Agricultural investment and trade opportunities in Indonesia (1)

Agribusiness Investment Reform

The investment enviroment provided by Indonesian government is primarily intended to create a more conducive environment for agribusiness development and an incentive for farmer and private enterprises to carry out agricultural activities. Hence, investment by both foreign and domestic investors is aimed at stimulating and encouraging investment in production activities with the direct involvement of farmers and other parties in private sectors.

The primary target of agribusiness investment is increasing production in food crops, horticulture, estate plantation and livestock the investment also plans to create production facilities for inputs like fertilizers and agricultural machinery. It is expected that these investments in processing, distribution and marketing activities, as well as the financial system will accelerate the development of agribusiness in rural area.

During the 2005-2006 periods, total domestic investment in agribusiness was Rp 40,713.1 billion. With largest contribution invested in food industry and estate crop. Due the economic crisis, this number declined to Rp 766 billion in 1998. The domestic agribusiness investment was about Rp 763.3 billion due to the more actable economic and political condition in Indonesia. And in 2006, the number domestic investment was Rp 28,301.7 billion.

Foreign investment trend were decrees, during period 2005-2006 total foreign investment in agribusiness was US$ 3,009.3 billion and average US$ 1,504.7 billion. In 2006, the number foreign investment was US$ 1,904.9 billion. However during 2006 the number of foreign investment was growing as well as the domestic investment.

Investment policies statement

Recognizing, that the importance of private sector investment to achieve sustainable economic growth, employment creation, development of strategic national resources, transfer and implementation of competitive technology and technical skills, export growth and improved balance of payments.

Appreciating, that an appropriate legal framework is prerequisite to promoting a stable, predictable and attractive business environment in order to encourage and support private economic activity Indonesian and foreign investors.

Acknowledging, that an appropriate legal framework for investment must provide certain key principles, among which are: equal treatment of investor in similar circumstances irrespective of nationality; protection against expropriation, confiscation or requisition of investments and unilateral alteration or termination of contracts, freedom to repatriate foreign investment capital and net proceeds there on; and access to impartial, quick and effective mechanisms for the resolution of commercial and other investment disputes.

Cognizant, that these principles have increasingly been adopted as standard international practice and have been incorporated into national legislation in many countries, both regionally and globally, and have been recognized in various international documents, including the GATT/WTO agreements, the APEC Non Binding Investment Principles, and numerous bilateral investment agreements.

Undertake and resolves to reform the investment policies, legislation and regulations of the Republic so as to create and enabling environment for private investment consistent with the above stated principles, to be characterized by active promotion and facilitation of investment, transparent criteria for the admission and establishment of investments, transparency of government procedures and administration, screening and licensing requirements based on a short “negative list” of restricted investment.

The government has therefore established an “Investment Policy Reform Initiative” having as its objective the encouragement and facilitation of private sector investment through reform and implementation of transparent, predictable, market oriented policies applied equally to both foreign and domestic investors. In this the government has recently adopted major policies changes, including liberalizing the rules for foreign investment.

The government is committed to the rapid elimination of the remaining restriction on foreign and local private investment. This statement sets forth newly adopted and current policies of the Government for promoting and facilitating private sector investment in Indonesia. The Government is fully committed to these policies and will take the necessary steps to ensure their effective implementation. This statement will be supplemented by detailed investment guidelines to be issued in the near future. To encourage and facilitate private investment, the government has adopted the following policies.

Freedom to Invest

Investors shall be permitted to invest in any sector of the economy except in small number of activities, which are listed on “negative list”. There shall be no restriction on the size of the investment, the source of funds or whether the product s is destined for export or for the domestic market. Exciting foreign investors may invest in activities other than those initially authorized, except for activities started on “negative list”.

Company Formation

Industrial licenses are still needed based on the principles of fairness, simple, quick and transparent mechanism and procedure. Procedures for company formation are to be administered so as to permit prompt establishment of business enterprises.

