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Investing Indonesia

Written By: admin on May 14, 2014 No Comment

The Country
Indonesia is located in South-East Asia between the Indian
and Pacific Oceans and is bordered by Malaysia, Singapore,
East Timor and PNG. The main islands of Java, Sumatra,
Kalimantan, Sulawesi and Papua feature spectacular
mountain ranges flanked by rich coastal plains, fertile valleys
and large areas of lowlands. The smaller islands, many of
which are uninhabited, are often fringed by brilliant beaches
and coral reefs and bedecked with tropical palm trees.
A large percentage of world trade transits the strategically
important straits of Malacca that link the Indonesian ocean
littoral to the South China Sea and the larger Pacific Ocean
basin.
Indonesia is rich in natural resources, minerals, oil, and fertile
land to support agricultural products. It is these resources,
together with the islands’ central location between India and
the Orient, that have made Indonesia so attractive to foreign
traders, rulers and investors both historically and as of today.
The people
The people of Indonesia are culturally diverse reflecting their
differing ethnic origins, religions and histories.
With an estimated population of 240.8 million, Indonesia is
the fourth most populous nation in the world after China,
India and the USA, as well as the world’s most populous
Muslim nation. The population is expected to grow by 2.5
million people per year through 2015. 54% of the population
is below 29 years of age, while about 70% is below 39
years of age. The most populated islands are Java, Sumatra,
Sulawesi and Kalimantan. Java, Bali and Madura are the most
densely populated with Papua, Kalimantan and many of the
smaller islands having low population densities. The most
populous cities are Jakarta, Surabaya and Bandung in Java,
and Medan in Sumatra. About 44% of the population resides
in urban areas, with the annual rate of urbanization estimated
at 1.7% over 2010-15.
Most Indonesians are of Malay descent and the largest
ethnic group, the Javanese, make up 40% of the total
population. The Javanese are pre-eminent in the social

elite, bureaucracy and the armed forces. There is also an
ethnic Chinese minority whose influence in business is
proportionately greater than their numbers. Papua, the
eastern half of the island of New Guinea, is people by
Melanesians.
The official language of the country is Bahasa Indonesia,
which is similar to Malay. This is the second language of
many rural Indonesians after their local tongue, of which
there are almost 300. English language skills are actively
encouraged in recognition of the opportunities English
affords to Indonesians in education, commerce and
international relations. English is understood by business
people in the cities. The country has more than a 90%
literacy rate.
Over 85% of the population follow the Moslem faith, but
there are significant minorities of Hindus (centered in Bali),
and Christians.

The climate
Straddling the equator from latitude 60o
N to 110o
S, Indonesia
has a typically tropical climate marked by heavy rainfall as
well as high humidity and temperatures. Rainfall increases
during the monsoon season which typically runs from
October to April. The tropical climate is moderated by
mountains in large parts of the country. In most parts of the
country, temperatures generally range from 23o
to 33o
C.
The type of government
The 1945 Constitution of the Republic of Indonesia provides
for independent executive, legislative and judicial functions.
The highest authority is the People’s Consultative Assembly
(MPR), which meets annually to hear accountability
reports from the President and government agencies and
provide policy guidance. The MPR includes the House of
Representatives (DPR), which has 560 members, and the
Council of Regional Representatives (DPD) which has 132
members. Members are elected to five year terms.
The President and Vice-president are elected by direct
popular vote. The president is the Chief Executive, the Head
of State and Commander-in-Chief of the Armed Forces, and
also appoints Cabinet Ministers who are responsible only to
him/ her.
The country is divided administratively into 34 provinces
headed by a Governor and elected provincial assemblies, and
hundreds of districts and municipalities headed by a Regent,
each with its own elected council assemblies. Governors and
Regents are appointed by, and report to, the local assembly
or council. These regional governments have responsibility
to administer a wide range of matters, including health,
education and investment.
The type of legal system
The judiciary is based on the Supreme Court and separate
courts for public administration and military, religious and civil
matters. A comprehensive system of civil laws has replaced
most of the statutes established by the Dutch. In addition,
there is an extensive range of decrees and regulations
developed and applied by government departments. For
foreign investors, the most relevant areas are laws regarding:
• foreign investment
• company law
• business licensing and trade
• taxation and customs
• labor
• land and buildings
• regional regulations.
Certain industries are subject to specific regulations and
requirements, including oil & gas, financial services and
mining which are covered in Chapter 5.
Professional advice should always be obtained with regard
to contracts and agreements made in Indonesia. One reason
is that the civil law provides for certain clauses to apply to
all agreements unless specifically excluded. Litigation can
be unpredictable and time consuming, and as a result is
not commonly an effective route to resolve disputes. The
protection provided by agreements of themselves can be
limited, and commercial arrangements should be designed,
where possible, with safeguards which can operate in the
event of later disagreements. Contracts commonly include
Indonesian or international arbitration for resolution of
disputes. A popular choice is Singapore in accordance with
the rules and regulations of the Singapore International
Arbitration Centre, where the final, binding arbitral award is
automatically ratified in the Indonesian Courts.
Indonesian laws become operative following issuance
of Implementing Regulations, and can be subsequently
stipulated in Ministerial and Presidential regulations and
decrees. A significant period of time can elapse between
new laws being announced, drafted, passed by Parliament
and final regulations or decrees being rolled out.

