In an article written for the November issue of business magazine GlobeAsia, Senior Foreign Counsel Shamim Razavi discusses the legislative changes introduced by Indonesia's new government and looks back at other recent regulatory developments in Indonesia.

This article has been reproduced with permission of GlobeAsia.

Parsing Legislation

In the last days of the outgoing parliament, a raft of new measures were announced and enacted in a sudden flurry of legislative activity – particularly laws in the banking, insurance and plantation sectors.

When first proposed, these laws often had a distinctly nationalistic flavour - reducing the maximum foreign ownership in key sectors – and it was this aspect which initially caught the attention of the media and investors.

However, by way of a reflection of a healthy parliamentary process, much of this legislation was amended during passage and the end result was often much more nuanced – and much less reported – than the initial drafts.

Although we are now in a new parliament, with a new President, many of the legislators remain the same – and indeed the Red and White coalition maintains the balance of parliamentary power. In order to be able to predict the direction of economic legislation in the new parliament, parsing that final raft of legislation provides some interesting clues.

In terms of the optics of the new draft laws, there was certainly a clear trend: an initial fanfare heralding the lowering of the limits on foreign investment and highlighting the advantages this would bring for Indonesians. This was invariably followed by a wave of criticism from industry insiders and investors alike pointing out that the domestic capacity in the sectors targeted would not be able to fill the gap left by reducing foreign ownership and that the end result would be bad for Indonesia.

After that criticism, a period of uneasy silence was followed by the new law being enacted almost unnoticed, some months later. Unsurprisingly, that silent period was in fact filled with parliamentary debate and deliberation and accompanied by the taking of soundings from industry players (with a fair bit of lobbying from them to boot). In other words, there was a healthy democratic process with an Indonesian twist and flare.

Such initial fanfare clearly played into the nationalist narrative which has characterised political discourse in this election year and was possibly a goal in and of itself with little expectation that such restrictions could be maintained in the final shape of the law. Certainly, there was traction in the idea that Indonesia's resources and industries are best left in Indonesian hands to the extent possible – an idea which of course has merit.

However, at the same time Indonesian resource players and industries recognize that the knowhow and networks of foreign partners are key to expanding domestic capacity and hence, in that period of pre-enactment deliberation, more discreet voices were heard in the legislative process.

In the result, the more restrictive laws either fell off the parliamentary agenda or, when passed, were stripped of their more immediate restrictions on foreign ownership, deferring any new limitations to future subsidiary regulations to be adopted at the Ministerial level in due course. Of course, the passage of these less dramatic versions of the legislation generated much less media and public interest but it is still worthwhile to look at the laws as passed to see whether there is a clear trend emerging.

Insurance Law
During the parliament's discussions on the new insurance law there were rumours in circulation that the foreign ownership cap for insurance companies was to be decreased from the current 80% to become 40%. After an initial panic, the law when passed left the foreign ownership threshold untouched – for now.

Plantation Law
In the plantation sector, the draft plantation law proposed a dramatic decrease in foreign ownership from 95% to 30%. The draft also included a provision requiring existing plantation companies with more than 30% foreign ownership to divest their investment and hold a maximum of 30% within 5 years – a rather unusual provision, as often existing companies are 'grandfathered' or allowed to maintain their current ownership percentage.

When enacted, the foreign ownership threshold was left unchanged at 95% – again, for now.

Banking Law
In the banking sector, the initial legislation before parliament proposed a decrease in the foreign ownership cap for banks from 99% to 40%. This law was not passed before the term of the outgoing parliament expired, and so if it were to be resurrected, it would need to be proposed afresh in the new session.

A trend?

Can these recent developments be seen as a building trend – one that shows parliamentarians' intentions to minimize foreign ownership in Indonesia's economy? Or is it mere coincidence that this draft legislation just happened to come up at the same time?

To answer this, it is instructive to take a look back at other recent developments.

Raw Mineral Ban
Early in January, the government issued regulations which prohibit the export of raw mineral ore. This prohibition was in line with the mandate under the mining law which stated that by 2014 coal and minerals were to be processed domestically – to increase the value of coal and minerals before they are exported. The issuance of these regulations sent shock waves through the mining sector.

Previously, investors had been confident that the Government would not implement the threatened prohibition – given its potentially massive impact on both mining operations and the Indonesian economy, alongside the Government's patchy track record in issuing regulations implementing such restrictions.

In the event, the prohibition was implemented and did cause major production disruption which was felt by mining companies throughout the country. Mining companies were forced to halt their operations because they were not able to export their minerals, while processing their minerals domestically was not an option due to the lack of smelters in the country.

Following the export ban on raw minerals, the long-standing debate on whether to ban low calorific value coal exports reignited. However, given the experience with the ban on mineral ore, there was less investor complacency this time around and after significant lobbying efforts, and despite several revisions of the draft regulation, the regulation to date has not been adopted.

Jam Today. Jam Tomorrow?
The banking, plantation and insurance sectors breathed an almost audible sigh of relief as the legislative process came to a conclusion with no immediate change. However, on closer analysis, this relief may have been premature.

It is a significant feature of the final versions of the Insurance and Plantations Laws that discretion to lower the foreign investor threshold has been delegated by parliament to the ministerial level. This is in fact a rather sophisticated measure, allowing subsidiary legislation and regulation to fine-tune the foreign investment limits in a fashion that allows the ministries – with their more technical knowledge of the relevant industries – to determine the appropriate levels. How it will play out, however, depends on three key factors: the new Ministers appointed by President Jokowi, the political climate, and the complacency or otherwise of industry.

Were these recent legislative changes coincidence or coordinated? On its best reading, they could be seen merely as a final push to meet the parliament's initial target of passing 247 new laws during its five-year mandate – in the end it passed only 126. Certainly, there was a flurry of new proposed laws in those final parliamentary days, beyond the three discussed here. One can only speculate as to why those three drafts had ambitions of restricting foreign ownership restrictions, but the fact remains that all of them as eventually passed did not impose any immediate foreign ownership restrictions.

The new government
The previous government's clear drive to develop domestic processing of resources, instead of merely having these resources exploited endlessly, can be seen as upholding the spirit of nationalism – in a positive way. There was clearly an emerging understanding that in order to take the next step of economic growth, the nation had to step up from being a producing-exporting economy and become a manufacturing economy.

If this approach is continued by the new government, it must be coupled with the understanding that it will require extensive infrastructure development and a significant amount of foreign investment – and that further and unpredictable restrictions on foreign investments would defeat this goal.

There is every indication that the new administration has a strong focus on building the Indonesian economy for the benefit of Indonesia but in a way that harnesses foreign investment. While there will always be countervailing political forces, the campaign messages of both candidates were built on economic growth and stability.

In respect of stability, industry vigilance will be key. With increasing powers given to Ministers to determine investment limits and the like, a constant dialogue will be necessary to ensure that the kind of radical changes announced out of the blue which tend to rattle investors and markets do not become the norm.

While of course investors always favour greater access to Indonesian markets, it is the unpredictability of changes in foreign investment regulation that is particularly damaging to future investment. It is hoped that the dialogue we have seen in recent months continues to be the norm.

The nationalism issue will doubtless be a challenge for the new government and especially President Jokowi. Potentially, the final flurry of legislation was a trap for the new government – presented with the impossible dilemma of measures which appear to be strongly nationalistic on the one hand but which could have had a chilling effect on foreign investment and economic growth on the other. That dilemma could well be a theme not only of the past few months but also of the immediate future.