The Investment Negative List: Protectionism is sometimes necessary

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Independent Observer

IO, Jakarta – This November, the Government launched the 16th Economic Policy Package in order to encourage investments and strengthen domestic economy. One of the pointsts of the policy package is the relaxation of the Investment Negative List (Daftar Negatif Investasi – “DNI”), the list of businesses that are prohibited from accepting foreign investments.

Coordinating Minister of the Economy, Darmin Nasution, explains that the Government has several reasons for issuing the policy for relaxing the DNI requirement. Among others, it is the Government’s evaluation of Presidential Regulation (Peraturan President – “Perpres”) Number 44 of 2016 concerning DNI. He said that the evaluation results show that there are several business fields that remain unattractive to investors, even though they are open for foreign investments. Furthermore, relaxation of DNI is the Government’s effort to synchronize a number of tax facilities also regulated in the 16th Economic Policy Package. In this policy package, the Government awards tax holidays and super tax deduction for several business fields.

Initially, DNI is relaxed by taking 54 business fields out of the DNI because the Government wants to simplify investment processes of these business fields. Because of the many polemics and arguments this measure caused, President Joko Widodo (Jokowi) finally put micro, small, and medium-sized businesses (Usaha Mikro, Kecil, dan Menengah – “UMKM”) back into the revised DNI. According to Coordinating Minister Darmin, President Jokowi means that UMKM and cooperatives’ business fields are not included in the DNI revision, or they remain in the list of investments unavailable to foreign investors. Darmin said that there are 5 business fields categorized as UMKM businesses that are re-entered into DNI. “What I know is that the UMKM businesses were first taken out from DNI, but they are put back in. There were 5 categories. In any case, if it’s related to UMKMs, we are returning them to the DNI, while the rest remains,” Darmin stated at the office of the Coordinating Ministry of the Economy on Wednesday (28/11/2018) night.

The five business categories being returned to the DNI are grouped into “A” and “B” groups. Group A contains four business fields taken out of the group reserved for micro, small, and medium-sized businesses and cooperatives (Usaha Mikro, Kecil, dan Menengah dan Koperasi – “UMKM -K”). Foreign investments are not allowed for this group, because there is a minimum investment limit of Rp 10 billion for foreign investors, and the maximum asset value for UMKM-K is Rp 10 billion. There is one business field taken out of partnership requirement in Group B.

The remaining 49 business fields will stay in the revised DNI regulation, and they will be further regulated using Perpres. They are divided into 25 business fields that can be 100% foreign-owned and 24 business fields with a limited foreign ownership, or below 100%. Darmin said that the policy is thoroughly discussed at the level of the relevant ministries, we only need to wait until the Perpres is issued. He stated that he will submit the draft to Jokowi for signing on Monday (3/11/2018). “Yes, that’s the plan, Monday. This package is an expansion of enacted tax facilities. That’s already signed, but it must still be enacted to the Ministry of Justice and Human Rights, and that is completed according to the revised Small and Medium-sized Business Law,” he said.

Darmin further stated that the 5 business fields being returned to DNI would not be 100% foreign possession, because of the Rp 10 billion minimum limit for foreign investment. One thing for sure, Darmin complies with President Jokowi’s decision to keep UMKM-K sectors in the DNI.

This is proof that the President and his Ministers are uncoordinated in terms of making policies. After all, Jokowi is forced to retract and revise the policy that he issued a mere 2 weeks ago due to strong resistance of entrepreneurs and the general public to the policy.

In-depth Reviews
In relation with DNI relaxation, Eko Listiyanto, Vice Director of the Institute for Development of Economics and Finance (INDEF), said that investments must be directed in such a way that they promote, but they must also be reviewed thoroughly. “I am not so sure that all of these sectors are reviewed properly. He understands that DNI is relaxed in order to allow the Government to attract dollars through investments

Unfortunately, Eko said, he does not think this policy would be effective in view of previous DNI amendments in 2104 and 2016. “There is no effect whatsoever towards the movement of foreign investors. In the end, foreign investors prefer to invest in mineral and coal, mining – still stuck with anything related to natural resources. So what are we revising the list for, especially for services? Even if foreign investors invest in services, there won’t be much added value, especially since nearly all of these fields can be performed equally well by domestic economic participants.”

