VZCZCXRO3122
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #0336 0571049
ZNR UUUUU ZZH
R 261049Z FEB 09
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 1594
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS COLL
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS JAKARTA 000336 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EAP/MTS, EEB/IFD/OIA 
USTR FOR KELHERS, BWEISEL 
 
E.O. 12598: N/A 
TAGS: ECON EINV ETRD ECON ID
 
SUBJECT: Preview of Revisions to Investment Law and Negative List 
 
¶1. (SBU) Summary:  Proposed changes to Indonesia's Investment Law 
and Negative list include long-awaited clarifications but offer 
little in the way of new reforms or liberalization.  The Embassy has 
seen an informal, advance copy of the proposed legislation.  The 
draft proposal provides legal clarity in areas including 
grandfathering and capital market investments and proposes modest 
changes to foreign equity limits for some business fields.  Contacts 
confirm the revisions will also include backsliding on foreign 
equity caps for several sectors, but the version we saw did not 
detail which ones or by how much.  The draft also enhances the role 
of the Investment Coordinating Board (BKPM) in implementing the 
Investment Law.  The Government of Indonesia (GOI) has not made the 
draft proposal public.  End Summary 
 
¶2. (SBU) The proposed changes to the Investment Law (Presidential 
Regulation 111/2007) clarify a number of investment issues 
including: implementation of grandfathering provisions, status of 
capital market investments, and the Investment Law's applicability 
in Indonesia's Special Economic Zones (SEZ).  The proposed revisions 
confirm that investment restrictions do not apply to investors 
holding valid business licenses approved before July 3, 2007.  The 
proposal also clarifies that capital investments in publicly listed 
companies through the stock exchange are not subject to Indonesia's 
Negative List of Sectors Open to Foreign Investment (DNI). In 
addition, the revisions propose that the DNI would not apply in 
Indonesia's special economic zones. 
 
¶3.  (SBU) The revisions to the DNI propose modest changes to 
investment limits for individual sectors; however none represent 
breakthrough reforms.  As drafted, the revisions would increase 
foreign equity caps for eight sectors.  For example, selected 
business fields in Hospitality and Tourism would increase the 
maximum foreign ownership from 50 percent to 51 percent.  Among the 
other sectors proposed for greater openness are: direct selling (60 
percent to 95 percent), art galleries (50 percent to 67 percent), 
labor agencies (0 to 49 percent) and ecotourism (25 percent to 51 
percent.)  Contacts involved with the drafting of the proposal 
confirm it will also contain reductions on foreign equity caps for 
twelve sectors, but the version we saw did not detail which sectors. 
 The revisions will also clarify the Investment Law's provision that 
any business field not specifically referenced by the DNI is 
considered 100 percent open to foreign investment. 
 
¶4.  (SBU) The proposed revisions also carve out a significant role 
for the Investment Coordinating Board (BKPM) in implementing the 
Investment Law and DNI.  BKPM is authorized to issue further 
provisions as necessary to clarify and facilitate implementation of 
the Investment Law.  The proposal harmonizes the definition of small 
and medium sized companies (SME) with Law No 20/2008 on SMEs.  Other 
provisions are designed to ensure Indonesia's compliance with the 
ASEAN Economic Community Blueprint.  Most importantly, the proposed 
revisions clarify the station of the Investment Law in Indonesia's 
hierarchy of laws.  (This latter provision is intended to strengthen 
the Coordinating Ministry's hand in confronting line ministries that 
issue decrees in contradiction of the Investment Law.) 
 
¶5.  (SBU) The GOI does not appear to have followed its own legal 
process for determining the opening or closing of business fields as 
described in Presidential Regulation 76/2007.  That regulation 
dictates that proposed changes to foreign equity caps must be shown 
to provide a net benefit to Indonesia's overall national economic 
interests; however there is no evidence that criteria has been 
applied.  [Note: The Indonesian Business Association (KADIN) has 
questioned the legitimacy of the new foreign equity caps on these 
grounds.]  The next step in codifying the revisions will be a review 
of the proposal by Coordinating Minister for the Economy Sri 
Mulyani.  Once cleared by Mulyani, the final draft will then be 
presented to President Yudhoyono for his approval and issuance as a 
Presidential Regulation.  Changes to the final proposal are possible 
during both steps. 
 
¶6.  (SBU) The proposed revisions to the Investment Law represent 
much needed progress and clarification in a number of important 
investment-related areas.  However, the potential backsliding on the 
investment limits in any sector, if ultimately enacted, would be 
perceived negatively by investors.  The pressure to reduce foreign 
equity caps reflects a recurring tension between reform-minded 
technocrats pressing for greater liberalization and plutocratic 
rent-seekers protecting narrow business interests.  Nonetheless, any 
new barriers on foreign investment raise questions about Indonesia's 
commitment to an open investment climate and undermine investor 
perception of legal certainty. 
 
HUME