The climate
Straddling the equator from latitude 60o
N to 110o
S, Indonesia
has a typically tropical climate marked by heavy rainfall as
well as high humidity and temperatures. Rainfall increases
during the monsoon season which typically runs from
October to April. The tropical climate is moderated by
mountains in large parts of the country. In most parts of the
country, temperatures generally range from 23o
to 33o
C.
The type of government
The 1945 Constitution of the Republic of Indonesia provides
for independent executive, legislative and judicial functions.
The highest authority is the People’s Consultative Assembly
(MPR), which meets annually to hear accountability
reports from the President and government agencies and
provide policy guidance. The MPR includes the House of
Representatives (DPR), which has 560 members, and the
Council of Regional Representatives (DPD) which has 132
members. Members are elected to five year terms.
The President and Vice-president are elected by direct
popular vote. The president is the Chief Executive, the Head
of State and Commander-in-Chief of the Armed Forces, and
also appoints Cabinet Ministers who are responsible only to
him/ her.
The country is divided administratively into 34 provinces
headed by a Governor and elected provincial assemblies, and
hundreds of districts and municipalities headed by a Regent,
each with its own elected council assemblies. Governors and
Regents are appointed by, and report to, the local assembly
or council. These regional governments have responsibility
to administer a wide range of matters, including health,
education and investment.
The type of legal system
The judiciary is based on the Supreme Court and separate
courts for public administration and military, religious and civil
matters. A comprehensive system of civil laws has replaced
most of the statutes established by the Dutch. In addition,
there is an extensive range of decrees and regulations
developed and applied by government departments. For
foreign investors, the most relevant areas are laws regarding:
• foreign investment
• company law
• business licensing and trade
• taxation and customs
• labor
• land and buildings
• regional regulations.
Certain industries are subject to specific regulations and
requirements, including oil & gas, financial services and
mining which are covered in Chapter 5.
Professional advice should always be obtained with regard
to contracts and agreements made in Indonesia. One reason
is that the civil law provides for certain clauses to apply to
all agreements unless specifically excluded. Litigation can
be unpredictable and time consuming, and as a result is
not commonly an effective route to resolve disputes. The
protection provided by agreements of themselves can be
limited, and commercial arrangements should be designed,
where possible, with safeguards which can operate in the
event of later disagreements. Contracts commonly include
Indonesian or international arbitration for resolution of
disputes. A popular choice is Singapore in accordance with
the rules and regulations of the Singapore International
Arbitration Centre, where the final, binding arbitral award is
automatically ratified in the Indonesian Courts.
Indonesian laws become operative following issuance
of Implementing Regulations, and can be subsequently
stipulated in Ministerial and Presidential regulations and
decrees. A significant period of time can elapse between
new laws being announced, drafted, passed by Parliament
and final regulations or decrees being rolled out.

