INDONESIA UPDATE: NEW NEGATIVE INVESTMENT LIST

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1 June 6, 2016 INDONESIA UPDATE: NEW NEGATIVE INVESTMENT LIST To Our Clients and Friends: What is the Negative Investment List? The "Negative Investment List" or "DNI[1]" is a regulation issued under Indonesian law[2] which sets out a list of industry sectors in Indonesia for which foreign investment is either, or conditionally. This regulation is periodically updated to reflect the Indonesian Government's economic policy. In February the Indonesian Government indicated that it would be extensively revising the Negative Investment List as part of an economic stimulus package to further liberalize the Indonesian economy. One of the issues with interpreting this list is the often unintuitive classification of industry sectors themselves, which are generic and contain no detailed definitions. These classifications were devised by the Central Statistics Bureau and are referred as the 2015 Indonesian Business Sector Classifications ("KBLI"). Due to the lack of these definitions, other regulatory agencies often make their own determinations on what constitutes a certain business activity (see the "Commentary" section below). If an industry sector is not referred to in the Negative Investment List, then it is usually considered wholly open to foreign investment. What has Changed? The Indonesian Government's new 2016 Negative Investment List came into effect on May 18th, 2016[3] and this revokes and replaces the previous list issued in 2014[4]. The 2016 Negative Investment List is intended to make Indonesia more competitive within ASEAN[5] and to boost recently declining foreign direct investment ("FDI") into Indonesia. The table below summarises some of the most notable industry sectors to be affected by the 2016 Negative Investment List and its associated adjustments to foreign ownership limits[6]:

2 Industry Sector Energy, Transport & Infrastructure Geothermal Power (Power Plants of 10 MW or less) Toll Roads Construction Consultancy Services (For Projects of more than IDR10 billion) High Voltage Electricity Construction and Installation Ports Land Transportation Support Services related to Air Transport[7] Support Services related to Airports[8] Salvage Services or Maritime Subsea Work 2014 Negative Investment List of power plants in general is not for plants of less than 1 MW and for plants of 1 10 MW up to a maximum of 95% up to a maximum of 55% 2016 Negative Investment List Introduces a specific category of geothermal power plants which permits foreign ownership up to a maximum of 67% (70% for ASEAN member states) now up to a maximum of 49% No change now up to a maximum of 49% [9] 2

3 Industry Sector Maritime Cargo Handling Telecommunications 2014 Negative Investment List 2016 Negative Investment List (70% for ASEAN member states)[10] Telecommunications Equipment Testing Networks with Integrated Services Telecommunications Towers Financial Services Investment Financing, Working Capital Financing and Multipurpose Financing Pension Funds up to a maximum of 65% Not previously regulated No change up to a maximum of 85% Now deleted i.e., 100% foreign ownership Underwriting Firms Not previously regulated up to a maximum of 30% Non-Bank Money Changers Not previously regulated Healthcare Pharmaceutical Raw Materials up to a maximum of 85% 3

4 Industry Sector Healthcare Support Services[11] Hospital Management Services Medical Device Distributorship 2014 Negative Investment List up to a maximum of 67% up to a maximum of 33% as part of general distribution 2016 Negative Investment List now up to a maximum of 67% Now a specific category which permits foreign ownership up to a maximum of 49% Medical Equipment Not regulated Now includes a "Class A" sub-category for which foreign ownership is up to a maximum of 33% and other classes for which is [12] Commercial and Consumer Alcohol Industry Cane Sugar Industry Cold Storage Crumb Rubber Department Stores (retail space 400-2,000m2) up to a maximum of 95% up to a maximum of 33% No change subject to certain restrictions subject to certain restrictions[13] Now open to foreign ownership up to a maximum of 67%[14] 4

5 Industry Sector Distribution Not Affiliated with Production Electronic Trade Transaction Providers (Investment of less than IDR100billion) Film/ Movie Industry Film Processing Laboratories Non-Hazardous Waste Processing and Disposal Tourism Related Industries[15] Warehousing 2014 Negative Investment List up to a maximum of 33% Not previously regulated up to a maximum of 95% Various categories depending upon the type of business with foreign ownership up to a maximum ranging from 49 51% up to a maximum of 33% 2016 Negative Investment List now up to a maximum of 49% Exceptions Portfolio investments (i.e., investments in listed companies through share purchases on the Indonesian Stock Exchange) are not covered by the restrictions in the Negative Investment List. Wholly-owned foreign ownership is generally in Special Economic Zones (unless the industry sector is reserved for micro/medium sized enterprises). Special Economic Zones are certain areas which have been granted with special economic privileges by the Government of Indonesia. A special grandfathering provision is contained within the 2016 Negative Investment List so that any existing foreign investors in industry sectors that have been affected by the new Negative Investment List are to retain their previously approved investment even if that investment now exceeds the new threshold or is. 5

