After 10 months of deliberations and 11 years in the planning, Indonesia's Parliament passed a new investment bill that ensures equal government treatment for foreign and domestic investors and promises to cut the costly and cumbersome red tape that inhibits many local business sectors.
The new law integrates previous investment-related laws and is specifically designed to revive sagging foreign investment, especially foreign direct investment (FDI) in new industrial capacity and natural-resource extraction. The move comes as Indonesia has been hit particularly hard by China receiving the lion's share of Asia-destined foreign capital in recent years.
President Susilo Bambang Yudhoyono has pursued a business-friendly policy and stated his hope that the new investment-promotin g provisions will propel economic growth and resolve the country's pressing unemployment problem - 10.6% of the workforce is currently jobless. The issue promises to feature prominently during general elections scheduled for 2009.
The new law leaves several sectors of the Indonesian economy closed to foreigners, principally communications, media and local transportation. However, it goes a long way in sorting out issues related to land and property, which have been perennial hurdles to luring badly needed foreign investment in infrastructure projects.
The new law extends land-cultivation rights for foreigners to 95 years and building rights from 50 to 85 years. The clause was apparently designed to encourage more foreign investment in the mining and energy sectors, which have been hobbled by regulatory and legal uncertainty in recent years.
This particular clause sparked a heated debate in Parliament, prompting the walkout by former president Megawati Sukarnoputri' s nationalistic Indonesian Democratic Party of Struggle (PDI-P), whose legislators cried foul over the longer duration of land titles. National Awakening Party (PKB) legislators, though they remained in the chamber during the plenary session, claimed the longer land title periods would disproportionately benefit big investors - especially foreign ones - and at the same time hurt local farmers.
Outside the House of Representatives, hundreds of assorted activists from such organizations as the Forum for Indonesian Development, Solidarity for Indonesian Women, and the Urban Poor Consortium protested against the imminent passage of the law, claiming it would encourage "neo-colonialism" .
Foreigners will definitely benefit. Under the 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 industries, and environmentally friendly projects. Foreign investors, meanwhile, will be entitled to two-year residency permits that are eventually convertible into permanent residency permits.
The law also provides legal certainty where overlapping regional bylaws are involved and guarantees foreign investors against the threat of nationalization of their invested assets - which has been a growing risk ever since sweeping decentralization measures were introduced and nationalistic local officials leveraged them to extract benefits from foreign-invested companies situated in their regions.
Meanwhile, the Investment Coordinating Board (BKPM), currently under the control of the Trade Ministry, will be upgraded to a non-departmental institution that reports directly to the president. In anticipation of the new investment law's passage, preliminary BKPM figures show that FDI inflows reached US$3 billion from January to March this year.
Those figures look encouraging given that last year foreign investment fell to $5.9 billion, down 32.9% from the $8.9 billion received in 2005. Domestic investment last year fell in line with
foreign inflows, dipping 32.2% to Rp20.8 trillion ($2.28 billion) from Rp30.6 trillion in 2005.
Boediono, coordinating minister for the economy, concedes that BKPM statistics don't show the entire investment picture, as a substantial amount of funds are not recorded by the agency because they don't go through official channels. He was speaking on investment-related issues and the impending new investment law at last month's annual meeting of the Indonesian Chamber of Commerce and Industry (KADIN).
Long-term complaints
Foreign investors in Indonesia have long complained about rampant corruption, red tape, poor infrastructure, powerful labor unions, local-autonomy problems and judicial unpredictability. The foreign business community has so far responded coolly to the new law, which many contend does not go far enough without revisions to the labor and tax laws. And, of course, there are concerns about the actual implementation and the judiciary's willingness to uphold the new law impartially.