The climate
Straddling the equator from latitude 60o
N to 110o
S, Indonesia
has a typically tropical climate marked by heavy rainfall as
well as high humidity and temperatures. Rainfall increases
during the monsoon season which typically runs from
October to April. The tropical climate is moderated by
mountains in large parts of the country. In most parts of the
country, temperatures generally range from 23o
to 33o
C.
The type of government
The 1945 Constitution of the Republic of Indonesia provides
for independent executive, legislative and judicial functions.
The highest authority is the People’s Consultative Assembly
(MPR), which meets annually to hear accountability
reports from the President and government agencies and
provide policy guidance. The MPR includes the House of
Representatives (DPR), which has 560 members, and the
Council of Regional Representatives (DPD) which has 132
members. Members are elected to five year terms.
The President and Vice-president are elected by direct
popular vote. The president is the Chief Executive, the Head
of State and Commander-in-Chief of the Armed Forces, and
also appoints Cabinet Ministers who are responsible only to
him/ her.
The country is divided administratively into 34 provinces
headed by a Governor and elected provincial assemblies, and
hundreds of districts and municipalities headed by a Regent,
each with its own elected council assemblies. Governors and
Regents are appointed by, and report to, the local assembly
or council. These regional governments have responsibility
to administer a wide range of matters, including health,
education and investment.
The type of legal system
The judiciary is based on the Supreme Court and separate
courts for public administration and military, religious and civil
matters. A comprehensive system of civil laws has replaced
most of the statutes established by the Dutch. In addition,
there is an extensive range of decrees and regulations
developed and applied by government departments. For
foreign investors, the most relevant areas are laws regarding:
• foreign investment
• company law
• business licensing and trade
• taxation and customs
• labor
• land and buildings
• regional regulations.
Certain industries are subject to specific regulations and
requirements, including oil & gas, financial services and
mining which are covered in Chapter 5.
Professional advice should always be obtained with regard
to contracts and agreements made in Indonesia. One reason
is that the civil law provides for certain clauses to apply to
all agreements unless specifically excluded. Litigation can
be unpredictable and time consuming, and as a result is
not commonly an effective route to resolve disputes. The
protection provided by agreements of themselves can be
limited, and commercial arrangements should be designed,
where possible, with safeguards which can operate in the
event of later disagreements. Contracts commonly include
Indonesian or international arbitration for resolution of
disputes. A popular choice is Singapore in accordance with
the rules and regulations of the Singapore International
Arbitration Centre, where the final, binding arbitral award is
automatically ratified in the Indonesian Courts.
Indonesian laws become operative following issuance
of Implementing Regulations, and can be subsequently
stipulated in Ministerial and Presidential regulations and
decrees. A significant period of time can elapse between
new laws being announced, drafted, passed by Parliament
and final regulations or decrees being rolled out.

