Doing Business in Indonesia

Doing Business in Indonesia
Foreign Direct Investment

The new government has been transforming Indonesia into a country with one of the most liberal policy and regulatory frameworks for investments in Southeast Asia. Serious efforts are being made to give investors clearly spelled out investment laws, rules and regulations.

This chapter briefly discusses the general policies and basic guarantees; sectors closed for foreign direct investment; forms of doing business and allowable share ownership; other forms of doing business; direct foreign investment application and approval; employment of foreign nationals and work permits; and environmental concerns.
1. General Policy and Basic Guarantees for Foreign Direct Investment

Indonesia welcomes foreign direct investment, whether by individuals or entities. The investment is made in the form of a limited liability company.

With regard to the percentage of allowable foreign ownership, foreign direct investment is conducted in two ways; namely joint venture with domestic investors or full (100%) foreign investment. The government is continuing to review those lines of business open to foreign direct investment and the allowable percentage of foreign ownership.

With regard to the size of foreign investment, in practice, the Investment Board (the Indonesian government office with jurisdiction over foreign and domestic investment matters)
determines the minimum reasonable paid up capital of the limited liability company to be established, depending on the nature and type of business. For example, the reasonable paid up capital for a company in the service sector is normally US$100,000. The Indonesian constitution guarantees foreign investors’ the following basic rights:

* Freedom from expropriation without just compensation.
* Right to remit profits, capital gains, and dividends within the guidelines of the Bank of Indonesia, the country’s central monetary authority.
* Right to remit the proceeds of the liquidation of investments.
* Right to obtain foreign exchange to meet principal and interest payments on foreign obligations.

Indonesia is a full member of the Multilateral Investment Guarantee Agency (MIGA), which is a member of the World Bank Group. Investments entered through MIGA are protected against various political risks. The agency was designed to encourage foreign investment by providing viable alternatives for investment insurance against non-commercial risks in developing countries, thereby creating investment opportunities in those countries. Indonesia also has bilateral agreements with 54 countries concerning the promotion and protection of foreign investments. A standard bilateral agreement contains provisions to create favorable investment conditions for nationals of Indonesia and the contracting party on the basis of sovereign equality and mutual benefit. This is designed to stimulate investment in both countries.

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2. Lines of Business Closed to Foreign Direct Investment

In principle, all lines of businesses are open to foreign investment, except for those business activities or lines of business that have a vital role in national defense and security, such as the production of weapons, ammunitions, explosives and martial/war equipment.

In addition to these vital business activities, the Government can also determine other lines of business closed to foreign investment as set forth in the Presidential Decree on the “Negative List of Investment” and other regulations. This decree describes not only
the lines of business that are closed to foreign investment, but also the lines of business closed to all investment (foreign and domestic), the ratio of ownership between foreign and domestic investors in a joint venture, and the special criteria to be complied with by investors in investment in special lines of business.

According to the current Presidential Decree on the “Negative List of Investment” (Presidential Decree No. 96/2000 dated July 20, 2000 as amended by the Presidential Decree No. 118/2000 dated August 16, 2000), the lines of business that are totally closed to foreign investment include 1) germ plasma cultivation, 2) natural forest exploitation, 3) lumber contractors, 4) taxi/bus transportation services, 5) small-scale shipping, 6) trading and trade supporting services except large scale retailers (malls, supermarkets, department stores, shopping centers), wholesale trading (distributors/wholesalers, exporters and importers), exhibition/convention providers, quality certification service providers, market research service providers, warehousing service providers other than Line 1 and ports, and after-sales services,7) radio and television broadcasting, and 8) cinema operation.

The government has been showing a trend towards relaxing the negative list of investment, with more lines of business being opened up to foreign investment and foreign investors being
allowed a greater percentage of ownership.

A summary of the new ruling on foreign investment restrictions is included at the end of this chapter and marked Attachment 1.

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3. Setting Up a Foreign Direct Investment Company

A foreign direct investment company in Indonesia (known locally as “Penanaman Modal Asing” or PMA), can take the form of a 100% foreign owned limited liability company or can be established as a limited liability company through a joint venture with Indonesian
partners. In the case of a joint venture, the Indonesian partner is required to own at least 5% of the shares. The Corporate Law requires that there are at least two shareholders in a PMA company, or any limited liability company. The shareholders can be two individuals, two
companies, or a mixture of both. Therefore, in the case of a PMA company with full foreign ownership, the foreign investor initially planning the investment in Indonesia must invite another foreign party to participate in shareholding of the proposed company.
When a PMA company is established, the initial investment approval from the Board of Investment will be valid for three years. Once the PMA company is ready to start its commercial operations, it is required to apply for a permanent business license, which is valid for 30 years and can be extended for another 30 years. To obtain the permanent business license, the company has to secure the approvals, permits, and licenses required by the different government agencies.