Similarly with Eko, Piter Abdullah, Research Director of Core Indonesia, said that DNI relaxation does not have sufficiently clear purpose and there is an impression that it is not based on proper in-depth reviews and preparation. The Government should first evaluate what previous policies might help cause low investment realization, especially for foreign investments.

Meanwhile, Economist Drajad H. Wibowo, admitted that we cannot shield ourselves completely from globalization and we cannot nurture a xenophobic attitude. Foreign investments is an inescapable fact around the world, but there are “red lines” that are drawn according to the condition of each country. Drajad believes that the impact of DNI relaxation to investment climate improvement is negligible. This is because it would still be difficult for anyone to administer business permits, not to mention there are various other obstacles. This policy actually has the potential of causing conflicts in the field, which would only increase Indonesia’s country risk.

Handling Current Transaction Deficit
Bank Indonesia (BI) announced that our current transaction deficit is USD 8. 8 billion or 3. 37% of our Gross Domestic Product (GDP) in Quarter III of 2018. This realization is the worst during President Joko Widodo’s Government. Increased deficit in current transaction balance shows that there is an increasing gap between our need for foreign currency for importing goods and services, and the supply of foreign currency from exports. This condition causes Indonesia to depend even more on foreign investments, including short-term ones, to expand its portfolio and increase the supply of foreign currency. This causes the rupiah exchange rate to be vulnerable to volatility.

Historically, current transaction balance started to suffer a deficit in Quarter IV of 2011. The deficit remains within 2%-4% of GDP in 2012 to Quarter III of 2014, before later stabilizing below the safe level of 3%. However, conditions change starting this year: deficit again exceeded 3% in Quarter II and Quarter III. BI stated that current transaction deficit in Quarter III is affected by the reduction of the performance of goods trade balance and the increase of service balance deficits. To be precise, the reduction of goods trade balance occurs because of the increase of petroleum and natural gas trade balance deficit. Meanwhile, the increase of non-petroleum and natural gas goods trade balance surplus is relatively limited due to the high level of imports caused by strong domestic demand.

With such a large current transaction deficit, Piter concludes that the Government wants to use the DNI relaxation policy to recover the so far quite large outflow of foreign capital. So far, our foreign capital flow is a surplus, both in Foreign Direct Investment (FDI) form or investment in portfolio form. This is usually sufficient to cover our current account deficit. However, this year our current account deficit increased to the 3% range. On the other hand, there is a huge outflow of foreign capital. FDI slowed down while portfolio goes out on the other hand, causing capital flow to be negative. Current account suffers a deficit that causes capital balance to also be deficit, which means that finally, our payment balance also becomes deficit. This is the source of the pressure against the rupiah.

The Government seeks to resolve this by returning foreign capital flow back into Indonesia, whether from BI portfolios that increase interest rates or from DNI relaxation. “We hope that this would bring FDIs back in, and cause overall foreign capital flow to be good. Later this will cause our capital balance to become surplus, which means that it would be sufficient to cover current account deficits. However, I think this policy is inappropriate, because the problem in foreign investments, specifically in FDIs, is not about DNI. Foreign investors are very much interested in Indonesia, as obvious from the data about the principal permits issued by the Capital Investment Coordination Agency (Badan Koordinasi Penanaman Modal – “BKPM”), which shows that many foreign investors apply for principal permits because they are interested in investing. The number of principal permits issued by BKPM in the past 4 years have rose significantly. However, the number of principal permits issued has risen drastically, but investment realization is stagnant, or even decreased. This means that many investments are approved but cannot be realized,” Piter said.

Eko thinks that this policy does not increase job opportunities and technological transfer. This is because we need to see what sectors are involved. We can rest assured that capital- and service-intensive sectors would not effect any increase in job opportunities. However, it’s still possible in manufacturing. “It is still very much questionable whether we really can increase job opportunities through DNI or not. Then there is the issue of technological transfer: it actually never occurs. For me, technological transfer is only rhetoric where DNI is concerned. Let’s say for example that we get FDI in automotive sector, with the hope that one day we can design and produce our own cars instead of simply assembling them. However, we need to reconcile ourselves with the fact that no FDI would perform any technological transfer. Who would actually give away their technology for free? That’s the very life of a business, why would you give it away? You even fear leaks in the normal course of business! It’s true that they use our workers, but that does not determine whether there will be technological transfer or not. In that case, what is the urgency for opening up FDI opportunities?” Eko said.