Infrastructure

Introduction
Infrastructure spending in Indonesia (both government
and private) has remained subdued since the 1997 Asian
Economic crisis. As a result Indonesia continues to have
poor basic infrastructure and remains under invested.
Population pressures and strong interest of foreign investors
in Indonesian commodities gives rise to a significant need
for infrastructure development in the country, which has
a congested road network, over utilized airports, weak rail
connectivity, low electrification rate and an underdeveloped
port sector.
Unless progress is made, this will be a major barrier to
sustained longer term economic growth and development
across many industries, as well as adversely impact foreign
investment (Chapter 5). Indonesia ranks low among other
countries with regards to the quality of infrastructure and the
inadequate supply of infrastructure is consistently identified
by companies as a constraint on their operations and
investment.
Indonesia infrastructure
Road network 437,759 kilometers, of which 258,744
kilometers are paved
Railway network 5,042 kilometers, of which 565
kilometers are electrified
Air • 684 airports, of which 13 are
international airports
• 64 heliports
Maritime • 21,579 kilometers of navigable
waterways
• Pipelines:
– natural gas 8,183 kilometers
– oil 7,429 kilometers
– refined product 1,329 kilometers
Road
Indonesia’s road network totals 437,759km, of which
258,744km (46%) are paved or sealed. It is estimated that
90% of all domestic passenger transport and 50% of cargo
traffic is carried by road.
The road network is best in the most developed islands and
main population centers of Java, Sumatra and Bali. Mining
related transport (road, rail) infrastructure is more developed
in Kalimantan compared to Sumatra.
Despite being given a high priority in government spending
programs, road building in Indonesia has progressed at a
slow pace. Only 85kms of the 1,095km target for new
toll roads has been developed over the past 5 years. Land
acquisition challenges are commented on overleaf.
Rail
The railway system covers 5,042km, all of which is narrow
gauge; 565km is electrified.
The public railway which comprises most of the Indonesian
rail network is operated by the state-owned PT Kereta Api
(Persero), while some freight railways are privately owned
and operated.
Air
As of February 2011, there are 684 airports, of which 171 have
paved runways, and 64 heliports operated by Angkasa Pura I,
Angkasa Pura II and the Directorate General for Aviation.
Based on Ministry of Transportation Regulation No.11/2010,
there are 5 main airports in Indonesia: Soekarno Hatta –
Jakarta, Ngurah Rai – Bali, Sultan Hasanuddin – Makassar,
Juanda – Surabaya, and Polonia – Medan.
There are 16 scheduled commercial airlines, 30 charter
airlines and 7 cargo (freight) airlines operating in Indonesia.
4. Infrastructure
Maritime
There are 21,579km of navigable waterways in the larger
islands such as Sumatra, Java, Madura, Kalimantan, Sulawesi
and Irian Jaya.
Natural gas pipelines extend 8,183km, with oil pipelines
totaling 7,429km and refined product pipelines 1,329km.
The main ports are at Jakarta and Palembang supported by
others in Cilacap, Cirebon, Kupang, Makassar, Semarang and
Surabaya. Belawan and Medan are big commodity ports.
Indonesia is recognized to have a lack of deep water ports.
In 2011, marine fleets operating in Indonesia totaled 16,331
vessels consisting of 10,902 national fleets, 562 foreign
chartered fleets and 4,867 foreign agency fleets.
Indonesia’s infrastructure condition
Overview
The World Economic Forum ranks Indonesia’s road
infrastructure as 83rd out of 142 countries, rail infrastructure
as 52nd out of 123 countries and port infrastructure as 103rd
