Indonesia’s Revised Negative Investment List Is Truly Negative

DNI a stumbling block to investment and source of confusion to investors since it was first issued

By Andrew White, AmCham Indonesia Managing Director
Sunday, May 18, 2014

Indonesia’s long-awaited revised negative investment list, or DNI, has now been enacted into law. The list was first issued in 1998 and is supposed to be revised every three years. The list was revised last in 2010 and previously, in 2007 and 2000.

The list specifies those sectors of the Indonesian economy in which foreign investment is either prohibited or limited. An important point to understand is that the DNI can be no more liberal than various other laws and regulations already on the books, and so it cannot liberalize investment restrictions included in other laws. At best, it only parrots restrictions already in place; at worst, it adds more restrictions and prohibitions on foreign investment.

While recognizing the need to control foreign investment in specific, sensitive areas of the economy such as certain military technologies, security printing, and media, the DNI has historically gone much further. It sets arbitrary limits to foreign investment across a wide range of sectors of the economy, with foreign investment caps ranging anywhere from no ownership to 95 percent ownership. It has served both as a stumbling block to investment and a source of confusion to investors since it was first issued. Why? Principally because companies wanting to invest look for long-term certainty, and an investment permission list that changes every three years creates only uncertainty.

When the government announced in early 2013 that it was working on a new revised DNI, foreign investors were initially optimistic that this signaled an opening up to investment. Investors were encouraged in initial discussions with government representatives who informed foreign business groups that the aim of revising the list was to spur investment by opening up sectors formerly limited or closed. Investors assumed that during the process of liberalizing the DNI, the government would in tandem work to amend existing laws and regulations that restrict investment to bring them in line with a more investment-friendly DNI. Foreign business groups were further heartened by assurances provided by the government that they would be included in stakeholder consultations during the revision process and that their input would be taken into account.

Much has changed since then. Increasingly, the government’s attitude toward investment has become less open and more protection-oriented. As revisions to the DNI dragged along, rumors began circulating in the foreign investment community that certain interests were arguing forcefully behind closed doors against any further opening of the economy, and were urging further investment restrictions in sectors previously unrestricted or less restricted, including wholesale and retail trade, electricity, and oil and gas. Contrary to initial assurances from the government that foreign investors would be part of the formal stakeholder consultation process, no formal review and comment mechanism was ever instituted involving foreign investors. Decisions were made behind closed doors.

The outcome was sadly predictable. The newly revised DNI represents a step backward towards a more protectionist, less investment-friendly environment. It arrives in the wake of a number of recently issued protectionist laws and regulations, including the recent mineral export tax regulation and Trade and Industry laws that make it increasingly more difficult for foreign companies to invest and do business in Indonesia.

The revised DNI entirely closes retail trade to foreign investment. It even more heavily restricts foreign investment in a number of other sectors, including telecommunications, agriculture, oil, gas, electricity and power. While the new list opens slightly investment in some sectors, such as pharmaceutical (to 85 percent from 75 percent), these incremental increases will have little, if any, positive impact on future investment decisions.

Future investments in the energy sector have been dealt a particularly hard body blow by the new DNI. Platform oil and gas construction, onshore and offshore gas drilling, pipeline installation, oil and gas well operation and maintenance are now either additionally limited or closed entirely to foreign investment.

The investment limitations in oil and gas are particularly ill-timed given Indonesia’s desperate need to spur production and reduce its reliance on imported fuel.

Today, Indonesia relies on imports for more than 50 percent of its total energy needs, and some experts say that figure will approach 90 percent by 2030 if new discoveries are not brought on line. Domestic oil production, which peaked in 1995 at 1.6 million barrels per day, is expected to decline to 804,000 bpd in 2014 — its lowest level since 1969. Investment projects already approved and in the pipeline are moving at a snail’s pace due to bureaucratic delays.

New discovery projects are not being approved. Less than 10 percent of total oil investment is going to exploring new wells (only 16 percent of 33 targeted wells have been drilled in 2014), and Indonesia’s proven oil reserves have declined by more than 30 percent since 1997.

Suffice it to say that the newly revised negative investment list is truly negative for future investment.

Andrew White is managing director of the American Chamber of Commerce in Indonesia.

This article first appeared in the May 13, 2004 edition of the Jakarta Globe newspaper.

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