VZCZCXRO1062
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #1212/01 1200934
ZNR UUUUU ZZH
R 300934Z APR 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 4537
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 0498
RUEHBY/AMEMBASSY CANBERRA 0708
RUEHBJ/AMEMBASSY BEIJING 4071

UNCLAS SECTION 01 OF 05 JAKARTA 001212 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EEB/IFD/OIA AND EAP/MTS 
TREASURY FOR IA-SEARLS 
SINGAPORE FOR BAKER 
USDOC FOR SBERLINGETTE/4430 
DEPT PASS USTR DKATZ 
 
E.O. 12958: N/A 
TAGS: EINV ECON ETRD PGOV KCOR ID
SUBJECT: INDONESIA'S NEW INVESTMENT LAW - GOOD NEWS AND GREY AREAS 
 
¶1. (SBU) Summary.  After a two year delay, Parliament passed a new 
Capital Investment Law on March 29 that provides a range of 
protections for investors including equal treatment for foreign and 
domestic investors, protection against nationalization, 
international arbitration for foreign investors, free repatriation 
of profits, and extended land usage periods.  Investors were hoping 
that the Investment Coordinating Board's (BKPM) burdensome approval 
authority would be curtailed in the new law.  The new law does not 
provide explicit authority for the BKPM to issue investment 
approvals, which may herald a shift to a streamlined investment 
registration system.  However, the BKPM retains authority to issue 
recommendation letters for granting certain investment incentives, a 
potential backdoor approval.  The new law leaves unresolved a number 
of policy and operational issues, the clarification of which will 
determine the degree of openness and competitiveness of Indonesia's 
investment regime.  These include the content of a forthcoming 
"negative list" of open, restricted, and closed sectors for 
investment, the future role of a strengthened BKPM, and the balance 
of authority between the BKPM, Jakarta line ministries, and local 
governments in the issuance of investment permits and licenses, 
traditionally an area of widespread rent seeking in Indonesia.  We 
encourage Washington agencies to use available opportunities, 
including the May 21 visit by Trade Minister Mari Pangestu, to urge 
the GOI to use forthcoming Presidential Regulations for a more open, 
transparent, and competitive investment regime in Indonesia -- by 
reducing the number of sectors on the negative list and maximizing 
the openness of investment licensing.  Suggested talking points are 
in paragraph 18.  End Summary. 
 
Main Features of New Law 
------------------------ 
 
¶2. (U) On March 29, Parliament (the DPR) passed a new Capital 
Investment Law creating a single umbrella law for both foreign and 
domestic investment and replacing the 1967 Foreign Investment Law 
and the 1968 Domestic Investment Law.  The law provides a range of 
investment protections: 
 
- Article 6 provides "equal treatment for all investors, regardless 
of their country of origin, who undertake investment activity in 
Indonesia in accordance with prevailing laws and regulations." 
 
- Article 12 specifies that all business sectors are open to 
investment activity except those which are explicitly closed. 
 
- Article 14 entitles investors to "certainty of rights, law and 
protection" as well as "transparent information." 
 
- Article 32 (4) mandates international arbitration in the event of 
disputes between foreign investors and the government based on 
agreement between the parties. 
 
- Article 7 provides protection against nationalization, noting that 
any taking over of ownership rights must be in accordance with the 
law, and be compensated at market value.  Any dispute, along with 
compensation, will be settled through arbitration. 
 
- Article 8 gives the investor the right to freely transfer and 
repatriate capital, profits, bank interest, dividends, and other 
earnings, as well as funds required to purchase raw materials, 
replace assets, repay loans, or conduct a range of other 
transactions.  Transfers and repatriations must take place "in 
accordance with prevailing laws and regulations." 
 
- The new law does not repeat provisions requiring forced 
divestiture and limiting the duration of foreign investment that 
existed under the 1967 Foreign Investment Law, Articles 18 and 27. 
 
Investment Incentives 
--------------------- 
 
¶3. (U) Article 18 provides for special tax incentives for certain 
types of investment under specified conditions. Capital investment 
qualifying for special treatment must fulfill certain criteria such 
as employing a large number of workers (not specified); 
infrastructure or SME projects; investments in remote or undeveloped 
areas; or investments promoting innovation, research or "pioneering" 
industries. 
Incentives offered to these industries include income tax 
reductions; exemptions or reductions of import duties and VAT for 
 
JAKARTA 00001212  002 OF 005 
 
 
capital goods and raw materials; accelerated depreciation; and 
reduced property tax.  Article 20 states that these incentives will 
not be granted to foreign capital investment which is not in the 
form of a limited liability company. 
 
