General Guidelines of Investment



Indonesia remains among the most attractive destinations as an investment center owing to the vast natural resources, its landmass, and availability of relatively cheap labor as compared to other countries in the region. Deregulation and the reduction in bureaucracy has made it much more convenient than in the past. At the same time, these newer regulations mean that 100 percent foreign ownership is permissible in certain sectors.

A moot point is that Indonesia does not impose any restrictions on the transfer of foreign exchange and in several sectors there are attractive tax incentives. In encouraging and seeking foreign investment, the government is guided by the principle that the national economy needs such investment to maintain the momentum of growth. It thus actively promotes investments that create job opportunities for its citizens, brings in capital, technology and management skills that are currently lacking in the country. Before even considering investment in Indonesia, one should have a copy of what is known as the "Negative List of Investment" (Daftar Negative Investasi/DNI). This contains the full list of those business sectors that are absolutely closed to all foreign as well as domestic investments, and those sectors that are closed to foreign investments. The special provisions or terms for certain fields of business open to capital investment must be observed by investors, both in applying for and in conducting capital investment activities in the country as outlined in the Capital Investment Implementation Technical Guidance (Pertunjuk Teknis Pelaksanaan Penanaman Modal/PTPPM).

Approval for foreign investment can be obtained either in Indonesia through the Office of the State Minister/Board of Investment and State-Owned Enterprises Development (BPM-PBUMN) in Jakarta or through the Regional Investment Coordinating Board (BKPMD) in each of the provinces of the Republic. It may also be obtained through the Representative Offices of the Republic of Indonesia, Indonesian Embassies, Consulate Generals or Consuls. There are a total of 156 offices in various parts of the world.

In the case where investments are to be located in Bonded Zones, applications must be submitted to the Office of the State Minister/BPM,PBUMN through the respective Bonded Zone Authority. From a legal stand point, Foreign Direct Investment (FDI), which is referred to locally as Penanaman Modal Asing (PMA), is governed by the Foreign Capital Investment Law of 1967 that was further amended in 1970. Under the rules, a PMA company is granted a 30-year period to operate after its legal formation. During this period, if an additional investment to the original is undertaken, then a further 30-year period would be granted for the project. It is also possible for this term to be extended by another 30 years.

A PMA company is generally considered to be a joint venture (JV) between foreign and Indonesian partners. Such a partnership can involve corporations or individuals. The law states that the joint venture should take the form of a Limited Liability company (denoted as Perseroan Terbatas - PT) and is subject to Indonesian Corporate Law. There are no specific requirements on the minimum amount of investment as the parties concerned are left to determine their required sums. In practice though, the investment approval board requires a minimum capital of US250,000.

A PMA company may also be established as wholly owned by the foreign investor. However, no later than 15 years of commercial operation, some of its shares must be divested to Indonesians (individuals) or business entities by direct or indirect placements through the local stock exchange. In a PMA joint venture company, the foreign and national shareholders are free to choose members of the supervisory and management board. The employment of foreign operational directors, managers, technicians and even specialized workers is allowed as long as Indonesians are not available or qualified to fill these positions. The Department of Manpower issues regular directions on those positions that are available for expatriate employment. However, an expatriate even those who are directors wishing to take up or continue employment in Indonesia must possess a work permit.

Potential investors should also be aware of the Board of Investment and State-Owned Enterprises, which was established following the merger of two government bodies, the Investment Coordinating Board (BKPM) and the Board of State-Owned Enterprises. This is a Non-Departmental Government Agency responsible directly to the President of the Republic. The Board is also charged with the task of determining policy on direct investment in accordance with the overall guidelines of the Government. It also plays a coordinating role on all investment activities through promotion, usage of foreign technical assistance, the development of national entrepreneurial capabilities and the effective usage of investment funds both domestic and foreign. Apart from its routine tasks, the Board of Investment and State-Owned Enterprises also assists investors in feasibility studies and in seeking potential and qualified local partners.

There are several other local government agencies whose task is to assist in foreign investment. Among them are Indonesian Representative Office (Indonesian Embassy, Indonesian Consulate General and Indonesian Consulate) who can be approached for foreign capital investment (PMA). The Regional Investment Coordinating Board (BKPMD) is headed by a chairman and is responsible to the provincial Governor whose task is to assist investors in the regions.

The Province National Land Agency (BPN Province) Office - the agency for land affairs at the first level region and responsible directly to the Head of the National Agency for Land Affairs. It deals with such matters as land titles and the like. Regency National Land Agency (BPN Kabupaten/Kota) Offices - the land affairs agency at the second level regions and is responsible to the BPN Province. Their task is to assist the investor in obtaining land for the location of the investment project. Regency Public Works (Dinas PU Kabupaten/Kota) Offices - The Dinas PU

Kabupaten/Kota is the local government at the second level regions, whose task is to ensure that all construction tasks are carried out on behalf of the investor. The Executive Secretary of the Second Level Regions issues the Nuisance Act Permit for the investment projects.

Regional Environment Impact Management Agency (BAPEDALDA) - the agency responsible for assessing environmental impact studies and monitoring environmental issues. PT Superintending Company of Indonesia (SUCOFINDO) - a state owned enterprise, which is responsible for verifying the Master list of capital goods and raw materials. Foreign investors should also be aware that Indonesia does not recognize the free-hold concept with regards to land. In its place, there are various rights placed on land that are divided into separate elements and subject to
separate titles.

The Basic Agrarian Law recognizes several types of rights to land. Hak Milik, the right of ownership, which is an inheritance right that can only be held by an Indonesian. Thus only Indonesian companies have legal rights to own land. However, foreign investors have some leeway as well, mainly in three areas. These rights authorize the use of land in some way, the duration of the validity, its utilization, opportunity to mortgage and proof of title. With the hak guna usaha (right of exploitation), one has the right to use state-owned land of not less than 25 hectares for agriculture, including plantations, fishing and cattle rearing. Here, the title is normally used for a 35-year period, but an extension of 25 years can be obtained provided the land has been properly maintained and managed. Under this proviso, a foreign joint venture company can hold the land, which can be transferred with government approval and can even be used as collateral.

The hak guna bangunan (right of building) gives the rights to construct and own buildings. Usually the title is for 30 years and can be renewed with local government approval. This too can be held by a PMA company. The third area of interest to the foreign concern that has obtained mining rights, or forest exploitation rights from the relevant ministries, is the hak pakai (right of use). In this case, they automatically have the right to use the land within their concession boundaries for purposes linked to the operation of their businesses. While this may appear to be a cumbersome structure, it has been necessary to have various bodies and approvals to ensure the smooth operations of any foreign investment. It must be borne in mind that in the outlying provinces because of the ethnic diversities in the country and certain regional aspirations, only the local government office will be in the best position to deal with such matters. A certain amount of patience and adherence to the rules and regulations are traits that would go well in this country. (Source: Investing Indonesia 2001, The Trade, Tourism & Investment Promotion Board Indonesian Chamber of Commerce & Industry, PT. Indo Multi Media MNC Group, Jakarta, Indonesia