Allowable Share Ownership

Foreign investors may own a maximum of 95% of the shares of PMA companies involved in construction and operations of ports and harbors; processing and provision of clean water for the public; electricity production, transmission and distribution; generation of atomic power; public railway service; shipping and medical services (covering among others building and operation of hospitals, medical check-ups, clinical laboratories and mental rehabilitation service). In the case of telecommunications and regular/non-regular/chartered commercial airlines, foreign investors who wish to participate in these industries must form a joint venture with an Indonesian company. Previously, the foreign ownership in these industries was limited to a maximum of 49%. However, based on Presidential Decree No. 118/2000 dated August 16, 2000, there is no limitation on the percentage. A more conservative interpretation
based on the Investment Law, suggests foreign investors may own a maximum of 95% of the shares. A 100% foreign-owned PMA company is required to divest part of its shares to Indonesians within a maximum period of 15 years from the start of its commercial operation.

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4. Other Business Forms

Representative Office

A foreign company may establish a Representative Office in Indonesia. There are three types of Representative Office in Indonesia:

1. Representative Office under the Department of Trade and Industry, which may only conduct promotional activities, market research and information gathering functions.

2. Representative Office under the Construction Service Development Agency (formerly this type of Representative Office was under the State Ministry of Public Works). This type of
Representative Office allows a foreign contracting company to enter into a Joint Operation Agreement with a local contractor to execute a public works contract of limited scope and
duration. One company may be the main contractor with the other as the sub-contractor.

3. Regional Representative Office under the Board of Investment, which may only supervise and coordinate the affiliates/branches/subsidiaries for, and on behalf of, its parent company.

Agency and Distributorship

A foreign business firm may appoint an Indonesian person or company to act as its agent or distributor to engage in trading activities. Expatriate personnel may be assigned to and be
employed by the Indonesian person or company. However, for those foreign business firms who want to have a business presence in Indonesia, the recent regulations allow the foreign company to set up a PMA company, which can engage in large-scale retail and
distribution/wholesale activities.

Cooperation Agreement

A business agreement with a domestic enterprise to provide technical assistance, management, and financial arrangements.

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5. Foreign Investment Application and Approval

Foreign investment application and approval, except for investments in the oil and gas and financial sectors, can be obtained at any one of the following: 1) the Office of the Board of Investment (BKPM) in Jakarta, 2) the Regional Investment Coordinating Board (BKPMD) in
the province where the project will be located and 3) the representative office of the Republic of Indonesia where the prospective investor resides.

To apply for investment approval, the foreign investor has to submit to any one of these entities two copies of form Model 1/PMA containing the following information:

1. Names and descriptions of the applicants
2. Name of the company, location and main line of business
3. Annual production and sales of products
4. Land area, foreign and local manpower, and infrastructure requirements
5. Capital structure
6. Project timetable

Foreign investors have therefore the choice of where to apply and secure investment approval. However, for foreign investment projects located in the Bonded Zones, investors should submit the application to the BKPM through the respective Bonded Zone Authority.

After securing the PMA approval, the foreign investor has to secure the permits and licenses required to obtain a permanent business license to operate. For details on Investment Applications visit the Investment Coordinating Board’s website at www.bkpm.go.id.

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6. Employment of Foreign Nationals

PMA companies are allowed to appoint foreign managerial staff and technical experts for whom qualified Indonesian nationals are not yet available. A company wishing to have expatriate employees must obtain a work permit for them. Work permits are usually valid
for a 12-month period. To obtain them the employer or sponsor must submit to the Ministry of Manpower, a Manpower Plan. This should include a plan to train Indonesians who will later take over the positions for which the firm is seeking approval.

Within seven days of arrival in Indonesia the expatriate worker and immediate members of his/her family must report to the District Immigration Office of the district where they are residing to obtain a resident (KIM/S) card.

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7. Environmental Issues

Foreign investors should always consider environmental protection in connection with their activities located in Indonesia. Disregard of this issue can increase the risk that operations will be closed or interrupted as a result of pressure from non-government organizations or local residents.

Law Number 23 Year 1997 pertaining to the Environment Law, states that compliance with the environmental regulations is mandatory in Indonesia. Therefore, companies operating in
Indonesia should be increasingly aware of the need for environmental protection and preservation.

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Attachment 1: Negative Investment List

(As regulated in the Presidential Decree No. 96/2000 as amended by
Presidential Decree No. 118/2000)

Business Fields Totally Closed to Investment:

Agricultural Sector

1. Cultivation and processing of marijuana and the kinds

Marine and Fishery Sector

2. Collection/utilization of sponge

Industrial and Trading Sector

3. Industries of chemical products harmful to the environment, like penta chlorophenol, Dichloro Dipenhyl Trichloro Ethane (DDT), dieldrin, chlordane, carbon tetra chloride, Chloro Fluoro Carbon (CFC), methyl bromide, methyl chloroform, halon, etc.

