(By Michael Horn and Yenti Abdurrachman. Messrs. Horn and Abdurrachman are a partner and a senior associate, respectively, currently on secondment to PT CB Indonesia, our associated office in Indonesia. The following article is condensed from the version originally published in the Asia Law & Practice Invest in Indonesia handbook. This article will be published in two successive parts. Part I covers investment in Indonesia's telecommunications and retail sectors. Part II will cover investment in Indonesia's oil and gas and transportation sectors and will review passive portfolio investment and future trends.)
Introduction
Direct investment by foreign parties in Indonesia's booming economy takes many forms. Such investment may be made through (i) equity participation in Indonesian companies organized as Indonesian legal entities in partnership with Indonesian shareholders, (ii) 100% foreign equity ownership of Indonesian companies in certain instances, (iii) foreign investment in Indonesian legal entities (previously reserved for domestic equity investment only), and (iv) contractual joint ventures, which permit foreign capital in-flows without use of Indonesian companies in which foreigners own shares.
Below we provide a sectoral review highlighting areas of economic activity that appear to be of particular interest to foreign parties considering investment in Indonesia. As Indonesian transaction structures are evolving rapidly together with Indonesia's economy, we note that no article can substitute for tailored advice given in respect of current circumstances and specific investor needs. The choice of economic sectors analyzed below reflects our experience with significant, capital-intensive transactions that appear to be indicative of generally increased activity in such sectors.
Telecommunications
Fixed line cooperations arrangements
Prior to the enactment of the 1989 Telecommunications Law, Indonesia's telecommunications sector was governed by a succession of state-owned companies. The 1989 Telecommunications Law opened the sector to private investment. The Telecommunications Law stipulates that while telecommunications should be regulated and controlled by the state, the state may license private sector participation to accelerate network development.
The Telecommunications Law provisions permitting private sector participation distinguish between basic services, involving the delivery of information without processing or modification, and non-basic services, in which the transmitted data has been processed or modified. To offer basic services private companies must obtain a license from the Indonesian Ministry of Tourism, Post and Telecommunications (MTPT) and must do so in cooperation with an organizing body. FPT Telekomunikasi Indonesia (Telkom) is the organizing body for domestic services, while the organizing body for international services is Indosat. Cooperation between the private investor and the organizing body may be through a joint venture, joint operating scheme or management contract. By contrast, non-basic services offered by a private company need not be made pursuant to any cooperative arrangement with an organizing body provided that a MTPT license is first obtained to provide such n! on-basic services.
The Indonesian Government's current economic development plan for 1994-1998 contemplates the construction of five million additional line units, of which 3.2 million are to be built by Telkom, and the remaining 1.8 million are to be installed by the private sector. In order to attract such private sector investment, including foreign investment, the Indonesian Government has given its support to a new investment approach through a variation of the build-operate-transfer model. This type of scheme is also known as the joint operating (Kerja Sama Operasi or KSO) scheme. The KSO schemes, now in their implementation phase, establish contractual joint ventures between private consortia of investors and Telkom in five regions in Indonesia.
Telkom's licence under the Telecommunications Law confers on it the exclusive right as national operator to provide:
- local fixed wire line and local fixed wireless telecommunications services throughout Indonesia, including services through the KSO schemes, for a minimum of 15 years; and
- domestic long distance telecommunications services throughout Indonesia for a minimum of 10 years.
Each of the five investing consortia, under its license granted by the MTPT for the purpose of the KSO project, is given the exclusive right to provide basic telecommunications services on a fixed network or fixed wireless basis in its regional division throughout the KSO period, but without prejudice to any telecommunications service right already given to any other third parties in that regional division prior to the issuance of the licence.
Mobile cellular strategic alliances
Indonesia has recently witnessed a flurry of activity in the mobile cellular telecommunications sector. Each of the limited number of Indonesian mobile cellular telecommunications companies has been involved recently in one or more equity or debt transactions seeking foreign funds and expertise. These transactions have taken the forms of:
- acquisitions by foreign telecommunications companies of newly-issued or existing shares of the Indonesian company;
- extensions of credit in a variety of debt transaction forms; and
- debt/equity hybrid transaction forms, such as investments by foreign parties in convertible bonds.
While the foreign parties in these transactions have typically been experienced telecommunications operators, passive portfolio investment by non-operating entities is also occurring. The Indonesian telecommunications companies whose shares have been sold, bonds issued or indebtedness created, are relatively new companies created in the last several years as joint ventures between Indonesian private parties, Indonesia's quasi-state sector domestic telecommunications giant Telkom, and often a variety of foundations and cooperatives associated with state entities and state-owned enterprises.
The MTPT appears receptive to foreign equity investment in Indonesian mobile cellular telecommunications companies, and Telkom has shown its favor on these transactions by giving its consent to foreign investment, acting in its capacity as a shareholder.
No foreign investor has taken a majority equity position in any mobile cellular telecommunications company in Indonesia, although it is not clear whether this failure results from government policy or instead merely reflects private party investment preferences. In theory, foreigners are permitted to own 95% of the equity of a mobile cellular or other Indonesian telecommunications companies in a joint venture with a 5% Indonesian equity holder. In practice, this does not appear to have materialized.
Transactions to date include relatively standard mergers and acquisitions transactions, including issuance of new shares and transfer of existing shares.
Retail Trade
Certain logistical challenges present themselves in a land as vast and as diverse as Indonesia, where the wide distribution of goods is acknowledged to be difficult. Thousands of retail outlets extend across dozens of islands in Indonesia, some lacking in modern transportation and communication infrastructure.
Historically, foreign companies have been prohibited by law from distributing their own products, and both retail and distribution remain closed to foreign investment. Many new players, however, have entered the retail market, despite this prohibition. By the end of 1997, estimates suggest that we will be seeing at least six Macros, one Price Costco, two Wal-marts, one Davids and 12 Dairy Farms in Indonesia. In 1990 there was not a single multinational retailer or wholesaler.
In light of the prohibition on direct investment, foreign involvement in retail is limited to licensing and franchising. The products of manufacturing or processing companies in which foreigners own equity may be sold at the wholesale level, generally understood to permit sales only to distributors.
The rules on distribution by foreign companies were relaxed through a series of laws in 1987, 1989 and 1996. Foreign manufacturing joint ventures may now set up a separate joint venture distribution company in which a majority of the equity may be held by the foreign party and may also import complementary goods produced by overseas parties to complement their own product lines. Such products may be sold in addition to the companies' locally produced products. However, restrictions still exist, and the Indonesian market remains in many ways closed to foreign distribution and trade.
Goods produced overseas may enter Indonesia through an independent importer or distributor, or by a foreign joint venture. Goods produced in Indonesia by a foreign joint venture, as well as complementary products imported by the joint venture may be sold either directly to independent Indonesian distributors or through a joint venture distributor. The shares of such joint venture distributor may be 80% held by the manufacturing joint venture.