In 2007, the Government of the Republic of Indonesia (“GOI”) enacted a new Investment law in the form of Law Number 25 of 2007 concerning Investment (“Investment Act”) and made this Investment Act the legal basis of investment activities in Indonesia.
Under this Investment Act, the GOI determines basic investment policies which the foreign investor should pay attention to, that the GOI will give equal treatment to all investors, domestic or foreign, who invest in Indonesia and also ensures legal certainty, business certainty and business safety for investors starting from the licensing process to the termination of investment activities, but still all in accordance with the prevailing legislative regulations.
This Investment Act also regulates what are called Special Economic Zones (Zona Ekonomi Khusus) for which the GOI is entitled to establish separate investment policies. In practice, Batam-Bintan-Karimun have been determined as a Special Economic Zone where foreign investors who are interested in and intend to invest in those areas will benefit from investment policies such as the implementation of single export-import documents and different treatment in the application process whereby the foreign investor can directly apply to those areas for the investment instead of addressed to the central government.
Under the current foreign investment regime, the Investment Coordinating Board (BKPM) is the government body which processes and handles FDI administration and licensing.
A key provision in Indonesia's FDI regime is the Negative Investment List (Daftar Negatif Investasi, or DNI). The list outlines the business fields (under the government business field classifications) that are closed to investment, the business fields that are restricted to investment (e.g. reserved for Indonesian SMEs, or strategic state-owned companies) and the business fields that are open to investment subject to certain conditions, including foreign ownership limitations. It thus determines in which fields foreign investors can have 100% ownership of companies, in which fields they are required to partner with Indonesian businesses, and what particular regulations (e.g. Compliance with local regulations) should be heeded for other sectors still.
The DNI is updated every two years. The government has sought to make the list specific and more transparent, with the current DNI (issued in May 2010) containing 280 business fields. All the fields not listed in the DNI are supposed to be open to investment and open to 100% foreign ownership as well. However, in reality, the list is open to wide interpretation, and causes a lot of uncertainty.
The amount of capital to be invested in a foreign-owned company is decided by the investing parties themselves, and the BKPM approval is based on the economics and scale of the project. Nevertheless, a minimum of USD 100,000 is actually applied. Foreign investment companies are basically free to choose where in Indonesia they will set up operations.
Establishing a company in Indonesia is a highly bureaucratic process, but nonetheless a process that has become relatively easier over the past few years. The first step in this rather complex process is the obtaining of an Investment Approval from the Investment Coordination Board. This approval process is nowadays relatively quick, and can be completed in as little as 10 days.
But this is only the beginning of the process. Once Investment Approval is given, there are a number of other licences the investor must seek from local authorities, depending upon the exact nature of the business activity. This can take considerable time and is often fraught with bureaucratic chicken-egg situations.
The SP also permits the investor to establish an Indonesian company, a process that will take at least two months.
As you can see from this very brief introduction, the process is a complicated and lengthy one and can be a virtual mine field to those who are unfamiliar with dealing with Indonesian ministries. It is essential to acquire the advisory services of a professional investment consultant which specializes in assisting foreign companies who want to establish businesses in Indonesia.
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