From the Economist Intelligence Unit ViewsWire
Why is Indonesia attracting investors?
Foreign investment in Indonesia has risen sharply, but there are renewed concerns about the country's investor-friendliness following the release in June of revised foreign ownership limits. Although the new rules aim to provide greater clarity over the permitted levels of foreign participation in different sectors, the reforms send a mixed signal to investors regarding the future direction of investment policy.
Realised foreign direct investment (FDI) in the first half of the year rose to US$3.5bn, up by 17% year on year, according to the Investment Co-ordinating Board (BKPM). Domestic investment rose to Rp28.4trn (US$3bn) in the same period, up from Rp11.2trn in the year-earlier period.
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The combined value of approved foreign and domestic investment projects rose by nearly 53% year on year in the first six months of 2007. The data offer encouraging signs of an upturn in new investment, although this has not yet been corroborated by other measures, such as direct investment flows in the capital account and imports of capital goods.
A revised "negative investment list", published in June, sets out those industries that are subject to limits on foreign investment. In total, the list specifies 338 industrial subsectors, but in the main serves to clarify existing restrictions rather than impose new ones, and more industries have been opened to greater foreign investment than have been closed. Important industries that remain open to foreign investment include banking, where foreign investors are allowed to hold a controlling stake of up to 99%; power generation, oil and gas, toll-road operation, water, agriculture and plantations (all of which are subject to a ceiling of 95%); insurance (80%); pharmaceuticals (75%); health services (65%); and construction (55%).
However, tighter restrictions have been introduced in the telecommunications sector. Under the new regulations, foreign investors can own up to 65% of mobile-telephone operators (compared with a previous limit of 95%) and 49% of fixed-line phone companies, down from 95%. There had been fears of even tighter restrictions, largely as a result of growing nationalist ire at Singaporean interests in the local telecoms industry
In addition, 25 industries are closed to foreign investment, up from 11 previously, although this reflects a more detailed specification rather than the introduction of additional restrictions. Closed industries include public health, culture and the environment. The new rules will not be applied retroactively.
In many cases, the varying limits on holdings are likely to make little practical difference to foreign investors as long as foreign majority ownership is permitted. Nonetheless, the new restrictions could deter foreigners in two ways. First, the changes generate uncertainty over the future direction of investment policy. Second, to the extent that foreign investment in the telecommunications and transport sectors (two weak points in Indonesia's poor infrastructure network) is deterred, improvement in Indonesia's infrastructure will be retarded, making foreigners more reluctant to invest in other sectors.