From Asia Times http://www.atimes.com/atimes/Southeast_Asia/IG10Ae02.html

Indonesia blacklists FDI
By Bill Guerin

JAKARTA - In an unexpected lurch toward more market protectionism, Indonesia last week greatly expanded its "negative investment list" of local industries to which foreign investment is partially or wholly restricted in Southeast Asia's largest economy.

The new list, which does not require parliamentary approval and is mandated under the recently enacted 2007 Investment Law, will affect at least 338 business sectors, up substantially from 83 previously. The foreign-investment restrictions are by far the most maintained by any regional government and ironically come at a time when foreign direct investment (FDI) to Indonesia trails regional rivals - not to mention China.

According to Trade Minister Mari Pangestu, the ruling, which represents the first major revision in more than seven years, is designed to protect "national interests". As with the previous list, the provisions appear to apply only to FDI, and not to purchases of shares of companies listed on the local stock exchange. The new list will be in force for three years unless revised earlier by a government team tasked with regularly assessing the list. Business fields not covered by the decrees are open to investment unless otherwise closed by law.

Areas in which foreign investment is subject to restriction include armaments and so-called "high-polluting" industries. Foreign investment will also be capped at 49% and 20% respectively for transportation and broadcasting ventures. New foreign investments in the energy and plantation sectors, meanwhile, will be capped at 95%, from 100% previously.

Foreign ownership in the lucrative mobile and fixed-line telecommunications will be capped at 65% and 49% respectively, down substantially from the previous 95% cap for both sectors. The new ruling takes immediate effect, although existing foreign investments in the telecom sector will apparently be unaffected. That's a concession to incumbent Singaporean and Malaysian investors, who already own large chunks of Indonesia's major telecom operators.

Singapore's government investment arm Temasek owns 35% and nearly 42% respectively of local communication companies Telkomsel and Indosat, Indonesia's largest and second-largest mobile-telecom operators. Meanwhile, Telekom Malaysia holds almost 70% of Indonesia's third-largest mobile-telecom operator, PT Excelcomindo Pratama, and another Malaysian company, Maxis, maintains a 95% stake in the small operator Natrindo.

All of these foreign stakes transcend the new protectionist limits, but officials have said there will be no retroactive application of the ruling. According to market analysts, Indonesia's mobile-telecom sector is expected to soar to 100 million subscribers by 2010, from 70 million currently. Those bullish predictions are based on Indonesia's comparatively low mobile-phone penetration rate of 25%, which lags neighboring Malaysia's 80% and Thailand's 60%. Currently, state-controlled Telkomsel and Indosat together control more than four-fifths of Indonesia's mobile-telecommunications traffic and subscriber bases.

Also under the new list, foreign investment will be capped at 80% in the insurance sector, 75% for pharmaceuticals, 65% in health services and 55% in the construction sector. The banking, oil-and-gas, power-generation, toll-road, water and agriculture sectors all still allow for 99% foreign ownership. And certain sectors, including travel agencies and hospital and health-support services, allow for more foreign ownership than previously.

Hard economic realities
Despite relative political stability and recent efforts to improve the overall investment climate, President Susilo Bambang Yudhoyono's government has failed to attract major new foreign investments during his three-year tenure. His administration had earlier set a target of US$426 billion in both foreign and domestic investment for the five-year period spanning 2004-09, including $123 billion for new infrastructure - the bulk of which was expected to come from the private sector.

Yudhoyono has walked a policy tightrope in trying to balance the interests of foreign investors and nationalistic business groups averse to foreigners taking controlling stakes in strategic industries. Some analysts believe that the new negative investment list reflects Yudhoyono's need to shore up political support from powerful business groups in the run-up to what are expected to be hotly contested elections in 2009. At the same time, the new nationalistic measures against select foreign investments threaten to undermine his government's broad economic-reform strategy.

According to Mohammad Lufti, head of the Investment Coordinating Board (BKPM), such levels of investment are necessary to achieve the government's 6.6% annual economic growth for the next three years. High economic growth is in turn needed to reduce unemployment from its stubbornly high level of 9.7% to a more manageable 5.5% and reduce the number of people living in poverty from 36 million to 17 million.

To be sure, there are recent statistical reasons for optimism. Economic growth was higher than expected and on government target at 6.6% in the first quarter of this year. Inflation fell to a manageable 1.4% in the first five months, benchmark interest rates are down to 8.25%, the lowest level in two years, and banks have recently increased their lending targets.

But private investment remains perilously low. Realized FDI in the first half of this year was up 16.8% year on year, from Rp31.59 trillion ($3.5 billion) to Rp36.9 trillion. Realized domestic investment for the same period also rose to Rp18.62 trillion from Rp10.47 trillion.

However, both those increases are up from substantially lower bases. Throughout 2006, actual foreign direct investment dropped to $5.98 billion from $8.91 billion in 2005. Confusing policy signals have caused a substantial discrepancy in FDI approvals and actual realized investments. Last year the government approved $15.6 billion worth of investments, but actually realized only 38% of those foreign commitments.

Those FDI figures could fall further on the newly enacted foreign-investment restrictions. One early response to the measures came from the Indonesian Chamber of Commerce and Industry (Kadin), whose chairman, Muhammad S Hidayat, was quoted in the local media saying some of the changes raised more questions than answers and that the chamber would call a meeting this week with representatives of foreign chambers of commerce to seek foreign views on the new list.

Hidayat said Kadin had played an active role in the drafting of the new tax-law package, but the preliminary details it was provided on the proposed negative investment list were very different from the more restrictive list that was recently announced. Under the new investment law, tax incentives - including reductions, breaks, and deferments - will be granted for investments in labor-intensive industries and in projects related to infrastructure, transfer of technology, so-called "pioneering" and "environmentally friendly" projects.

Both Kadin and International Chamber of Commerce chairman Peter Fanning played major roles in the 2007 Investment Law draft. Enacted in April, the law mandates equal treatment for domestic and foreign companies in some areas and the right for foreign companies to seek redress through binding arbitration using international laws in cases of disputes with the government.

Foreign companies are also protected against nationalization by the government, except in cases of corporate crime. In addition, a new taxation and procedure law enacted last month is widely seen as foreign-investor-friendly, with greater legal rights given to taxpayers and more oversight and tougher penalties stipulated against tax officials found guilty of misconduct - a perennial problem for foreign investors in Indonesia.

Still, the investment law was widely viewed as only one part of a package of reforms needed to improve the overall investment climate, including streamlined investment-approval procedures, other tax reforms, and amendments to the controversial 2003 labor law.

The World Trade Organization in its latest trade-policy review warned that further delays in implementing these key areas could further undermine investor confidence and crimp economic growth. It's still unclear whether the new list is in violation of the world body's trade and investment protection regulations. What is clear is that the new restrictions on FDI could make the WTO's earlier warning a self-fulfilling prophesy.

Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has been in Indonesia for more than 20 years, mostly in journalism and editorial positions. He specializes in Indonesian political, business and economic analysis, and hosts a weekly television political talk show, Face to Face, broadcast on two Indonesia-based satellite channels. He can be reached at softsell@prima.net.id.
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