INDONESIA TRADE DIRECTORY ON DISK 1993 TRADEWARE BOX 406 WHITE MARSH VA 23183 TITLE : INDONESIA - NEW INVESTMENT REGULATIONS - SUBJECT: INVESTMENT MEASURES IN INDONESIA'S 1992 DEREGULATION PACKAGE 1. NOTE: THE FOLLOWING IS PART OF A SERIES OF CABLES ON THE GOVERNMENT OF INDONESIA'S JULY 6 1992 DEREGULATION PACKAGE. 2. SUMMARY: INVESTMENT MEASURES INCLUDED IN THE GOVERNMENT OF INDONESIA'S (GOI'S) JULY 1992 DEREGULATION PACKAGE MAY HAVE AN IMPACT ON THE EASE OF DOING BUSINESS HERE, IF THEY ARE FULLY IMPLEMENTED. THE PACKAGE INCLUDES MEASURES TO ALLOW JOINT VENTURES WITH FOREIGN OWNERSHIP TO HOLD LAND USE TITLES, AND TO USE THOSE TITLES FOR LOAN COLLATERAL. JOINT VENTURES WITH FOREIGN OWNERSHIP WILL ALSO BE ALLOWED TO HOLD BUILDING RIGHTS ON COMMERCIAL PROPERTY. LAND USE PERMITS AND EXPATRIATE WORK PERMITS SHOULD ALSO BECOME EASIER TO OBTAIN IF THE NEW MEASURES ARE IMPLEMENTED FULLY. THE JULY PACKAGE ALSO REMOVED 9 SECTORS FROM THE NEGATIVE INVESTMENT LIST, OPENING THEM TO FOREIGN " INVESTMENT. END SUMMARY. - - - - - - - - - - - - - - - - - - - - - - FREEING UP LAND TITLES MAY SPUR DEVELOPMENT - - - - - - - - - - - - - - - - - - - - - - 3. THE GOI'S JULY 6 1992 DEREGULATION PACKAGE (PAKJUL) INCLUDED MEASURES WHICH WILL ALLOW JOINT VENTURES WITH FOREIGN OWNERSHIP TO HOLD LAND USE TITLES (HAK GUNA USAHA - HGU) FOR A PERIOD OF UP TO 30 YEARS, WITH A POSSIBLE 25-YEAR EXTENSION. COMPANIES CAN USE SUCH TITLES AS COLLATERAL FOR BANK LOANS. THE PACKAGE DOES NOT SPECIFY WHAT PERCENTAGE OF THE JOINT VENTURE CAN BE FOREIGN-OWNED IN ORDER TO QUALIFY FOR THE PERMITS. 4. THE DECREE ALSO STATES THAT JOINT VENTURES WITH FOREIGN OWNERSHIP WILL BE ALLOWED TO HOLD BUILDING RIGHTS (HAK GUNA PEMBANGUNAN - HGB) FOR A SIMILAR PERIOD. JOINT VENTURE COMPANIES WILL BE ALLOWED TO HOLD THE RIGHTS TO BUILD INFRASTRUCTURE SUCH AS FACTORY BUILDINGS, WAREHOUSES, AND EMPLOYEE HOUSING. 5. COMMENT AND BACKGROUND: IT APPEARS THAT THE CHANGES IN THE OWNERSHIP OF LAND USE TITLES ARE PRIMARILY TARGETED AT THE PLANTATION SECTOR, WHICH HAS LOBBIED THE GOVERNMENT FOR THIS CHANGE IN HGU ISSUANCE, IN PART BECAUSE OF THE NEED FOR CONTINUAL REPLANTING AND THE LAG TIME BETWEEN PLANTING AND HARVEST. MANY FOREIGN-OWNED PLANTATIONS WHICH CURRENTLY OPERATE IN INDONESIA WERE EXPROPRIATED DURING THE SUKARNO ERA, BUT RETURNED IN THE LATE 60S AFTER SOEHARTO CAME TO POWER. MOST OF THE LAND USE TITLES NEGOTIATED AT THAT TIME WILL EXPIRE IN THE LATE 90S, AND MOST FOREIGN PLANTATION GROUPS HAVE BEEN IN THE PROCESS OF RENEGOTIATING EXTENSIONS. 