesian national interests.

'There is a lot of room for debate there.'