out of 142 countries.
Poor levels of infrastructure development are not only
holding back Indonesia’s growth potential but also poverty
reduction progress. The symptoms of more than a decade of
low infrastructure investment include increasing congestion
in urban areas, high levels of inter-island cargo transport
costs, electricity blackouts and low access to improved
sanitation.
• Transportation: Indonesia has experienced a rapid
increase in the numbers of cars in circulation with
virtually no major investment in toll and other road
infrastructure. Ports are among the least efficient in
South-East Asia in terms of turnaround times and unit
costs. According to a World Bank survey of international
buyers at the Jakarta Trade Expo 2009, most firms
are satisfied with factory gate prices and the quality
of Indonesian products but find high transport costs
and lack of reliability of delivery schedules as the main
constraints for business transactions(1). For example,
logistics costs from Cikarang – Bekasi factories to
Tanjung Priok ports for a 40ft container is USD 775, far
higher than logistics costs from factories in Malaysia to
port, which are only USD 450. Thailand is in the same
range(2). Corresponding costs in Vietnam are lower again
at USD 250(3).
Sources: (1) Logistic Performance Index 2010: Indonesia, World Bank
(2) World Bank, Indonesia’s Logistics Costs Inefficient, November 11, 2011
(3) www.viglaceraland.vn/tiensoniz/Investment/PriceCharges/tabid/1119/Default.aspx
Transport is expected to account for 71% of the total
infrastructure investment – from USD 26.1 billion in 2010
to USD 93.0 billion in 2014.
• Water & sanitation: water access is low; 76% of the
population do not have access to ‘improved’ water and
only 24% are connected to local water utility companies.
Sanitation services are severely lacking – only 1.3% of
the population are reached (not necessarily connected)
to a sewage network.
The Government has stated its commitment to achieving
the Millennium Development Goals(1). In order to do
so, an estimated 10 million household connections is
required to be implemented.
• Energy: access is low; 43% of the population is without
power (approx. 90 million people); investment needs are
high – an estimated USD 15-17 billion is required before
2012 for an additional 9,700 MW of capacity, expanded
transmission and distribution.
Road infrastructure is the platform for all other major
infrastructure: land acquisition is the challenge
underpinning progress
The lack of clear regulations on land acquisition for public
use and the provision of land compensation to owners
have caused delays to toll road and other infrastructure
projects. There has been a long history of informal land
ownership in Indonesia that gives rise to any number of
individuals claiming the rights to the land during the land
acquisition process. The implication of this is the need for the
administrative process involving a number of government
institutions to resolve land ownership issues, which is
problematic.
Another frequent issue encountered is land owners
holding on to their land as long as possible to benefit from
appreciation in value while a project progresses, which has
led to unexpected land cost escalation. Property prices in
Indonesia and especially Java and Jakarta are increasing at a
rapid rate.
Land acquisition issues have been one of the main
obstacles for infrastructure projects in Indonesia. Enactment
of President Regulation No.36/2005 concerning Land
Acquisition for Infrastructure Development was intended to
outline the rules and procedures for infrastructure projects
serving public purposes, however the regulation was not
effective due to vagueness in the rules.