6. COMMENT, CONTINUED: THE PROVISIONS ON BUILDING RIGHTS, HGB, COULD GREATLY BENEFIT THE MANUFACTURING AND INDUSTRIAL SECTORS. HOWEVER, THE PACKAGE IS UNCLEAR ON THE SCOPE OF THIS CHANGE, AND THE GOVERNMENT HAS NOT YET ISSUED IMPLEMENTING REGULATIONS. SOME OF OUR INTERLOCUTORS HAVE SAID THIS PROVISION WILL APPLY ONLY TO FACILITIES IN INDUS""IAL ESTATES, BUT ONE CONTACT IN THE FINANCE MINIS"RY SAID THAT JOINT VENTURES IN ALL AREAS WILL BE ELIGIBLE. 7. COMMENT, CONTINUED: SEVERAL ECONOMISTS HAVE COMMENTED THAT THE TOTAL LAND USE TIME PERIOD OF 5" YEARS IS STILL TOO SHORT, ESPECIALLY IN COMPARISON WITH THE 100-YEAR LAND TITLES OFFERED BY SOME OTHER ASIAN COUNTRIES. END COMMENT. 8. THE PACKAGE ALSO INCLUDES MEASURES WHICH ABOLISH THE REQUIREMENT FOR FOUR PERMITS PREVIOUSLY ISSUED BY THE NATIONAL INVESTMENT COORDINATING BOARD (BKPM). FOUR OTHER PERMITS FROM BKPM ARE STILL REQUIRED: BUSINESS LICENSES, LIMITED IMPORT LICENSES, TAX AND IMPORT DUTY RELIEF LICENSES, AND EXPATRIATE WORK PERMITS. - - - - - - - - - - - - - - - - - - - - - WORK PERMIT ISSUANCE TO BE DECENTRALIZED - - - - - - - - - - - - - - - - - - - - 9. IN THE PRESS RELEASE ANNOUNCING PAKJUL, MINISTER PRAWIRO STRESSED THAT THE GOI WILL NOW D"CENTRALIZE THE AUTHORITY TO ISSUE WORK PERMITS TO EXPATRIATES. PROVINCIAL OFFICES OF THE LABOR MINISTRY AND THE INVESTMENT COORDINATING BOARD (BKPM) SHOULD NOW HAVE THE AUTHORITY TO ISSUE PERMITS, AND PROVINCIAL OFFICES OF THE MINISTRY OF TOURISM, POST, AND TELECOMMUNICATIONS SHOULD BE ABLE TO APPROVE APPLICATIONS FOR WORKERS IN THE HOTEL/RESTAURANT INDUSTRY. UNDER THE NEW PACKAGE, ISSUANCE OF EXPATRIATE WORK PERMITS WILL NO LONGER REQUIRE DEPARTMENT OF TECHNOLOGY PERMISSION, AND THE GOVERNMENT WILL BE REQUIRED TO ACT ON APPLICATIONS WITHIN FOUR DAYS OF SUBMISSION. 