Taxes and Duties

The government is committed to enhance the country’s investment climate and international competitiveness by further reducing simplifying taxes and duties through ongoing tax and trade policy reform programs. The current Indonesia tax law provides tax incentive to investor who invests in certain sectors and or certain areas as follows:
-Investment allowances,
-Accelerated depreciation and amortization,
-Expanded loss compensation but not more than 10 years,
-10% tax rate for dividend paid to foreign tax payer, except to prevail tax convention maintaining lower tax rate.

Indonesia always tries to maintain equal treatment in tax law not only for tax cases that have similarities. By giving tax incentive to investors, Indonesia must assure that this incentive granted still reflect the principle of equal treatment and the application of that principle did not depart from the objective of tax incentive.

Availability of to Foreign Exchange

The government will continue to ensure, according to pre-set criteria and procedures that foreign exchange for import transactions and dividend payments is freely available and the Governments is committed to ensuring the ease of repatriation of capital and payments for business services.

Access to Local Funding

The government is considering introducing a simple system that will allow foreign investments access to local funding based on simple established criteria.

Labor Practice

Within the framework of the labor laws of Indonesia, the Government recognizes that enterprises may require foreign expertise. Accordingly, it will continue to make residence permits readily available according to prevailing regulation for key personnel required for employment in such enterprises.

General Infrastructure

The Government recognizes the importance of infrastructure to support investment and is committed to make available adequate infrastructure such as transport, electricity, water, and communications through partnership mechanisms that attract private capital. Adequate legal protection including guarantees for the integrity of contracts will be provided.

Availability of Land

The government is committed to ensure that land for industrial and commercial use is ready available to investors. The Government will receive and simplify all existing land licensing and environmental approval procedures to ensure transparency.
The Government is committed to develop new serviced industrial sites and has provided the necessary framework to enable private investors to develop industrial sites including through arrangements for subleasing to other investors.

Encouragement for small and medium Enterprises

The country’s small and medium scale enterprises hold great potential for rapid economic growth and employment creation. The Government is therefore dedicated to continuing with various programs assists these enterprises, including simplifying the regulatory and policy environment, removing obstacles to securing access to raw materials, removing tax related impediments and improving access to credit.

The Government will promote mutually advantageous, commercially beneficial subcontracting/partnership arrangements between large-scale foreign and local firms and small- and medium-scale business.

Investment Promotion

To further enhance the capacity of the BKPM (Investment Coordinating Board) and to create an integrated investment promotion regime, the Government is actively reviewing proposals for the formation of an independent, public private partnership to promote and facilitate all private investment in Indonesia.

Investment Services

The Government is committed that investment services for foreign and domestic investment in the era of the regional autonomy is more preferable that the current condition. Therefore, a “one stop service” system will be introduced to be implemented in the region.

Investment Protection

The government recognizes that security of assets of investor is of paramount importance. It therefore, assures investors that it will avoid using any measures that will adversely affect their property rights. In the case of foreign investors, the Government has negotiated and concluded several bilateral investment treaties, which provide direct protection to investors for the security of their assets as well as assurances for the repatriation of proceeds from their investments. The Government will actively work to pursue to conclude additional bilateral investment treaties with other countries. Indonesia has also joined the Multilateral Investment Guarantee Agency (MIGA).

Double Taxation Relief

To improve economic and trade relationship with other countries, Indonesia would like to have certain law provisions that regulate the right of tax imposed law imposed from each country. The purposes of those provisions are achievement of rule of law, avoiding double taxation, and prevention of tax evasion. Government is entitled to make an agreement with other countries to avoid double taxation and to prevent tax evasion.

The frame work and the matter of this agreement are based on international convention and other rule of laws and also the tax regulation of each country.

Arbitration

The Government recognized that foreign investors must have an appropriate forum to resolve disputes that cannot be settled amicably. While such disputes would normally lie within the jurisdiction of a competent court, parties may agree in certain cases to pursue extra-judicial adjudication and to choose an appropriate forum, including international conciliation or arbitration. To that end, Indonesia has become a member of the International Center for settlement of investment Disputes (ICSID) at Washington DC.


To be continued.

Source: Guide to Agricultural Investment and Trade Opportunities in Indonesia,
Ministry of Agriculture, the Republic of Indonesia