Introduction
Infrastructure spending in Indonesia (both government
and private) has remained subdued since the 1997 Asian
Economic crisis. As a result Indonesia continues to have
poor basic infrastructure and remains under invested.
Population pressures and strong interest of foreign investors
in Indonesian commodities gives rise to a significant need
for infrastructure development in the country, which has
a congested road network, over utilized airports, weak rail
connectivity, low electrification rate and an underdeveloped
port sector.
Unless progress is made, this will be a major barrier to
sustained longer term economic growth and development
across many industries, as well as adversely impact foreign
investment (Chapter 5). Indonesia ranks low among other
countries with regards to the quality of infrastructure and the
inadequate supply of infrastructure is consistently identified
by companies as a constraint on their operations and
investment.
Indonesia infrastructure
Road network 437,759 kilometers, of which 258,744
kilometers are paved
Railway network 5,042 kilometers, of which 565
kilometers are electrified
Air • 684 airports, of which 13 are
international airports
• 64 heliports
Maritime • 21,579 kilometers of navigable
waterways
• Pipelines:
– natural gas 8,183 kilometers
– oil 7,429 kilometers
– refined product 1,329 kilometers
Road
Indonesia’s road network totals 437,759km, of which
258,744km (46%) are paved or sealed. It is estimated that
90% of all domestic passenger transport and 50% of cargo
traffic is carried by road.
The road network is best in the most developed islands and
main population centers of Java, Sumatra and Bali. Mining
related transport (road, rail) infrastructure is more developed
in Kalimantan compared to Sumatra.
Despite being given a high priority in government spending
programs, road building in Indonesia has progressed at a
slow pace. Only 85kms of the 1,095km target for new
toll roads has been developed over the past 5 years. Land
acquisition challenges are commented on overleaf.
Rail
The railway system covers 5,042km, all of which is narrow
gauge; 565km is electrified.
The public railway which comprises most of the Indonesian
rail network is operated by the state-owned PT Kereta Api
(Persero), while some freight railways are privately owned
and operated.
Air
As of February 2011, there are 684 airports, of which 171 have
paved runways, and 64 heliports operated by Angkasa Pura I,
Angkasa Pura II and the Directorate General for Aviation.
Based on Ministry of Transportation Regulation No.11/2010,
there are 5 main airports in Indonesia: Soekarno Hatta –
Jakarta, Ngurah Rai – Bali, Sultan Hasanuddin – Makassar,
Juanda – Surabaya, and Polonia – Medan.
There are 16 scheduled commercial airlines, 30 charter
airlines and 7 cargo (freight) airlines operating in Indonesia.
4. Infrastructure
Maritime
There are 21,579km of navigable waterways in the larger
islands such as Sumatra, Java, Madura, Kalimantan, Sulawesi
and Irian Jaya.
Natural gas pipelines extend 8,183km, with oil pipelines
totaling 7,429km and refined product pipelines 1,329km.
The main ports are at Jakarta and Palembang supported by
others in Cilacap, Cirebon, Kupang, Makassar, Semarang and
Surabaya. Belawan and Medan are big commodity ports.
Indonesia is recognized to have a lack of deep water ports.
In 2011, marine fleets operating in Indonesia totaled 16,331
vessels consisting of 10,902 national fleets, 562 foreign
chartered fleets and 4,867 foreign agency fleets.
Indonesia’s infrastructure condition
Overview
The World Economic Forum ranks Indonesia’s road
infrastructure as 83rd out of 142 countries, rail infrastructure
as 52nd out of 123 countries and port infrastructure as 103rd
out of 142 countries.
Poor levels of infrastructure development are not only
holding back Indonesia’s growth potential but also poverty
reduction progress. The symptoms of more than a decade of
low infrastructure investment include increasing congestion
in urban areas, high levels of inter-island cargo transport
costs, electricity blackouts and low access to improved
sanitation.
• Transportation: Indonesia has experienced a rapid
increase in the numbers of cars in circulation with
virtually no major investment in toll and other road
infrastructure. Ports are among the least efficient in
South-East Asia in terms of turnaround times and unit
costs. According to a World Bank survey of international
buyers at the Jakarta Trade Expo 2009, most firms
are satisfied with factory gate prices and the quality
of Indonesian products but find high transport costs
and lack of reliability of delivery schedules as the main
constraints for business transactions(1). For example,
logistics costs from Cikarang – Bekasi factories to
Tanjung Priok ports for a 40ft container is USD 775, far
higher than logistics costs from factories in Malaysia to
port, which are only USD 450. Thailand is in the same
range(2). Corresponding costs in Vietnam are lower again
at USD 250(3).
Sources: (1) Logistic Performance Index 2010: Indonesia, World Bank
(2) World Bank, Indonesia’s Logistics Costs Inefficient, November 11, 2011
(3) www.viglaceraland.vn/tiensoniz/Investment/PriceCharges/tabid/1119/Default.aspx
Transport is expected to account for 71% of the total
infrastructure investment – from USD 26.1 billion in 2010
to USD 93.0 billion in 2014.
• Water & sanitation: water access is low; 76% of the
population do not have access to ‘improved’ water and
only 24% are connected to local water utility companies.
Sanitation services are severely lacking – only 1.3% of
the population are reached (not necessarily connected)
to a sewage network.
The Government has stated its commitment to achieving
the Millennium Development Goals(1). In order to do
so, an estimated 10 million household connections is
required to be implemented.
• Energy: access is low; 43% of the population is without
power (approx. 90 million people); investment needs are
high – an estimated USD 15-17 billion is required before
2012 for an additional 9,700 MW of capacity, expanded
transmission and distribution.
Road infrastructure is the platform for all other major
infrastructure: land acquisition is the challenge
underpinning progress
The lack of clear regulations on land acquisition for public
use and the provision of land compensation to owners
have caused delays to toll road and other infrastructure
projects. There has been a long history of informal land
ownership in Indonesia that gives rise to any number of
individuals claiming the rights to the land during the land
acquisition process. The implication of this is the need for the
administrative process involving a number of government
institutions to resolve land ownership issues, which is
problematic.
Another frequent issue encountered is land owners
holding on to their land as long as possible to benefit from
appreciation in value while a project progresses, which has
led to unexpected land cost escalation. Property prices in
Indonesia and especially Java and Jakarta are increasing at a
rapid rate.
Land acquisition issues have been one of the main
obstacles for infrastructure projects in Indonesia. Enactment
of President Regulation No.36/2005 concerning Land
Acquisition for Infrastructure Development was intended to
outline the rules and procedures for infrastructure projects
serving public purposes, however the regulation was not
effective due to vagueness in the rules.