According to Eko, current transaction deficit is the reason why the Government relaxed DNI. Therefore, DNI is an instrument for reducing deficit pressure. “Because when foreign money comes in, dollar supply increases. This means that rupiah stability is better preserved. Reasons other than this is difficult to explain, because it is directed that way – because the Government has a headache due to deficit increase. One of the options available to it is to open sectors that would attract foreign investments so we can maintain exchange rates, that’s the concrete objective. Other reasons, such as “to fill in industrial trees”, are just fluff,” he said.

Drajad doubts that the policy would be able to resolve current account deficit, because the expected incoming investment value is relatively small. On the other hand, many commodity import types contribute to the deficit, such as petroleum and natural gas, capital goods, foodstuff, etc. “So there’s no relation there. I don’t think much good would come of it. Its impact to current account deficit is relatively small, its impact to growth is even more dubious. As for equalization of distribution, this might actually increase the gap as foreign businesses enter our household industries,” he said.

Investment Climate
The World Bank once released the statement that ease of doing business in Indonesia has increased. in October 2016, the World Bank reports that ease of doing business in Indonesia increased 15 points, rising from rank 106 to 91. Later, in November 2017, World Bank released the report that ease of doing business in Indonesia increased 19 points, rising from rank 91 to 72. Encouraged by the twice rising in ranks, President Joko Widodo (Jokowi) set a high target for ease of doing business: there must be a rise of rank to the 40th.

Yet instead of increasing, ease of doing business rank in Indonesia decreased. On 1 November 2018, World Bank stated that the ease of doing business in Indonesia decrease from 72 to 73. The reduction occurred after the Government launched the integrated permit system, or the online single submission (OSS) policy. Furthermore, Government has also launched 16 Economic Policy Packages whose purpose is to increase the ease of doing business and investment in our homeland.

Eko believes that the decrease of Indonesia’s ease of doing business rank shows that DNI relaxation is absolutely unrelated to investment ranking. This is because they touch on very different aspects: DNI is related to ownership limits, while ease of doing business is not about limits. Instead, it is about the speed of available infrastructures, honest bureaucrats, and business stability. “Most of these investors are not worried about possession limit, but they want a healthy business climate,” he said.

Piter said that there are many factors that would cause investments to be unrealizable. For example, there might be policy inconsistency in the Government itself. Let’s say that the Government said that when regions enter the Government’s Special Economic Region (Kawasan Ekonomi Khusus – “KEK”), then the Government will have supporting facilities ready for them. However, when investments come in, the Government has not built any supporting facilities after all. For example, the Government promised to construct a railway in Sei Mangke, North Sumatera from KEK to ports and other facilities. The investment has come in, but the promised facilities are not yet completed. This is a great letdown to investors.

Another example that showcases Government policy inconsistency is metal smelting plants. Initially, the Government stated that all mining companies cannot export concentrates, but must first establish smelters to process and add value to the concentrates or raw materials. The Government later obligated mining companies to get investors to help them construct smelting plants, because it is too expensive. After several investors came in and started to construct smelting plants, the Government later changed its policy again and re-allowed mining companies to export concentrates.

This causes losses to the investor. Such policy inconsistencies in the business permit requirement keep investments out. And that is just one issue. There are still labor problems, land acquisition problems, and raw material problems. The struggle simply to obtain permits is so bad, while there are still other things to think of once the business is set up. Without thorough evaluation that considers these things, the Government suddenly issued DNI relaxation policy.

This brings us to another issue about our investment climate: the lack of good coordination between the central and regional government, as well as between agencies. Even now the Coordinating Ministry of the Economy has many unresolved issues with BKPM.

