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Govt launches 'priority list' to boost investment in key industries
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he government has issued a regulation containing a so-called priority list that promises potential investors fiscal and nonfiscal incentives and scraps some restrictions on foreign investment to spur inflow of investment to the recession-hit country.
Presidential Regulation No. 10/2021, which implements elements of the recently passed Job Creation Law, stipulates that the priority investment list covers high-tech, pioneering, export-oriented, research-oriented, capital-intensive and labor-intensive industries, as well as national strategic projects. The new rules will come into effect 30 days from Feb. 2.
The regulation also officially scraps the government’s negative investment list (DNI) and allows both foreign and domestic investment in all business sectors, with the exception of six prohibited sectors – including narcotics and gambling – and businesses that can be carried out by the government. Foreign investment, however, is still capped in certain sectors.
Industries included in the priority list will get both fiscal and nonfiscal incentives, including tax allowances, tax holidays and relaxed licensing procedures. The businesses eligible for tax allowances range from e-commerce to small scale power plants, while oil and gas refineries, vaccine manufacturers and electric vehicle (EV) and EV battery manufacturers are eligible for tax holidays.
“With the changes in the business licensing process and expansion of industries for investment, we believe this will be a game changer in spurring investment and creating new jobs,” Coordinating Economic Minister Airlangga Hartarto said in a statement on Monday.
Investment, which together with household spending accounts for more than 89 percent of the gross domestic product (GDP) last year, has been impacted severely by the raging global pandemic.
Read also: Jobs law liberalizes more industries for investors
The country fell into a recession last year for the first time since the 1998 Asian financial crisis. The economy shrank by 2.07 percent as most economic components fell, including investment.
While overall investment rose 2.1 percent year-on-year (yoy) in 2020 to Rp 826.3 trillion (US$58.71 billion), foreign direct investment (FDI) contracted by 2.4 percent to Rp 412.8 trillion, according to data from the Investment Coordinating Board (BKPM).
The government aims for the jobs law and its implementing regulations to improve Indonesia’s business climate by revising 79 prevailing laws. The government has issued a total of 49 implementing regulations for the law so far.
The DNI previously kept 20 sectors off limits for foreign investors. One of those sectors, alcoholic beverages, is now open for investment in areas like Bali and North Sulawesi.
However, the new regulation maintains restrictions on foreign involvement in some industries, like traditional medicine, batik fabric and processed coffee with geographical indications.
BKPM head Bahlil Lahadalia said earlier this month that Indonesia would focus on several sectors, including healthcare, electronic, renewables, infrastructure, automotives and value-added mining commodities. President Joko “Jokowi” Widodo has declared a target to lure Rp 900 trillion in investment this year.
The regulation comes as Indonesia is gunning for bona fide companies, such as United-States-based electric vehicle producer Tesla, to invest in Indonesia, as it eyes to become a major player in the EV industry.
It has so far reported to have secured commitment from Chinese battery manufacturer Contemporary Amperex Technology Co. Limited (CATL) to invest $5.2 billion and South Korean electronics company LG to invest $9.8 billion.
The regulation also stipulates the minimum requirement of Rp 10 billion for FDI. However, there is an exemption for foreign investment in startups in special economic zones (SEZ), which is aimed at strengthening the startup ecosystem.
Bank Permata economist Josua Pardede said the key differences between the new regulation and Law No. 25/2007 were the expansion of incentives for investors, which now include nonfiscal incentives, and the Rp 10 billion requirement for FDI.
“This provision tends to have no significant impact on the flow of foreign direct investment to Indonesia, as most foreign investment entering the country seems to be large-scale businesses,” Josua told The Jakarta Post via text message on Monday.
The latest regulation was the right step, as it offered sought-after incentives like a relaxed licensing process and imports of capital goods and raw materials, said Shinta Kamdani, the deputy chairwoman of the Indonesian Chamber of Commerce and Industry (Kadin).
However, she noted that investors based their decision on whether to develop set up businesses in a country on the competitiveness of the business climate in that country relative to other countries.
“Incentives are just sweeteners for the business climate,” Shinta told The Jakarta Post via text message on Monday. “It is like the cream on the cake. If the cake itself is spoiled, you would not want to eat it, no matter how good the cream tastes or looks.”
The government’s move to put labor-intensive industries on the priority list was expected to prop up job creation and thus help pandemic-hit workers who lost their jobs recently, said Mohammad Faisal, the executive director of Center for Reform on Economics (CORE) Indonesia.
The unemployment rate was 7.07 percent in August last year, marking an increase of 1.84 percentage points from a year earlier, according to Statistics Indonesia (BPS).
“The unemployment is still high and it is rising during the pandemic,” Faisal told the Post in a phone interview on Monday. “We need job creation, which can be achieved through investment. So, we have to make sure that investment really creates many jobs.”