6 Commentary Despite the more liberalized scope of the Negative Investment List, there continue to be a number of other practical restrictions (or rather conditions) to foreign investment in Indonesia. One of the most significant of these are requirements of the Indonesian Investment Coordinating Board ("BKPM") of a minimum investment amount greater than IDR2.5 billion (approximately USD 186,000) (which BKPM usually expects to be increased to IDR10 billion (approximately USD 746,000) within one year depending upon the initial approval) for the establishment of a foreign investment company. The establishment of such a corporate vehicle is often a prerequisite for a foreign investor wishing to establish a venture in Indonesia (although see the exception above regarding portfolio investments). As mentioned above, due to the KBLI not having produced definitions of what constitutes certain businesses or industry sectors, the BKPM often exercises its discretion to interpret which precise activities come within the scope of each industry sector or business line listed in the Negative Investment List. This often goes beyond a "filling in the blanks" type approach for example, if a particular business is not specifically mentioned in the Negative Investment List (i.e., which should, in theory mean it is open to ), the BKPM may still decide that that business in question falls within the scope of another industry sector. There is therefore often a need for potential investors in conjunction with their counsel to have an initial consultation with the BKPM before making an official application. In certain areas the 2016 Negative Investment List affords higher foreign ownership limits to investors of ASEAN member states. One area which remains untested is the degree to which the BKPM may seek to pierce corporate structures established by a non-asean company which owns or controls an ASEAN company and which is attempting to avail itself of the higher foreign ownership privileges accorded to an ASEAN company[16]. The new Negative Investment List has generally widened the overall scope of businesses for which foreign ownership is. While generally seen a positive move by the Indonesian Government, some aspects have come as a disappointment to some members of the business community who were anticipating a greater degree of liberalisation of certain sectors given the anticipation that a fundamental overhaul of the Negative Investment List would be forthcoming. Although a move in the right direction, foreign participation remains restricted across a considerable part of the Indonesian economy. It remains to be seen whether this will act as the defibrillator to the sluggish heart-beat of Asia's fifth largest economy. [1] Daftar Negatif Investasi. [2] Law No. 25 of 2007 on Capital Investment. [3] Presidential Regulation No. 44 of 2016 on Lists of Business that are Closed for Investment and Business that are Conditionally Open for Investment. 6

7 [4] Presidential Regulation No. 39 of [5] In addition, the 2016 Negative Investment List is also a recognition of the Government of Indonesia's obligations under the ASEAN Comprehensive Investment Agreement (ACIA) of 2009 whereby higher foreign ownership limits are afforded to investors from ASEAN member states. [6] The table does not purport to reflect all the industry sectors or business lines affected by the 2016 Negative Investment List, but only those likely to be of specific interest to our clients. Please contact us for queries on specific business activities. [7] For example: computer reservation systems, ground services, cargo handling and aircraft leasing. [8] Including freight forwarding services and airline general sales agents. [9] Subject to a special license being obtained from the Ministry of Transportation. [10] Limited to only 4 ports located in eastern Indonesia (Bitung, Ambon, Kupang and Sorong). [11] For example, pest control and ambulance services. [12] Class A medical equipment is the simplest kind and other classes B, C and D are in increasing order of complexity. All are subject to the obtaining of a license from Ministry of Health. [13] Foreign investors are still required to secure licenses from the Ministry of Industry and establish their own plantations. [14] Subject to a special license must be obtained from the Ministry of Trade. [15] This includes related businesses such as restaurants, recreation, arts and entertainment and sports facilities (excluding those for billiards, bowling and golf for which 2016 Negative Investment List permits foreign ownership up to a maximum of 67%). [16] The investment benefits of the ASEAN Comprehensive Investment Agreement of 2009 may be denied by an ASEAN member state (the "Denying State") to either (i) a non-asean investor which owns or controls an ASEAN Investor which has no substantive operations in the Denying State, (ii) an ASEAN Investor that is owned by an investor of the Denying State and which has no substantive operations in the Denying State, or (iii) an ASEAN Investor that is owned by a non- ASEAN investor and the Denying State has no diplomatic relations with the non-asean investor's state. 7

8 Gibson Dunn partner Saptak Santra prepared this client update with the assistance of lawyers from the Indonesian law firm Kandar & Partners. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues. For further details, please contact the Gibson Dunn lawyer with whom you usually work or the author: Saptak Santra - Singapore ( , ssantra@gibsondunn.com) 2016 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. 8