In other words, DNI relaxation is like treating a knife wound to the stomach with antacid pills instead of stitching – absolutely irrelevant, especially since later the Government makes this policy without sufficient communication and dissemination of information. DNI relaxation was decided without prior sufficient communication with Indonesia’s Chamber of Commerce (Kamar Dagang Indonesia – “Kadin”), Indonesian Entrepreneurs’ Association (Asosiasi Pengusaha Indonesia – “Apindo”), or even the entrepreneurs themselves. This is what later causes the brouhaha about DNI.

DNI relaxation expands the scope of sectors that can use foreign investments, but it does not resolve existing issues in the investment climate such as permit issues, labor issues, and the many other issues that actually have significant impact to investment. DNI relaxation is like adding new doors to a building, but without steadying the building’s walls and foundations first, without fixing the actual features first. The door may be open, but the road to the building is not upgraded and the building itself is not steady. How would things go later on?

Ninasapti Triaswati, an economic observer from University of Indonesia, said that if we want to increase investments, we need to improve our investment climate. Foreign investors would naturally compare us to neighboring countries in things such as the speed of getting permits, logistical costs, and many other considerations before making investments. We need to resolve this, as they are what the entrepreneurs actually consider, not just the scope of the portfolio. It’s more than just having the Government open industrial sectors via DNI relaxation.

“Our Government has a long outstanding homework, because our permit system, taxation, use of workers, minimum wages are among the things investors will consider before making investments. If we even have to import workers, what’s left for us? So I suggest that we allow highly skilled foreign workers, but not workers whose qualifications are equal to local workers. Foreign capital may come to finance technologically-intensive manufacturing or industry development. These are the things that we need to monitor, because if we want to expand our job opportunity, we must upgrade ourselves as well as our entrepreneurs,” Nina said.

UMKM Difficulty in Competing
According to the Ministry of Cooperatives and Small and Medium-sized Businesses data, 58.91 million micro business units and 59,260 small business unit. Unfortunately, only less than 5% of these UMKMs are connected to the export market. Furthermore, only 3.79 million UMKM entrepreneurs, or only about 6.4%, are connected to e-commerce. In other words, we actually have a largely untapped potential.

Eko confirms that it is hard for UMKMs to compete with foreign investors, especially since few Government policies support UMKM. For example, there is very little credit provided to UMKMs, while the Government seeks to get major investors in. “Because it’s not apple to apple, we should concentrate on protecting small businesses and not bother to open up DNI,” he said.

Meanwhile, according to Piter DNI relaxation does not mean that foreign capitalists just come in and later take out UMKM. The provisions of Foreign Investment Law that protect UMKM remain in effect. No foreign UMKM investments are allowed in Indonesia – only large companies are allowed in so that they would not directly face off UMKMs or generate UMKM-level businesses. The Law ensures that large companies do not steal away UMKMs’ business. From the Government’s explanation, it is hoped that incoming foreign capital can help UMKMs, because the requested investments are for fields that provide the technology that would later help UMKMs.

However, the remains a potential that UMKMs in Indonesia would be disrupted if the relations between foreign investors and UMKM are not maintained properly. For example, one of the industries being opened is textile embroidery. This is a UMKM field, a creative industry where we have sufficiently strong competitiveness. Foreign companies may come and be partners with our UMKMs to help us penetrate global market and export our industry, but the relationship between foreign companies and our UMKMs must be closely monitored. Otherwise, UMKMs as the smaller company will lose their bargaining position with the large companies and lose out.

“I suggest that the Government try to focus and evaluate the issues in our investments that cause it hard for foreign investments to be realized. If all of the principal permits issued by BKPM are realized, our investment growth can even exceed 20 digits. Now our investment growth is extremely low: investment inflow to Indonesia in Quarter II of 2018 only grew 5.87%. This is much lower than the figures in Quarter I of 2018 at 7.95%,” Piter said.

Ninasapti Triaswati thinks that the Government means for DNI relaxation to reduce current account deficit. “However, as we see it, even though the intent matters, the means of achieving the intent also matters. Are our UMKMs sufficiently protected by the Government when they must compete with foreign companies. Companies listed in Category C of the DNI can have 100% foreign ownership, and we must look at this more carefully because ecotourism or forestry-based tourism is included in this category.

