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Amidst Slowing Economy, Indonesia’s Tourism Sector Prepares to Take on Foreign Investment

Facing an economic slowdown, the Indonesian government is set to revamp laws on foreign ownership in certain sectors, starting with tourism investments.

To many foreigners, doing business in Indonesia has long been an attractive opportunity. The country is strengthening in terms of spending power, demographics, and diversity. It’s also becoming a world-renowned hotspot for tourism.

Unfortunately, the prospect of legally doing business in Indonesia comes with caveats, especially in the case of foreign ownership in businesses that take money out of the local economy. Most sectors have caps in place that limit foreign ownership to a maximum of 51 percent, as of 2014; the latest official revision of the government’s Negative Investments List. Historically, foreign firms have been made to jump through hoops just to operate legally in the archipelago.

Sizeable companies looking to do business in Indonesia without a local partner must usually set up a foreign investment entity. Indosight, a market entry service for foreign businesses in Indonesia, says this typically means a firm must have around US$1 million in capital on paper, with 25 percent of that amount paid upfront into an Indonesian bank account. This is not an easy thing for small or medium-sized enterprises looking to tap into the nation’s tourism sector. If foreigners want to be cowboys about it – and many do – they need to find a trusted local partner to act as the business owner. It happens more often than some might think.

Soon, however, these all-too-familiar woes may no longer apply.

Foreigners are allowed to have full ownership of restaurants, bars and cafes
BKPM to allow foreigners full ownership of restaurants, bars and cafes

Coordinating Board (BKPM) recently said it would allow foreigners full ownership of bars, cafes, restaurants, and sport centres in an attempt to bolster interest in the nation’s tourism sector.

Indonesia’s travel and leisure space is arguably on the brink of thriving, as more than 9 million tourists turned up from overseas in the past 12 months. However, due to the strict limitations on foreign investment and the volatility of the nation’s political landscape, many businesses have been hesitant about bringing their money to Indonesia, opting instead for neighbouring countries like Malaysia and Thailand.

It seems as though Indonesian officials have taken note of missed opportunities, and are now rethinking their strategy, with regard to foreign-owned businesses.

“With this revision, we are trying to build a perception that Indonesia is more open. With this rule, we believe the investment commitment could increase by 50 percent from last year,” head of BKPM Franky Sibarani recently told reporters. Last year, Indonesia eased the visa requirements of 84 countries for tourism-related purposes. BKPM now claims it has been working on increasing that number, further solidifying its resolve toward a booming tourism economy.

By the end of this quarter, BKPM says it will have also revised Indonesia’s Negative Investments List. The list states all the sectors in Indonesia open to foreign investment, as well as the maximum percentage of ownership foreigners can have in each space. Relaxed ownership laws are believed to take effect in several sectors, including film, e-commerce, manufacturing, and warehousing.

Experts say there is a high chance of seeing major changes when the updated Negative Investments List comes out in April. While not all sectors are expected to see the same leniency as tourism, analysts believe most industries could see foreign ownership caps spike up to anywhere between 60 percent and 70 percent.

But it’s not all great news for foreigners. Chairman of BPKM, Mahendra Siregar recently revealed that the government has chosen to reduce foreign ownership in other sectors. In onshore and offshore oil and gas drilling services, for example, foreign ownership will now be capped at 75 percent, as opposed to the previous 95 percent.

There are speculations as to why the government is choosing to revamp laws now. The news comes hot on the heels of reports that Indonesia is facing slow and stunted economic growth. But even with the declining state of the economy, opening up prospects of full ownership of tourist ventures like bars and restaurants to foreigners has reignited interest from overseas investors.

“In the past, people were always interested in investing in Indonesia. However, the restrictions on ownership meant that we would have to find partners, who most of the time wouldn’t have the same goals that we did, causing the deal to fall through,” explains Raja Lalwani, a private investor from Dubai looking to enter Indonesia’s restaurant market. “Being able to have full control opens us up to more opportunities than we had previously thought of.”

Lin Neumann, managing director at the American Chamber of Commerce in Indonesia, believes that due to President Joko Widodo’s promises to ease investment restrictions, the Chamber must also make sweeping changes. “The trend has been to restrict investment. For the first time in ten years, you have a president saying the opposite,” he recently told reporters.

This is contrary to previously implemented laws. In the past, Indonesia completely ended foreign investment in the retail sector, as well as heavily limited it in the agriculture and electricity industries. Reports claim that foreign shares in some oil and gas companies saw ownership drop from 95 percent to nothing at all. Analysts believe that although restrictions weren’t as heavy on investments in tourism, the increasing number of legal regulations applying to the surrounding sectors caused investors to become sceptical that Indonesia’s tourism would not suffer the same fate.

As with most claims from the government, rumours and speculations abound, and not much can be said with certainty at the moment. The proposed policy changes have already seen increased opposition from officials and lawmakers, which means there will be a lot of back-and-forth discourse on the matter before people like Raja Lalwani will be able to open up a bar on the beach in Seminyak.

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