Openness to Foreign Investment

Indonesia maintains significant and far-reaching foreign investment restrictions. Its investment climate continues to be characterized by legal uncertainty, economic nationalism, and disproportionate influence of business interests seeking control and ownership of existing enterprises and new market opportunities. Both through formal regulation and indirect guidance, foreign companies are sometimes compelled to do business with local partners and to purchase goods and services locally.

In an attempt to improve its foreign investment climate in 2007, Indonesia introduced a new investment law intended to provide improvements in transparency, as well as a range of investor protections, including non-discriminatory treatment, protection against expropriation, and recourse to international arbitration in disputes against the government. At the same time, however, the new law significantly increased the number of sectors in which foreign investment is restricted, and increased foreign equity limitations in sectors of interest to U.S. investors, including in telecommunications, pharmaceuticals, film and creative industries, and construction. An ongoing process of decentralization, intended to reduce burdensome bureaucratic procedures by moving decisions to provincial and district-level governments, has led to some improvements but has also resulted in new restrictive measures that appear to conflict with other national laws.

Indonesia continues to review the 2007 investment law and “negative list” of restricted sectors. In 2010 Indonesia issued long-awaited changes to its negative list delivering legal clarifications alongside limited liberalization. The clarifications include protections from retroactive implementation and promise a continuous review of closed sectors for increased market access. The revisions included some modest changes to investment limits for individual sectors, but also maintained or increased restrictions on others.

Although Indonesian officials have in the past provided assurances that the more restrictive provisions of the investment law would apply only to new investments, Indonesia appears to allow retroactive application in practice. Moreover, despite the fact that one of the intended purposes of the new law is to enhance transparency, it is unclear whether the negative list represents the full range of sectors where investment restrictions apply. Several ministries, including the Ministry of Communications and Informatics, the Ministry of Health, and the Ministry of Culture and Tourism, have issued decrees that introduce additional new investment restrictions in their respective sectors. For example, a new horticulture bill was passed by Indonesia’s House of Representatives on October 26, 2010, with the President Yudhoyono signing it into Law No. 13/2010 on Horticulture on November 24, 2010. Law 13/2010 contains restrictions on foreign investment in the horticulture sector. Upon implementation, foreign firms will be limited at 30 percent ownership. Firms that currently have more than 30 percent will be required to divest to that level. The United States continues to strongly urge Indonesia to enhance the transparency and openness of its investment regime, and to address specific problems and concerns of U.S. investors.

The GOI and in particular the Corruption Eradication Commission, which coordinates anti-corruption efforts and has the authority to investigate and prosecute high-level corruption cases, continues to address the widespread corruption problem in the country. Still, foreign companies continue to report corruption-related difficulties in Indonesia, including demands for unwarranted fees to obtain required permits or licenses, expedite processes, or to compete for government awards of contracts and concessions. The integrity of the legal system remains a concern, particularly for investors and companies drawn into disputes with local partners, who complain that the courts can be inefficient and corrupt. It is imperative that U.S. firms conduct extensive due diligence before entering into significant trade and investment in Indonesia. A number of U.S. firms which have sought legal relief after having being allegedly defrauded by local partners or clients have been forced to litigate spurious counterclaims.

Mining: Indonesia enacted a new mining law in January 2009. Many of the law’s implementing regulations have been released. The first mandated a preference for domestic companies as mining subcontractors. Under the new law, mining Contracts of Work (COW) and Coal Contracts of Work (CCOW) will no longer be issued. Under the new system, all mining companies, foreign and domestic, will require a mining license (IUP) or special mining license (IUPK), which will be issued by competitive tender by the local, provincial, or national government. Companies must obtain separate licenses for exploration and production phases of each mining concession; royalty and tax obligations will be subject to all changes in law; and foreign mining companies are again expected to divest an undefined portion of their holdings during the course of operations. The new law also requires that metal ore be processed in Indonesia, and smelted if the capacity exists. The GOI is seeking to build 35 new coal-fired power plants generating 10,000 MW of electricity by 2010, which will require state electricity firm PLN to double its coal demand to 70 MT per year. PLN is considering a variety of methods to access this coal, including in-kind royalty payments and domestic market obligations for coal producers.