Investment

The foreign investment landscape
Indonesia welcomes foreign investment on its own terms.
Government policies aim at ensuring that foreigners work
with Indonesians to assist in development of the country’s
economy and skill-base. There is a general recognition that
Indonesia needs the development capital, and the technical
and management skills of foreigners.
Government regulation of foreign investment in Indonesia is
manifested in a variety of ways, for example:
• approved and monitored through governmental bodies
• companies can employ only a limited number of
expatriates, and are required to demonstrate plans for
replacement of those expatriates by Indonesians (with
the exception of expatriate directors and commissioners)
• certain fields of business are closed to investment by
foreigners
• foreign individuals are permitted to acquire land or land
rights with a number of restrictions.
A “foreign investor” is usually a foreign company
incorporated under the laws of its host nation; however
foreign individuals are also acceptable.
Direct and Non-direct investment
Law No.25/2007 concerning Investment (“the Foreign
investment Law”) defines investment as Direct investment
and Indirect investment. Indirect investments, also known as
portfolio investments, are the transactions made through the
domestic capital market/stock exchanges of a country. The
Indonesian equity market is highly institutionalized, whereby
over a period from 2002 to 2007 foreign institutions held
almost 70% of the free-float value of the Indonesian equity
market, while less than 5% of the free float value was held
by individuals.
The Indonesian government encourages Direct foreign
investment or “FDI” in most areas of the Indonesian
economy. Foreign investment approvals can be issued either
by BKPM in Jakarta or an Investment Board (BPM) in every
Province, Investment Institution in Regency Municipality or
through Representative Offices of the Republic of Indonesia
in several countries.
Foreign Investment Law, Investment Negative List and
FDI
The Foreign Investment Law regulates FDI by granting a
right of entry to foreign businesses through a government
licensing procedure principally controlled by BKPM. It
specifies that foreign investment shall be in the form of
a limited liability Foreign Investment Company or “PMA”
incorporated in Indonesia, in which the investor goes
into partnership with an Indonesian person or entity as
shareholders. Foreign investors can hold up to 100%
ownership, or between 45% to 95% of ownership in certain
industries, but this will vary within sectors and business
fields.
Foreigners are permitted to invest with no restriction on
the maximum size of the investment, the source of funds
or whether the products are destined for export or for the
domestic market. This is except in an industry sector which
is listed as closed to foreign investment on the Investment
Negative List (“Negative List”) which attaches to the Foreign
Investment Law under Presidential Regulation.
The latest 2010 Negative List set out in Presidential
Regulation No.36/2010 contains 20 nominated industries or
fields of business that are closed to foreign investment. The
rest are open if certain conditions are fulfilled

Foreign investment restrictions
Fields of activity and local JV Partner
As indicated, initial investment proposals to BKPM need to
be in fields currently open to foreigners, as do applications
for expansion of existing facilities.
As explained, foreign investment will usually require a JV
arrangement between the foreign investor and at least one
local partner, either from inception of the project, or within a
specified period for those companies which have approval to
be wholly foreign-owned in the initial stages. The selection
of a reliable and understanding local shareholder and partner
is essential, as unsuccessful foreign investment ventures
can be associated with a background of tense relationships
between local and overseas shareholders.
BKPM may maintain lists of potential local partners in
certain fields from time to time, while banks, embassies and
accounting firms can often provide information of a similar
nature. In addition, accounting and investigation services
firms can undertake independent, confidential corporate
intelligence and research into the background and integrity of
prominent local corporate and individual subject targets.
Minimum investment and equity participation
Foreign investors can hold up to 100% equity initially,
except for certain industries where 49%, 65%, or 95%
are the maximum foreign ownership, but this varies within
sectors and business fields. The old foreign investment law
prior to 2007 expressly provided for where 100% foreign
ownership is initially permitted, for the foreign shareholder
to divest a minority share to an Indonesian shareholder
within 15 years. Whilst this is not specifically included in the
Foreign Investment Law, a general view is that it notionally
is contained in the spirit of the law, and 5% is the intended
minimum divestment.
Legal form
The Foreign Investment Law specifies that foreign
investment shall be in the form of a limited liability company,
Perseroan Terbatas (PT), incorporated in Indonesia in
accordance with the requirements of the Ministry of Law
and Human Rights (“MOLHR”). A PT company having an
approved foreign shareholding is known as a PMA.
Term Limit
The operating permit for a PMA company is unlimited as long
as the PMA company is still active.
Operations
The Foreign Investment Law grants the foreign investor the
freedom to manage a company for the term of its permit
approval, which includes the right to appoint directors and, if
necessary, foreign technicians and managers, where skilled
Indonesians are not available. Certain industries only allow

expatriate Technical Advisors (with the exception of Board
of Directors and Commissioners). More information on
obligations around domestic and foreign employees is set
out in Chapter 9 on Labor and Employment.

 

 

 

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