4. Industries of chemical products stipulated in the Schedule I of the Chemical Weapon Convention (sarin, soman, tabun, mustard, levisite, ricine and saxitoxin)

5. Industries of weapons and components

6. Industries of cyclamate and saccharine

7. Industries of alcoholic drinks (liquor, wine and drinks containing malt)

8. Operation of casinos/gambling

Communications Sector

9. Air traffic system providers (ATS providers) as well as ship statutory and classification surveys

10. Management and operations of Radio Frequency Spectrum and Satellite Orbit Monitoring Stations

Mining and Energy Sector

11. Mining or Radioactive minerals

Business Fields Closed to Investments with Ownership of Foreign Citizens and/or Statutory Bodies in Corporate Capital

Forestry and Plantation Sector

1. Germ plasma cultivation

2. Concessions for natural forest

3. Contractors in the field of lumbering

Communications Sector

4. Taxi/bus transport services

5. Small-scale sailing

Trading Sector

6. Trading and trading supporting services

EXCEPT: large-scale retailer (malls, supermarkets, department stores, shopping centers), wholesale trading (distributors/wholesalers, exporters and importers), exhibition/convention service providers, quality certification service providers, market research service providers, warehousing service providers other than Line I and seaports and after-sale service providers.

Information Sector

7. Radio and television broadcasting service providers, radio and television broadcasting subscription service providers, print media information service providers.

8. Film industry (film making businesses, film technical service providers, film export and import businesses, film distributors and movie house operators and/or film showing service).

Business Field Open to Foreign Investment on Condition of Joint Venture between Foreign and Domestic Capital

1. Building and operation of seaports

2. Electricity production, transmission, and distribution

3. Shipping

4. Processing and provision of clear water for public purpose

5. Public railway service

6. Atomic power plants

7. Medical services, covering the building and operation of hospitals, medical check-ups, clinical laboratories, mental rehabilitation service, public health maintenance security, rent of medical equipment, assistance services for health aid and evacuation of patients in emergency condition, hospital management services and services for testing, maintenance and repair of medical equipment

8. Telecommunications

9. Regular/non-regular/chartered commercial airliners

Business Field Open to Investments on Certain Conditions

Marine and Fishery Sector

1. Cultivation of fish in fresh waters
a. open to foreign investment for freshwater turtles, nila gift, sidat, kodok, lembu, freshwater giant shrimps and thillapya.
b. in cooperation with small-scale fishery businesses.

2. Fishing of demersal fish (big fish, grouper, and other sea fish)
- except ZEEI areas of the Malacca Strait and Arafura sea.

Industrial Sector

3. Industries of pulp made of wood
a. raw material coming from imported chips or guarantee of raw material supply from industrial timber estates (HTI).
b. other than sulfonating and/or chlorination (C12).

4. Industries of pulp made of other cellulose fibres or other materials
- other than sulfonating and chlorination (C12).

5. Chloro alkali producing industries
- other than those using mercury.

6. Processing of finished/semi finished goods of mangrove wood
- raw material coming from mangrove cultivation.

7. Money printing industry
- must secure operational licenses from BOTASUPAL-BAKIN and approval from Bank Indonesia.

8. Special printing industries (postal stamps, duty stamps, Bank Indonesia negotiable papers, passports, and stamped postal matter)
- must secure operational licenses from BOTASUPAL-BAKIN.

9. Milk processing industry (powder and sweetened condensed milk)
- processing, not merely repacking.

10. Plywood and rotary veneer industries
- only for Irian Jaya province (Papua).

11. Sawn timber industries
a. only for Irian Jaya province (Papua).
b. outside Irian Jaya province (Papua), only using logs from non-natural forests.

12. Ethyl alcohol industries
- technical grade, being only used as raw materials and auxiliary
materials of other industries.

13. Industries of raw materials for explosives (ammonium nitrates)
- must be in cooperation with business entities securing recommendation from the Ministry of Defense.

14. Industries of explosives and components for industrial (commercial) needs
a. must be in cooperation with business entities securing recommendation from the Ministry of Defense.
b. only manufacturing activities, while storage and distribution are executed by companies appointed by the government.

15. Electricity planning and supervision consulting services.
Open to foreign investment with the provisions that:
a. PLTA (hydro power plant) with a capacity of above 50 MW.
b. PLTU (steam power plant) with a capacity of above 100 MW.
c. PLTP (geothermal power plant) with a capacity of above 55 MW.
d. main electrical relay station with a voltage of above 500 KV.
e. transmission networks with a voltage of above 500 KV.

16. Electricity equipment construction, maintenance, installation services, development of technology supporting the supply of electricity and testing of electricity installations.
Open to foreign investments with the provisions that:
a. main electrical relay stations with a voltage of above 500 KV.
b. transmission networks with a voltage of above 500 KV.

17. Petroleum and natural gas drilling services
Open to foreign investments with the provisions that:
a. only for offshore drilling.
b. especially for locations outside the Eastern Indonesian Region, must cooperate with national partners operating in the similar business field.

18. Power plant businesses
- open to locations outside Java, Bali and Madura.

Trading Sector

19. Restaurants
- open to foreign investments with the special provisions that they must be located in tourism areas/zones and/or integrated with hotels.

20. Games services
- open to foreign investments with the special provisions that they must be located in tourism areas/zones and/or integrated with hotels.