Petroleum: Indonesia became a net oil importer in 2004. Crude oil production has steadily declined over the last decade as new production failed to offset declining output from aging fields. State revenue from the oil and gas sectors declined to an estimated Rp.176.8 trillion in 2009 from Rp.288.6 trillion in 2008, due to a decline in global prices. According to the GOI, Indonesia was only able to produce 954,000 barrels per day (BPD) of petroleum in 2010, well below its target of 965,000 BPD . The downstream market for fuels is technically open for foreign investment, although state-owned oil and gas company Pertamina remains the only authorized large-scale dealer for subsidized fuels in the country.

Natural gas production increased from its 2008 daily production level of 7.9 billion standard cubic feet per day (BSCFD) to 8.3 BSCFD in 2009, and increased 8.8 BSCFD in the first quarter of 2010, due to the LNG terminal at Tangguh coming into regular production. Although the government took some positive steps to reform the industry, including taking the first step to resolve its dispute with ExxonMobil over the East Natuna gas field, the general oil and gas investment climate remained below potential through 2010, due to problems with contract sanctity, regulatory issues, and uncertainty regarding contract terms and conditions. Although tenders for new blocks were increasingly successful in 2007 and 2008, two tenders for oil and gas blocks in 2009 failed to attract any significant international bidders, and tenders in 2010 had mixed results.

Policy changes continue to cause concerns for oil and gas investors. Regulators have begun implementing policies and guidance that mandate PSC holders to favor domestically-owned companies over foreign-invested firms in subcontracting tenders, and 35 percent local content is required to participate in a subcontracting tender. International oil and gas services companies have already felt a negative impact with this rule, and several recent tenders have failed due to the lack of qualified tenders. The Indonesian government has also mandated the use of government-owned banks for all of a PSC’s transactions and abandonment funds, despite higher fees associated with some nationally-owned banks. Questions over domestic market obligation also concern investors, and one recent LNG project, Donggi-Senoro, was canceled when the government ordered that all production go to local consumers, canceling the contracts with foreign buyers.

The Oil and Gas Law 22/2001 ordered the liberalization of the downstream sector, ending Pertamina’s monopoly and creating new refining, distribution and retail opportunities for private investors. As also required by the Oil and Gas Law, the GOI changed Pertamina into a limited liability company through a presidential decree. Shell became the first private company to open retail fuel stations, followed by Malaysian Petroleum Nasional (Petronas). The government authorized a few private bidders to sell subsidized fuel at their retail fuel stations, but only in extremely small amounts and only outside of Jakarta. Petronas proceeded to sell subsidized fuel under these conditions, but Shell did not.

Infrastructure and Transportation: The GOI said it plans to accelerate transportation infrastructure through the passage of four new bills in the transportation sector and provision of institutional guidelines for mass rapid transit (MRT) management in Jakarta. Parliament passed railway legislation in May 2007 and a maritime bill in May 2008. The Ministry of Transportation (MOT) also passed an aviation bill. Earlier legislation in the four sectors does not provide for an effective mechanism for private investments in the transportation sector or regional transportation planning after decentralization. Transportation projects have attracted few investors and the GOI has failed to provide tender documents for its model transportation projects. In step with the ongoing decentralization process, many regional governments have implemented transportation projects, but they have done so in a piecemeal fashion with little consideration for capacity, other infrastructure links, or transportation projects in neighboring districts. New legislation will focus on increasing opportunities for outside investment in the sector and streamlining the procedure to do so. The new bills also target better strategic planning and coordination for transportation links and infrastructure at the regional (provincial) level.

Jakarta’s choking traffic lowers both quality of life and economic growth. To remedy these twin maladies, the GOI infrastructure acceleration plan called for the creation of a Jakarta Mass Rapid Transit (MRT) institution. The local Jakarta administration established the limited liability Mass Rapid Transit Jakarta company (PT MRTJ) which the GOI hopes will serve as a role model for MRT development authorities in other large cities. One of PT MRTJ’s tasks will be to spur the controversial on-again-off-again Jakarta monorail project.

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