Noke Kiroyan, president of the Indonesia Australia Business Council, says tax and labor reform is far more important than the provisions included in the new law. KADIN chairman M S Hidayat, meanwhile, says that any revisions to the 2003 labor law, which grants dismissed workers generous severance and service payments, would need to be concluded this year, as next year the parties and legislators will be focused on the 2009 general elections and less likely to implement laws that would go down badly with a large section of the population. Yudhoyono earlier backed away from proposed business-friendly revisions to the labor law.
Sofyan Wanandi, chairman of the Indonesian Employers Association, contends that what concerns most foreign investors is the actual implementation of any business-related law, including the new investment law, particularly at the local-government level. For instance, the embattled mining sector has been under siege on several legal fronts since regional-autonomy laws were implemented in 2001, causing Indonesia to miss out on surging global commodity prices.
The Regional Administration Law No 22/1999 and the Intergovernmental Balance Law No 25/1999 were enacted in January 2001 amid regions' outcries for greater authority in managing local affairs. They have since used those power-devolving laws to challenge foreign-investor claims on resources they won through centrally administered concessions.
Meanwhile, the long-awaited draft bill on mining, which would replace the outmoded 1967 Mining Act, has been stuck in the corridors of power for years. The new mining bills meant to do away with the current contract of work (CoW) system that gives special incentives and guarantees to foreign investors. Though the CoW system had gained appreciation by the international mining industry, it will hypothetically be replaced by a new licensing system. Unlike the CoW system, which requires a presidential signature, future mining agreements would be subject to approval only from the local authorities.
Unlike under the CoW system, where disputes were settled through independent arbitration, under the new licensing system all decisions will be up to the local authorities, who could revoke their licenses at any time - or worse.
Richard Ness, US gold miner Newmont's president director for Indonesian operations, is on trial in Manado, North Sulawesi province, on charges that the company knowingly polluted the local environment. The mine has been closed since 2004, despite Newmont's claims that it has fully complied with local waste-disposal laws.
If Ness is eventually found guilty, Newmont has said it will reconsider its hundreds of millions of dollars' worth of investments in the country. And so far it's not clear to Newmont or many other foreign investors that the new investment law will provide any better protection against what they deem to be arbitrary and politically motivated charges against foreign investors.
The new law integrates previous investment-related laws and is specifically designed to revive sagging foreign investment, especially foreign direct investment (FDI) in new industrial capacity and natural-resource extraction. The move comes as Indonesia has been hit particularly hard by China receiving the lion's share of Asia-destined foreign capital in recent years.
President Susilo Bambang Yudhoyono has pursued a business-friendly policy and stated his hope that the new investment-promotin g provisions will propel economic growth and resolve the country's pressing unemployment problem - 10.6% of the workforce is currently jobless. The issue promises to feature prominently during general elections scheduled for 2009.
The new law leaves several sectors of the Indonesian economy closed to foreigners, principally communications, media and local transportation. However, it goes a long way in sorting out issues related to land and property, which have been perennial hurdles to luring badly needed foreign investment in infrastructure projects.
The new law extends land-cultivation rights for foreigners to 95 years and building rights from 50 to 85 years. The clause was apparently designed to encourage more foreign investment in the mining and energy sectors, which have been hobbled by regulatory and legal uncertainty in recent years.
This particular clause sparked a heated debate in Parliament, prompting the walkout by former president Megawati Sukarnoputri' s nationalistic Indonesian Democratic Party of Struggle (PDI-P), whose legislators cried foul over the longer duration of land titles. National Awakening Party (PKB) legislators, though they remained in the chamber during the plenary session, claimed the longer land title periods would disproportionately benefit big investors - especially foreign ones - and at the same time hurt local farmers.
Outside the House of Representatives, hundreds of assorted activists from such organizations as the Forum for Indonesian Development, Solidarity for Indonesian Women, and the Urban Poor Consortium protested against the imminent passage of the law, claiming it would encourage "neo-colonialism" .
Foreigners will definitely benefit. Under the 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 industries, and environmentally friendly projects. Foreign investors, meanwhile, will be entitled to two-year residency permits that are eventually convertible into permanent residency permits.
