Investments in ASEAN region: Mekong countries and Indonesia perspective

Author: | Published: 1 Sep 2012
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Foreign Direct Investment (FDI) flows to ASEAN have been increasing since 2002. This upward trend is reflective of increasing interest and confidence of investors in investing and doing business in the region. The Association of Southeast Asian Nations (ASEAN) was formed in 1967 with the signing of the Bangkok Declaration by the five original member countries – Indonesia, Malaysia, the Philippines, Singapore, and Thailand Brunei joined in 1984. Vietnam joined in 1995; Laos and Myanmar/Burma in 1997; and Cambodia in 1999.

Apart from the regional initiatives that have so far been formulated and carried out by ASEAN to increase FDI, each ASEAN member country continues to develop its investment climate in accordance with regionally and multilaterally accepted principles and through new investment measures enacted individually. These individual measures are encouraged by various regional agreements and multilateral bodies to increase the competitiveness of the region in attracting FDI. They include: improvements in the overall investment policy framework; granting of incentives; opening up of sectors for foreign investment; reduction of business costs through lowered taxation; streamlining and simplification of the investment process; and other investment facilitation measures. On the other hand, global competition in international trade poses significant challenges to companies, who must rapidly respond to changing marketplace requirements. It is necessary for firms and investors to know which ASEAN countries offer the most potential for investment.

Nearly all ASEAN countries receive high FDI inflows. For example, Singapore, Thailand, Malaysia, Indonesia and Vietnam have been the largest FDI recipients, together accounting for more than 90% of flows to the sub region. While FDI growth differs considerably between countries, the newer ASEAN member countries in particular (Myanmar, Vietnam, Cambodia and the Lao People’s Democratic Republic) recorded the strongest FDI growth, exceeding 70% in each (World Investment Report). Favourable regional economic growth, an improved investment environment, higher intraregional investments, and strengthened regional integration were key contributory factors.

Reinvested earnings were particularly strong, highlighting the importance of existing investors as a source of FDI. Increased inflows in Vietnam were the result of that country’s accession to the WTO in 2007, as well as greater liberalisation and FDI promotional efforts – particularly with respect to infrastructure FDI. There were higher FDI inflows in extractive industries in Myanmar, in telecommunications and textiles and garments manufacturing in Cambodia, and in agriculture, finance and manufacturing in the Lao People’s Democratic Republic.

The importance of Indonesia

This is the importance of Indonesia to ASEAN, rather than one man’s leadership or Indonesia’s size alone. There is no sign that the basic policy orientation of Indonesia or its fundamental commitment to regionalism has diminished despite the political changes that the country is undergoing.

At the same time, after the turmoil of 1965 and 1966, Indonesia made clear its continued adherence to a national policy of ethnic, racial and religious tolerance, and of unity in diversity that had kept, and continues to keep, the nation together. This had a reassuring effect on its would-be partners in ASEAN, all of whom were blessed with ethnic diversity and threatened by ethnic division. Moreover, Indonesia, in its wisdom, allowed itself to wield its already considerable weight in the world in the new context of ASEAN. In this way, ASEAN has been able to avoid the problems of some other regional associations, which are hampered and burdened by the dominance of their largest members. Instead, Indonesia’s international influence, prestige and activism, magnified by its new internationalist posture, were to be placed in ASEAN’s service at the UN, in the Non-Aligned Movement, in the Group of 77 and in other international forums.

With its vast natural resources and bustling population of around 240 million people, Indonesia is being considered as one of the most lucrative investment destinations and fastest growing economies in the world. In comparison to others, Indonesia is third only to China and India among the G20 industrialised and developing nations. Having overcome the Asian financial crisis of the late 1990s, and withstood the worst of the more recent global economic slowdown, Indonesia has shown itself to be a resilient economy whose industries have proven to be one of the most attractive for foreign investors.

Thirteen years ago, Indonesia broke free from three decades of authoritarianism. Today, it has the world’s fourth largest population and is one of Asia’s fastest growing economies. Known as the 'Asian miracle’ in the 1980s and early 1990s for opening its doors to FDI, Indonesia today is experiencing another kind of miracle: it has emerged as an unusually strong survivor of the international financial crisis. Combined with its growing commitment to sustainable development, the world’s fourth most populous nation is well positioned to spark interest from socially responsible investors. This is particularly true of those interested in investing in climate solutions and biodiversity in a large market. In fact, Indonesia has recovered the investment grade status of its sovereign debt at Fitch Ratings after 14 years. This places the country on the same level as India.