10. COMMENT: WE HAVE BEEN TOLD THE GOVERNMENT CURRENTLY ISSUES ONLY 26,000 EXPATRIATE WORK PERMITS FOR THE ENTIRE COUNTRY. WHILE THE MANUFACTURING AND SERVICE INDUSTRIES GENERALLY FACE GREATER DIFFICULTIES, EVEN THE FINANCIAL AND PETROLEUM SECTORS SOMETIMES HAVE DIFFICULTIES IN OBTAINING WORK PERMITS. AN EASING IN WORK PERMIT PROCEDURES COUL" LEAD TO GREATER INVESTMENT FROM COMPANIES FROM OTHER ASIAN COUNTRIES, WHO PREFER TO BRING IN THEIR OWN FLOOR MANAGEMENT FOR MANUFACTURING OPERATIONS. AGAIN, THE EXTENT TO WHICH IMPLEMENTATION OF PAKJUL'S POLICY ANNOUNCEMENT ACTUALLY EASES WORK PERMIT HEADACHES WILL DETERMINE THE IMPACT THIS PROVISION WILL HAVE ON INVESTMENT AND THE ECONOMY. END COMMENT. - - - - - - - - - - - - - - - - - - - - - - REDUCTIONS IN THE NEGATIVE INVESTMENT LIST - - - - - - - - - - - - - - - - - - - - - - 11. IN 1989 THE GOI REPLACED THE "POSITIVE LIST," A REGISTER OF INDUSTRIES IN WHICH FOREIGN INVESTMENT WAS ALLOWED, WITH THE NEGATIVE INVESTMENT LIST, A SPECIFIC ITERATION OF INDUSTRIES IN WHICH FOREIGN INVESTMENT IS PROHIBITED. THE NAME IS SOMEWHAT MISLEADING -- FOREIGN COMPANIES MAY ACTUALLY OPERATE IN SOME OF THESE INDUSTRIES IF THEY MEET CERTAIN REQUIREMENTS, SUCH AS PRODUCING PRIMARILY FOR EXPORT OR LOCATING THEIR OPERATIONS IN REMOTE AREAS. OF THE REMAINING 51 SECTORS ON THE LIST, ONLY 9 ARE COMPLETELY CLOSED TO FOREIGN INVESTMENT. 12. THE PRESS RELEASE ANNOUNCED THAT THE 1992 DEREGULATION PACKAGE CUTS 9 SECTORS FROM THE NEGATIVE INVESTMENT LIST. HOWEVER, AT LEAST TWO OF THOSE NINE SECTORS WERE BLENDED INTO OTHER DISALLOWED CATEGORIES. SECTORS LISTED IN 1991 WHICH WERE REMOVED FROM THE 1992 NEGATIVE INVESTMENT LIST ARE: -- NITROGEN FERTILIZER (UREA, AMMONIUM SULFATE) -- RAILWAY PARTS AND EQUIPMENT -- DIESEL ENGINES AND GASOLINE ENGINES FOR COMMERCIAL VEHICLES -- SEPTICHEMIA EPIZOOTICAE, ANTHRAX, BRUCELLOSIS,. HOOF AND MOUTH DISEASE AND RABIES VACCINES FOR ANIMALS -- CLOVE CIGARETTES -- MATCHES -- COLD ROLLED LOW CARBON STEEL SHEETS 13. COMMENT: WE PREDICT THE CHANGES IN THE NEGATIVE INVESTMENT LIST WILL HAVE NO MAJOR MACROECONOMIC IMPLICATIONS. 14. GENERAL COMMENT: PAKJUL IS IN MANY WAYS MORE NOTICEABLE FOR THE AREAS IT DOES NOT ADDRESS -- THE AUTOMOTIVE, TIMBER, AND FOOD INDUSTRIES -- THAN FOR THE AREAS IT DOES. SEVERAL OF OUR INTERLOCUTORS HAVE COMMENTED THAT THE EASY DEREGULATON MEASURES HAVE BEEN TAKEN, AND THE REMAINING SPECIAL TRADING ARRANGEMENTS WILL BE VERY DIFFICULT TO DISMANTLE. NEVERTHELESS, THE PACKAGE ILLUSTRATES THAT THE GOI IS CONVINCED OF THE NECESSITY OF ONGOING DEREGULATION OF THE ECONOMY, EVEN THOUGH THE PACE OF CHANGE MAY HAVE MOVED INTO A SLIGHTLY SLOWER GEAR. HAMILTON