¶4.  (SBU) However, the relationship between the incentives contained 
in the new Capital Investment Law and the GOI's recent investment 
incentive package outlined in Government Regulation 1/2007 of 
January 2007 is unclear.  The implementing regulations for 
Government Regulation 1/2007, Ministry of Finance decree 
20/HMS/2007, outline a similar, but not identical, set of incentives 
for investors, although they do not contain import duty reductions. 
Lengthy discussions between the Ministry of Finance, BKPM, and 
Ministry of Trade are likely as the GOI seeks to harmonize the new 
law with Government Regulation 1/2007 and its implementing 
regulations, as required by Article 39 of the new law. 
 
Negative List Pending 
--------------------- 
 
¶5. (SBU) Although the law contains a comprehensive set of investment 
protections, the degree to which it proves to be liberalizing in 
practice will depend on the implementing regulations, particularly 
forthcoming Presidential Regulations on the negative list and 
investment licensing.  Article 12 of the law states that the 
"Government, based on a Presidential Regulation, shall determine the 
business sectors closed for capital investment, both foreign and 
domestic, based on the criteria of health, morals, culture, 
environment, national defense and security, and other national 
interests."  Trade Minister Pangestu has stated the GOI's goal is to 
set out a clear set of guidelines and conditions for the negative 
list, using standard industry codes.  A joint Ministry of 
Trade-Coordinating Ministry for Economic Affairs team has prepared a 
first draft of a comprehensive negative list, which has sparked an 
intense bureaucratic struggle, with domestic industry groups and 
their allies in the line ministries seeking to ensure that the new 
negative list does not open their sectors to more foreign 
competition.  BKPM Chairman Lutfi spooked the markets the week of 
April 16 when he made comments suggesting the forthcoming negative 
list could close a number of sectors currently open to investors. 
 
¶6.  (SBU) Although few observers expect the final negative list to 
open significant new sectors to foreign investment, the fact that 
the negative list will be in the public domain for the first time in 
a unified document represents a major step forward for transparency. 
 Currently, Directorate Generals at line ministries with regulatory 
responsibilities keep their own lists of investment restrictions in 
the sectors they regulate, with no central document or formal 
process for revising the lists.  This leaves them with an extreme 
amount of discretionary authority in accepting or rejecting proposed 
investments.  Unlike the original optimistic forecasts that the 
implementing regulations would be completed within a month, World 
Bank consultants working with the GOI on the negative list now say 
it may take several months to complete the negative list. 
 
Who Licenses Investments? 
------------------------- 
 
¶7. (SBU) A second, major unresolved area in the new law relates to 
the question of which governmental bodies will license investments, 
and by what process.  Article 26, in a roundabout way, states that 
"authorized institutes or institutions" have the authority to 
provide "one-door integrated service" to issue investment licenses. 
Article 28 (j) then gives the BKPM power to "coordinate and 
implement" one-door services (also referred to as one-roof or 
one-stop services).  Article 29 adds that in carrying out its 
one-door integrated services, BKPM will "involve representatives 
from each relevant sector and region using officials who are 
competent and authorized." 
 
¶8.  (SBU) These provisions, in effect, paper over an ongoing 
bureaucratic struggle between the BKPM and the line ministries over 
which will issue relevant sectoral licenses (and control attendant 
rent-seeking opportunities).  The BKPM's consistent objective has 
been to move most, if not all, issuance of sectoral licenses 
required for investors into BKPM-operated one-stop shops.  However, 
the agency lacks the staff and expertise to issue licenses in 
specialized industries such as mining, aviation, or financial 
services, and also lacks the ability to evaluate environmental 
impact statements.  At the same time, line ministries are extremely 
 
JAKARTA 00001212  003 OF 005 
 
 
reluctant to give up their authorities.  One possible compromise 
would be to make the BKPM a "post office" for receiving license 
applications that it would then pass to line ministries for 
processing, but World Bank experts note that similar systems in 
other countries have worked poorly.  In any event, fierce 
bureaucratic fighting is likely as the GOI drafts the Presidential 
Regulation on provisions and procedures for the one-door integrated 
services as required by Article 26. 
 