The overall investment climate in Indonesia is very attractive and accessible to foreign investment. The availability of fiscal incentives to attract foreign investors, no limitation on value of investment, the possibility for foreign investors to wholly own their investment in almost all sectors, as well as a simplified investment approval process are just some of the advantages for foreign investment in Indonesia. As a member nation of the ASEAN countries, Indonesia is located on the crossroads of two great continents, namely Asia and Australia, and in between the Indian and Pacific Oceans. It offers comparative advantages to investors, such as (i) a vast, fertile country endowed with rich and diversified natural resources, such as agriculture, plantation, fisheries, mining, oil and gas; (ii) a large population; (iii) a strategic location between vital international sea communication lines; (iv) political stability; and (v) a more democratic country.

Indonesia is also making real efforts to increase accountability in its energy and resources sector by moving to become a candidate country in the Extractive Industries Transparency Initiative (EITI). EITI is a commitment to transparency on transactions involving natural resources.

The New Investment Law No.25 of 2007 (April 26 2007) (New Law 07) introduces new issues such as corporate social responsibility and a dispute settlement mechanism. New Law 07 also introduces one door integrated services pursuant to a licensing process. The process runs from the application stage until the issuance of all necessary documents. Moreover, New Law 07 gives regencies and cities the right, authority and obligation to regulate and self manage investment approvals taking into account the interests of the local communities. New Law 07 also offers equal treatment of every investor by bureaucracy reform in investment services and fiscal incentives. It shows the efforts of the government to make the investment climate more transparent.

Legal establishment: Foreign investors may be a corporate entity or an individual. In some sectors, investors can own all shares of a foreign investment company (PT Penamanan Modal or PT PMA) with certain exceptions. However, the said PT PMA must divest a portion of shares to an Indonesian party within 15 years after commencing commercial operations. On the other hand, the foreign investor can establish a joint venture with Indonesian parties. The Indonesian parties at least own 5% at the time of establishment. In that case, the foreign company is not required to divest its shares to Indonesian parties within 15 years. The foreign investors also must check the Negative List for the minimum percentage that can be held by foreigners in a company in certain sectors in Indonesia. A PT PMA is generally granted a 30-year period to operate after its legal formation. During this period, if an additional investment to the original were undertaken, then a further 30-year period would be granted for the project. It is also possible for third term to be granted for another 30 years. There are no minimum or maximum total investment (debt plus equity) requirements. However, investors in the manufacturing sector typically are expected to have a debt to equity ratio of 3:1 or less, while those in the agricultural or mining sectors may have ratios of 6:1 or greater. The Capital Investment Coordinating Board (BKPM) is the central authorised body receiving, reviewing and approving investment capital applications as well as monitoring approved projects. The BKPM’s duties under the law include coordinating and implementing one stop integrated services by developing an investor roadmap and providing consultation services to investors seeking capital investments. Although the law contains no provision authorising BKPM to approve investments, BKPM approval is needed in order for investors to receive immigration facilities or investment incentives.

Foreign investors must submit an application form – the so-called Model I – to BKPM. Various attachments must be submitted together with Model I including (a) a copy of the investors’ articles of association (or passport/identification card in the case of individuals), (b) flowchart of the production process or description of services, (c) power of attorney if the application is not signed and submitted by the investors themselves. After obtaining BKPM approval, the applicant can establish a limited liability company by executing a Deed of Establishment (DoE) in the notary public. Then, this DoE shall be submitted to the Ministry of Laws and Human Rights (MoLHR) for approval. One of the requirements to obtain MoLHR approval is that investors must submit proof that they have paid the issued capital. A company also has the obligation to register in the Company Registry maintained by the department of trade. Moreover, a company must apply the letter of domicile to sub district (Kelurahan). And it must obtain a taxpayer registration number (NPWP) and a taxable entrepreneur number (NPPKP) from the relevant tax office. After a company has been established, it must proceed immediately to take the following post formation steps:

  • Corporate housekeeping: A first meeting of shareholders, directors and commissioners must be held. The General Meeting of Shareholders (GMS) should confirm the appointment of the members of the Board of Commissioners (BoC) and the Board of Directors (BoD). The GMS, together with BoD and BoC, ratify all actions taken in PT PMA’s name prior to MoLHR approval of the DoE. Moreover, the share certificates, the share registry and the special register shall be prepared too. After obtaining a BKPM approval, a PT PMA has the obligation to submit a report of capital investment activities (Laporan Kegiatan Penanaman Modal or LKPM) to BKPM. A PT PMA that has not yet obtained a permanent business licence (IUT) shall submit a semi-annual report of LKPM to BKPM. A PT PMA that has obtained IUT must submit an annual LKPM. This report is in the standard form of BKPM. Furthermore, the copies of LKPM also must be delivered to the relevant government institutions, such as the department of trade, Bank Indonesia or the regional office of the relevant technical department. The initial investment approval serves as a temporary operating licence until a PT PMA reaches the stage of commercial production. At that time, a PT PMA shall apply for an IUT (permanent business licence) to BKPM. Upon issuance of the IUT, a PT PMA is authorised to conduct its activities for a 30-year period.
  • A PT PMA must apply for an expatriate manpower utilisation plan (RPTKA or Rencana Penggunan Tenaga Kerja Asing) from the Department of Manpower (DoM) in order to employ expatriates. The RPTKA serves as a basis for the expatriate to obtain their temporary stay permits (KITAS) and work permit (IKTA). DoM requires a PT PMA to employ three local employees for every expatriate it employs. A company with more than 10 employees must prepare company regulations and register with the DoM. If a company has a labour union, then the collective labour agreement is required to be registered in the DoM. Moreover, Indonesian law recognises both indefinite-term employment agreements and definite-term employment agreements. Before a company hires employees, it shall consider the advantages and disadvantages of these types of agreements.
  • Importing goods: A PT PMA wishing to import capital goods/ raw materials is required to have a limited importer licence number (Angka Pengenal Import Terbatas or APIT). The APIT is obtained through BKPM. Goods imported under an APIT are subject to a reduced withholding tax of 2.5% compared to the normal rate of 7.5%. This tax is a prepayment of income tax and is fully creditable. Under some conditions, an exemption from this tax is possible. A PT PMA may obtain favourable import duty reductions on imported production equipment, spare parts and raw materials that are not locally available. A PT PMA must submit a master list application to BKPM or the Customs and Excise Office (in certain circumstances). After the master list is approved, then a PT PMA receives an import duty reduction on the item listed in the letter to a maximum 5% duty rate.

Although 100% ownership by foreign investors is allowed, day to day management by the foreign entity requires significant familiarity with Indonesian regulations, industry networks and business culture. A PT PMA must have a minimum of two managers/ shareholders, and at least one director and chairman.

Conclusion

With the world’s 'stronger’ economies in distress, ASEAN should do better if the business sector looks within the region for investment and trade. Factually, Indonesia needs at least US$140 billion in investment over the next five years to upgrade infrastructure and meet its goal of 6-7% annual growth. Two-thirds of that funding will have to come from foreign investment. It is this growing population of would-be consumers that is helping drive Indonesia’s economy – which is much less dependent on exports than other emerging markets – and is forecast to do so for years to come.

For the last few years, ASEAN has been actively promoting foreign investment and has thus taken several key initiatives. In addition to the formation of a free trade area, the region aims to achieve an ASEAN Economic Community (AEC) by 2015. This promotes ASEAN not only as an integrated market but also as a single investment destination. Various tools such as the ASEAN Comprehensive Investment Agreement and the ASEAN Industrial Cooperation have been in place for the ease of doing business. They allow businesses to take advantage of the value chain of the production within the region.

About the author
WILLIAM D GREENLEE, JR
Partner; Managing Director, Laos; Head of DFDL China Desk

William’s practice focuses on M&A and project finance and includes negotiating, structuring, documenting and managing large private equity and opportunity fund companies and transactions. William holds a BA degree from the University of Oregon in Asian Studies with a minor in East Asian Literature and Juris Doctor from the University of San Francisco, California. William is a member of the State Bar of California, State Bar of Nevada, State Bar of California International Law Section and the Inter-Pacific Bar Association. He speaks English, Mandarin, Thai and Bahasa Indonesian.

About the author
VINAY AHUJA
Senior Adviser, Regional M&A Practice Group, Head DFDL India Desk

Vinay specialises in investment laws, general corporate laws and legal and practical aspects of corporate and commercial cross border transactions in the ASEAN region. His transactional and advisory experience includes advising and representing various multinational clients in transactions related to energy, oil and gas, information technology, real estate, consultancy, hospitality, agro, power, automotive, mining, telecommunications, logistics and infrastructure. In addition to Vinay’s transaction and advisory experience, he also has basic experience in arbitration and dispute resolution. He is a gold medalist graduate from Symbiosis Law School, University of Poona, India and also leads the DFDL India desk. Vinay is a member of Bar Council of India, Bar council of New Delhi, International Bar Association and Inter-Pacific Bar Association. He speaks English, Hindi, Punjabi, Sindhi and Urdu.

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