The law also provides legal certainty where overlapping regional bylaws are involved and guarantees foreign investors against the threat of nationalization of their invested assets - which has been a growing risk ever since sweeping decentralization measures were introduced and nationalistic local officials leveraged them to extract benefits from foreign-invested companies situated in their regions.
Meanwhile, the Investment Coordinating Board (BKPM), currently under the control of the Trade Ministry, will be upgraded to a non-departmental institution that reports directly to the president. In anticipation of the new investment law's passage, preliminary BKPM figures show that FDI inflows reached US$3 billion from January to March this year.
Those figures look encouraging given that last year foreign investment fell to $5.9 billion, down 32.9% from the $8.9 billion received in 2005. Domestic investment last year fell in line with
foreign inflows, dipping 32.2% to Rp20.8 trillion ($2.28 billion) from Rp30.6 trillion in 2005.
Boediono, coordinating minister for the economy, concedes that BKPM statistics don't show the entire investment picture, as a substantial amount of funds are not recorded by the agency because they don't go through official channels. He was speaking on investment-related issues and the impending new investment law at last month's annual meeting of the Indonesian Chamber of Commerce and Industry (KADIN).
Long-term complaints
Foreign investors in Indonesia have long complained about rampant corruption, red tape, poor infrastructure, powerful labor unions, local-autonomy problems and judicial unpredictability. The foreign business community has so far responded coolly to the new law, which many contend does not go far enough without revisions to the labor and tax laws. And, of course, there are concerns about the actual implementation and the judiciary's willingness to uphold the new law impartially.
Noke Kiroyan, president of the Indonesia Australia Business Council, says tax and labor reform is far more important than the provisions included in the new law. KADIN chairman M S Hidayat, meanwhile, says that any revisions to the 2003 labor law, which grants dismissed workers generous severance and service payments, would need to be concluded this year, as next year the parties and legislators will be focused on the 2009 general elections and less likely to implement laws that would go down badly with a large section of the population. Yudhoyono earlier backed away from proposed business-friendly revisions to the labor law.
Sofyan Wanandi, chairman of the Indonesian Employers Association, contends that what concerns most foreign investors is the actual implementation of any business-related law, including the new investment law, particularly at the local-government level. For instance, the embattled mining sector has been under siege on several legal fronts since regional-autonomy laws were implemented in 2001, causing Indonesia to miss out on surging global commodity prices.
The Regional Administration Law No 22/1999 and the Intergovernmental Balance Law No 25/1999 were enacted in January 2001 amid regions' outcries for greater authority in managing local affairs. They have since used those power-devolving laws to challenge foreign-investor claims on resources they won through centrally administered concessions.
Meanwhile, the long-awaited draft bill on mining, which would replace the outmoded 1967 Mining Act, has been stuck in the corridors of power for years. The new mining bills meant to do away with the current contract of work (CoW) system that gives special incentives and guarantees to foreign investors. Though the CoW system had gained appreciation by the international mining industry, it will hypothetically be replaced by a new licensing system. Unlike the CoW system, which requires a presidential signature, future mining agreements would be subject to approval only from the local authorities.
Unlike under the CoW system, where disputes were settled through independent arbitration, under the new licensing system all decisions will be up to the local authorities, who could revoke their licenses at any time - or worse.
Richard Ness, US gold miner Newmont's president director for Indonesian operations, is on trial in Manado, North Sulawesi province, on charges that the company knowingly polluted the local environment. The mine has been closed since 2004, despite Newmont's claims that it has fully complied with local waste-disposal laws.
If Ness is eventually found guilty, Newmont has said it will reconsider its hundreds of millions of dollars' worth of investments in the country. And so far it's not clear to Newmont or many other foreign investors that the new investment law will provide any better protection against what they deem to be arbitrary and politically motivated charges against foreign investors.
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