A STEP BACKWARD?
Indonesia’s new investment law.
By Gordon Feller

When the Indonesian government passed a major new investment law last March, it represented a brightening of the country’s investment climate. Among other steps, it abolished the twin set of rules that favored domestic over foreign investors and offered tax breaks and duty reductions to draw in overseas money.

But the outlook has turned cloudy. In July, the government issued changes to the “negative investment list” – the roster of local industries in which FDI is restricted. The number of sectors where investment is banned outright has grown from 11 to 25. New rules limit foreign ownership in fixed-line telecom businesses to 49%, while the FDI flow into the mobile telecoms sector is capped at 65%; both are down from 95%. Similarly, allowable investment in energy and plantations has been cut to 95%.

Responding to the sharp criticism that followed the announcement, Indonesia’s Trade Minister Mari Pangestu cited a need to “protect the national interest.” He said that the government will review these new FDI rules after three years. Following a series of government asset sales after the Asian financial crisis of the 1990s, some Indonesian politicians regularly raise concerns about the growing influence of foreign business in Southeast Asia’s biggest economy.

The move seems to favor certain domestic companies. Tjandra Lienandjaja, BNP Paribas Peregrine’s Jakarta-based analyst, thinks this move benefits existing mobile players Telekomunikasi Indonesia and Indosat: “We already have too many players right now; this should reduce the stiff competition in the market.”

The new list does ease restrictions in some areas. The caps on travel agencies and hospitals, for example, have been raised to 50% and 65%, respectively. But it remains to be seen if this will reassure foreign investors, who already complain that graft, red tape, tough labor laws, and an unreliable legal system often make Indonesia a poor choice compared with regional rivals. Already, FDI approvals far outpace actual FDI flows. In 2006, for example, actual foreign investment totaled US$5.98 bn, even though FDI approvals amounted to US$15.6 bn.

Indonesia certainly needs the investment. At 2.5% of GDP, the country’s infrastructure investment remains far below pre-crisis levels, when it comprised more than 6% of GDP. Indonesia’s infrastructure spending is now one of the lowest in the region.

For the years 2004-2009, the government hopes to draw in US$426 bn of FDI, with US$123 bn of that earmarked for infrastructure.