Role of BKPM: A Work in Progress? 
--------------------------------- 
 
¶9. (SBU) The new law strengthens the BKPM's status by turning it 
into a "non-governmental institution" with its chairman directly 
responsible to the President.  However, it contains little 
information on the policy or operational role of the BKPM, which has 
won little affection from foreign investors over the years because 
of its non-transparent and lengthy approval system.  Minister 
Pangestu had pushed since 2005 for BKPM's role to be one of 
investment promotion and registration, rather than approval.  But 
Article 27 wields the imprecise verb "coordinate" five times in four 
sentences when discussing the roles of the Government and BKPM.  The 
law gives government the authority to coordinate capital investment 
policy, while giving the authority for implementation of that policy 
to the BKPM. 
 
¶10. (SBU) One key unresolved issue is whether the BKPM will continue 
to approve investments.  Article 30 (7)(e) notes that the authority 
of the GOI (not BKPM, which is a non-governmental institution) 
covers "foreign capital investment and investors using foreign 
capital, capital from a foreign government based on an agreement 
between the GOI and the foreign government...."  The law does not 
explicitly grant the BKPM the authority to approve investments, as 
it has done throughout its existence.  (Note:  The BKPM administers 
a two-stage investment approval system that is separate from the 
business licensing procedures and corporate legalization process 
required of all foreign investments.  The BKPM process is not 
included in the International Finance Corporation's much-cited "151 
days".)  However, other portions of the law grant the BKPM the 
authority to issue letters of recommendation for foreign investors 
to receive immigration and residency permits.  "The BKPM fought hard 
to keep approval of FDI," one IFC consultant noted. 
 
Strengthened GOI Authority 
to Terminate Contracts 
-------------------------- 
 
¶11. (SBU) One provision of the law causing concern among the oil, 
gas, and mining communities is Article 33 (c), which appears to 
greatly strengthen the GOI's authority to terminate oil and gas 
Production Sharing Contracts (PSCs) or mining Contracts of Work 
(COW).  According to the article, the Government is required to 
terminate an agreement or cooperation contract with an investor if 
that investor "commits a corporate crime in the form of a tax crime, 
inflating recovery costs, and other markups to minimize profit, 
resulting in loss to the state, based on a finding or investigation 
by authorized officers, and after a binding court decision..." 
Although this provision, which Parliament asserted on its own 
initiative, only makes formal the de facto situation on this issue, 
it highlights the lack of trust between Indonesia and foreign 
investors in the resource sector. 
 
¶12. (SBU) Paragraph (a) of the same article prohibits all investors 
from "entering into agreements and/or statements which assert that 
share ownership in said limited liability company is for and on 
behalf of another person.  This appears designed to limit the use of 
nominees and is again likely aimed at PSCs and COWs in the oil, gas, 
and mining sector. 
 
Land and Labor Issues 
--------------------- 
 
¶13. (SBU) Articles 21 and 22 grant capital investment businesses 
rights over land.  Most observers view these measures as a 
strengthening of property rights for investors.  The issue of land 
use was a sensitive point of deliberation in the DPR and has caused 
some controversy since its announcement.  Under the two articles, 
the GOI can grant the right to cultivate land for 95 years (60 years 
initial application plus a 35-year extension); the right to build 
for 80 years (50 plus 30); and the right to use for 70 (45 plus 25). 
 
JAKARTA 00001212  004 OF 005 
 
 
 These land use rights are intended to support long-term investments 
that help the Indonesian economy become more competitive, do not 
require a large area, and do not damage the public interest.  Rights 
can be renewed after evaluation.  However, there is some question as 
to whether the new land use provisions conflict with the 1993 
Agrarian Law. 
 
¶14. (SBU) Article 10 specifies a preference for Indonesian manpower, 
but grants investors the right to hire foreign experts for 
particular positions.  However, foreign workers are obligated to 
conduct training and transfer technology to Indonesian workers. 
Article 23 (3) states that foreign capital investors may be granted 
a limited stay permit for two years, which can be converted to a 
permanent residence permit after two years consecutive residence. 
This provision replaces the current one-year permit and six-month 
visa, and may represent a major win for foreign Chambers of Commerce 
in Jakarta.  However it is unclear if the "foreign capital 
investors" the article cites includes foreign managers of companies 
or just equity investors/shareholders.  Article 23 (4) notes that 
the limited state permit is granted by the DG for Immigration "based 
on a recommendation of the BKPM."  This provision concerns some 
observers, because it could provide the BKPM the discretion to keep 
certain foreign investors out by withholding a recommendation. 
Criteria for granting the recommendation are also unclear.  Article 
23 will require an implementing regulation from the Ministry of 
Labor. 
 
