Preview of Revisions to Investment Law and Negative List

UNCLAS JAKARTA 000336 SIPDIS SENSITIVE DEPT FOR EAP/MTS, EEB/IFD/OIA USTR FOR KELHERS, BWEISEL E.O. 12598: N/A TAGS: ECON EINV ETRD ECON ID SUBJECT: Preview of Revisions to Investment Law and Negative List ¶1. (SBU) Summary: Proposed changes to Indonesia's Investment Law and Negative list include long-awaited clarifications but offer little in the way of new reforms or liberalization. The Embassy has seen an informal, advance copy of the proposed legislation. The draft proposal provides legal clarity in areas including grandfathering and capital market investments and proposes modest changes to foreign equity limits for some business fields. Contacts confirm the revisions will also include backsliding on foreign equity caps for several sectors, but the version we saw did not detail which ones or by how much. The draft also enhances the role of the Investment Coordinating Board (BKPM) in implementing the Investment Law. The Government of Indonesia (GOI) has not made the draft proposal public. End Summary ¶2. (SBU) The proposed changes to the Investment Law (Presidential Regulation 111/2007) clarify a number of investment issues including: implementation of grandfathering provisions, status of capital market investments, and the Investment Law's applicability in Indonesia's Special Economic Zones (SEZ). The proposed revisions confirm that investment restrictions do not apply to investors holding valid business licenses approved before July 3, 2007. The proposal also clarifies that capital investments in publicly listed companies through the stock exchange are not subject to Indonesia's Negative List of Sectors Open to Foreign Investment (DNI). In addition, the revisions propose that the DNI would not apply in Indonesia's special economic zones. ¶3. (SBU) The revisions to the DNI propose modest changes to investment limits for individual sectors; however none represent breakthrough reforms. As drafted, the revisions would increase foreign equity caps for eight sectors. For example, selected business fields in Hospitality and Tourism would increase the maximum foreign ownership from 50 percent to 51 percent. Among the other sectors proposed for greater openness are: direct selling (60 percent to 95 percent),art galleries (50 percent to 67 percent), labor agencies (0 to 49 percent) and ecotourism (25 percent to 51 percent.) Contacts involved with the drafting of the proposal confirm it will also contain reductions on foreign equity caps for twelve sectors, but the version we saw did not detail which sectors. The revisions will also clarify the Investment Law's provision that any business field not specifically referenced by the DNI is considered 100 percent open to foreign investment. ¶4. (SBU) The proposed revisions also carve out a significant role for the Investment Coordinating Board (BKPM) in implementing the Investment Law and DNI. BKPM is authorized to issue further provisions as necessary to clarify and facilitate implementation of the Investment Law. The proposal harmonizes the definition of small and medium sized companies (SME) with Law No 20/2008 on SMEs. Other provisions are designed to ensure Indonesia's compliance with the ASEAN Economic Community Blueprint. Most importantly, the proposed revisions clarify the station of the Investment Law in Indonesia's hierarchy of laws. (This latter provision is intended to strengthen the Coordinating Ministry's hand in confronting line ministries that issue decrees in contradiction of the Investment Law.) ¶5. (SBU) The GOI does not appear to have followed its own legal process for determining the opening or closing of business fields as described in Presidential Regulation 76/2007. That regulation dictates that proposed changes to foreign equity caps must be shown to provide a net benefit to Indonesia's overall national economic interests; however there is no evidence that criteria has been applied. [Note: The Indonesian Business Association (KADIN) has questioned the legitimacy of the new foreign equity caps on these grounds.] The next step in codifying the revisions will be a review of the proposal by Coordinating Minister for the Economy Sri Mulyani. Once cleared by Mulyani, the final draft will then be presented to President Yudhoyono for his approval and issuance as a Presidential Regulation. Changes to the final proposal are possible during both steps. ¶6. (SBU) The proposed revisions to the Investment Law represent much needed progress and clarification in a number of important investment-related areas. However, the potential backsliding on the investment limits in any sector, if ultimately enacted, would be perceived negatively by investors. The pressure to reduce foreign equity caps reflects a recurring tension between reform-minded technocrats pressing for greater liberalization and plutocratic rent-seekers protecting narrow business interests. Nonetheless, any new barriers on foreign investment raise questions about Indonesia's commitment to an open investment climate and undermine investor perception of legal certainty. HUME