As we see it, many local economy activities are already involved in ecotourism. We also see art galleries in this category, which are generally managed by UMKMs. If foreign businesses come with large capital, they might still compete with our UMKMs because they have different definition of “UMKM” from Indonesia. UMKMs in Indonesia have a maximum asset value of Rp 10 billion, so for foreign companies to enter, they must have assets exceeding Rp 10 billion in value. But they are allowed to do the things that locals could have done. This rule actually means that foreign companies may enter Indonesia if they have sufficient money, even though they have the same business as small local companies.

In other countries, local economic activities are usually protected, but they might partner up with foreign companies later. Indonesian UMKMs are much smaller in scale than investing foreign companies, and the foreigners have networking. If local economy activities must face off with this kind of foreign companies, we fear that they would not be able to compete. Therefore, the Government must have clear classification about which businesses are open for foreign investment: there must be a business roadmap defining “large”, “medium”, “small”, and “micro” businesses, and which ones are protected by the Government.

At the regional level, we must still face the issue of high logistic costs. We actually have not completed our own tasks, but we already open doors for results that might not be so good. Our neighbors protect their small entrepreneurs – they only open large-scale businesses such as 5-star hotels and make them partner with small-scale local businesses. In Bali, we note that some restaurants only have foreign partners, and even use foreign currency for all of the restaurant’s business. The Governor of Bali raised a fuss about this recently. Therefore, our Government should be wiser. The most important thing is to ask, “What does the local economy gain from all this?”“ Nina said.

“I cannot emphasize enough about how other countries, whether advanced or developing, protect their local economy carefully. If we go to New Zealand, everything is local, there is relatively no foreign companies. There is even no KFC branches there. Another foreign fast food restaurant, Pizza Hut, is present in New Zealand – but as a partnership.

We note that Indonesian ecotourism will grow rapidly, because Indonesia has many regions blessed with amazing natural beauty. Yet our economic roadmap remains unclear, causing regional entrepreneurs to complain. How come we do not finish off the frameworks we already have, such as the One-window Integrated Services (Pelayanan Terpadu Satu Pintu – “PTSP”) for local business permit administration? This service remains ineffective because the bureaucrats running them are still so obtuse. Technology should help simplify permit administration, so that we can create a lot of startups and allow them to develop. We have not even completed this basic structure, but the Government quickly open new sectors without sufficient preparation.

The issue is not how to increase the types of available sectors, but we should stabilize our framework first, how to implement them properly at micro level. I think this is a cause of concern, as the Government quickly opens up investment opportunities for many sectors without making clear evaluation beforehand,” Nina said.

“Especially since nowadays our regional retail businesses are in a bad condition. We need to evaluate and determine more clearly: if we want to open up new sectors for possible investments, what’s the investment limitation and what are the qualifications for that sector? Yes, we sorely need investments, but if we open up investment opportunities without involving local partners, nothing good would come of it. Local micro, small, and medium entrepreneurs would not get anything. Large companies are competitive and can take care of themselves.

Therefore, we must look at and determine classifications carefully. The important thing is to make the targets more specific. For example, Korea provides incentive to reward foreign investors for creating job opportunities to local residents. DNI is only about opening up sectors for investment, but where’s the incentive, and what are the benefits for us? Do we seek job opportunities for local workers, or do we seek gross income and tax? We can think up incentives to make sure that foreign entrepreneurs bring benefit to the local economy. However, now we also noted some extreme negative impacts, such as what the Governor protested of in Bali. The tourism bureau is foreign, and the restaurants also belong to foreigners. What does the local economy get? Just next to nothing!

We need to clarify things. Among others, we need to stipulate that the rupiah currency is used when making new business in Indonesia. Violations should be punished by cancellation of permits. Again and again I say, the Government must ensure that local entrepreneurs, local economy, local governments benefit from foreign investments, whether in terms of job opportunities, taxes, etc. It is necessary to evaluate whether these sectors should really be relaxed from DNI, especially those sectors relating to micro, small, and medium-sized businesses. Releasing industrial sectors from DNI does not resolve the issue, it only increases the number of items available for investment. The basic problem is that our bureaucracy is too slow to support entrepreneurs properly for self-development,” Nina said.

(Dessy Aipipidely, Ekawati)