Restricted Sectors for Investment

Indonesia's investment law allows the establishment of wholly owned foreign companies, except for sectors on the government's "negative investment list." Presidential Decree 96/2000 sets out the most recent list of sectors with investment restrictions of some sort. These include the following:

(a). Sectors closed to all investors: Businesses that produce, process, or develop any of the following: marijuana, sponges, harmful chemical products, weapons, alcoholic drinks, casinos, air traffic systems.

(b) Sectors closed to foreign investors: germ plasm cultivation; forest concessions; lumbering contractors; taxi/bus transport and small-scale water transport services; print media, TV, radio, film and cinema, including distribution and exhibition; small-scale retail trade.

(c). Industries with restricted ownership limits for foreigners: airport/seaport construction and operation; electricity production, transmission and distribution; atomic power plants; shipping; drinking water; railway service; certain medical services. In addition, a variety of industries have limitation on foreign investment, usually restrictions on business locations and scope of operation. Projects in these industries require special licensing.

(d) Other sectors are reserved for domestic small-scale enterprises, or large or medium-scale foreign companies on condition that they partner with local small businesses or cooperatives before investment applications are approved, such partnerships need not include explicit domestic share ownership.

Government Regulation No. 20/1994 and Decree No. 15/1994 requires foreign investors with wholly owned companies to divest partial ownership to an Indonesian partner after fifteen years of commercial operations. The regulation does not specify the required divestment percentage, and may lead government officials to make arbitrary rulings in the future.

BKPM officials maintain that foreign investors will only need to divest between one and five percent of ownership, but no companies are required to divest prior to 2008. Under Indonesia's Coal Contracts of Work (CCOW) foreign shareholders are required to divest up to 51 percent under a fixed timetable.

Foreign firms are now allowed to invest directly in both wholesale and large-scale retail trade sectors (generally interpreted as shopping centers, malls, supermarkets, and department stores), with the condition that they enter into a cooperative agreement with a small-scale enterprise.

Such an agreement, in practice, did not require equity participation by the small-scale enterprise. In addition, many foreign firms use franchising, licensing, and technical service agreements to distribute their goods.

Indonesia has lifted many restrictions on foreign participation in domestic distribution services. Under current regulations, foreign companies manufacturing in Indonesia may distribute their locally produced goods at the wholesale level and may apply for permits to import and distribute other products as well.

These licensing processes may be substantially affected by decentralization. Companies engaging in wholesale distribution may not conduct retail operations directly, but must form a separate retail company. However this regulation has been amended by Regulation No.111 of 2007.

The revisions and clarifications under Regulation 111 are minor, but significant in nature and provide a regulatory framework that is far less susceptible to deviant interpretations which the government is endeavouring to avoid in order to increase capital investment. The major amendments relate to restrictions imposed on foreign capital investment in the retail sector; now this sector has restrictions on foreign investors participating in business ventures and therefore provide simultaneous protection for Indonesian retailers, such as, among other things:

• Supermarkets with a selling space area of less than 1,200m2
• Department Stores with a selling space area of less than 2,000m2
• Mini Markets with a selling space area of less than 400m2
• Non-Store Retail Sales of Agricultural Produce, e.g. rice and other crops, fruits, vegetables, etc.
• Non-Store Retail Sales of Processed Foods and Beverages, e.g. rice, bread, deep-fried, boiled or steamed cakes and the like, coffee and various sugars, etc.
• Non-Store Retail Sales of Chemicals, Pharmaceuticals, Cosmetics and Laboratory Apparatus, e.g. medicinal herbs, cosmetics, etc.
• Non-Store Retail Sale of Textiles, Clothing, Footwear and Articles of Personal Use, e.g. shoes, sandals and other footwear, etc.
• Non-Store Retail Sale of Household Goods and Kitchenware, e.g. electronic appliances, devices and equipment, plastic/melamine wares etc.
• Non-Store Retail Sale of Paper, Paper Articles, Stationery, Printed Matters, Sports Goods, Musical Instruments, Photographic Instruments, and Computers, e.g. photographic and optical devices/equipments, software printing and publication, etc.
• Non-Store Retail Sales of Handicraft, Toys, and Paintings. Retail Sale of Fuels and Lubricants, e.g. oil fuel, gas fuel, lubricating oils, and other fuels.
• Retail Sale of Construction Materials, e.g. cement, limestone, sand, stones and paints, etc.
• Retail Sale of Machines (except Cars and Motorcycles) and Spare Parts including Transportation Vehicles, e.g. farm machineries, sewing machines, non-engine driven land transportation vehicle and water transportation vehicles, etc.
• Retail Sale of Cars, e.g. car spare parts and accessories, etc.

The amendments other than in the retail sector are, among others: Rental of Farm, Construction and Civil Engineering Machineries and their equipments. Other Services i.e. Laundry, Haircutting and Tailoring Services and Beauty Salon.

Further amendments to the Negative List are possible. However, any future amendments will be in accordance with the national interest and the needs of the Indonesian