Investment Promotion 
and Special Economic Zones 
-------------------------- 
 
¶15. (SBU) One of Trade Minister Mari Pangestu's original goals for 
the investment law was to use it to strengthen the BKPM's investment 
promotion function.  Article 28 (f) gives BKPM the "duty and 
function...to promote capital investment" but without further 
details or clarification.  There is no indication as to what 
investment promotion should consist of, or how it should be carried 
out.  Article 31 grants the Government the authority to determine 
"stand-alone investment policies" for SEZs, and require the GOI to 
set out the provisions governing Special Economic Zones in a law. 
 
¶16. (U) According to Article 35, international agreements approved 
before this law, shall remain valid, i.e. are grandfathered. 
However draft agreements not yet concluded, must be adjusted 
according to the provisions of the law (Article 36).  This may have 
an impact on future discussions of an updated OPIC bilateral 
agreement. 
 
Observers: Mixed Sentiments 
--------------------------- 
 
¶17. (SBU) "We're just glad the law finally passed after two years," 
one international investment bank noted, "but the devil is still in 
the details."  Some analysts estimate that at four presidential 
regulations and several ministerial decrees will be required to 
manage the various provisions of the new law.  Sofjan Wanandi, head 
of the Indonesian Employers Association told the press, "whether the 
investment law will manage to attract investors will depend on its 
implementation.  Investors will take a wait-and-see attitude until 
the regulations are issued."  Despite reports sourced to BKPM 
Chairman Lutfi that the GOI was considering restricting foreign 
ownership in several sectors, Sahala Gaol, Deputy to the 
Coordinating Ministry for Finance and Macro Economy in the 
Coordinating Ministry for Economic Affairs said, "The goal of the 
new law is to increase FDI, not to restrict it.  We'll push back on 
efforts to limit foreign ownership.  We want the negative list 
smaller, and much more clear." 
 
Suggested Talking Points 
------------------------ 
 
¶18. (SBU) Key features of Indonesia's investment regime still remain 
to be fixed by regulation, particularly the degree of openness to 
foreign investment and the nature of Indonesia's investment 
licensing regime.  We encourage Washington agencies to use available 
opportunities, including the May 21 visit by Trade Minister Mari 
Pangestu, to urge the GOI to ensure forthcoming Presidential 
Regulations on the negative list and investment licensing lead to a 
more open, transparent, and competitive investment regime in 
Indonesia.  Embassy recommends the following talking points be 
 
JAKARTA 00001212  005 OF 005 
 
 
raised with Trade Minister Pangestu during her visit, and with other 
GOI officials as appropriate. 
 
--Passing a comprehensive investment law represents a major step 
forward for Indonesia's investment climate.  We expect the new law 
to encourage U.S. investors to give Indonesia a closer look.  It is 
time now to follow-up the law with forward-leaning regulations. 
 
--Important that the regulations to be issued under the law continue 
the shift toward a more open, transparent, and competitive 
investment regime.  Backtracking on the basic, pro-investment nature 
of the law through restrictive implementing regulations would be 
harmful to Indonesia's investment climate, likely attract negative 
press attention, and encourage potential investors to look 
elsewhere. 
 
--In particular, we hope the forthcoming investment list will both 
clearly describe the restrictions facing investors in one 
authoritative document, and open up new sectors for foreign 
investors.  Opening up previously closed or restricted sectors would 
help meet the Government's goal of attracting new investment, and 
send a signal that Indonesia is serious about competing for scarce 
investment dollars. 
 
--Also encourage the Government to adopt as flexible as possible 
investment licensing system, and avoid giving licensing and permit 
issuing monopolies to any one ministry or level of government. 
Allowing competition in the issuance of non-technical licenses is 
the surest way to create a more streamlined investment system.  A 
competitive licensing and permit issuing system would also help 
Indonesia reduce further the number of days to start a business 
toward the Government's 30-day goal. 
 
HEFFERN