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Economy

Indonesia to offer investment incentives for 'priority' sectors

Presidential decree provides benefits for industries from nickel to chips

A heavy truck drives through a nickel mining area in Soroako, South Sulawesi, Indonesia, in this March 2019 photo.   © AP

JAKARTA -- In a bid to spur both domestic and foreign investment, Indonesia has designated 245 industries as "priority" and will offer incentives to attract capital to those sectors.

The move is part of a presidential regulation that supersedes Indonesia's "omnibus law," sweeping legislation that made changes to more than 70 labor, tax and other key laws. The omnibus legislation was passed by parliament and later enacted following an acrimonious debate last year.

The regulation was signed by President Joko Widodo on Feb. 2, but was only recently made public. It takes effect 30 days after the president signed it.

The priority industries include some that Jakarta deems strategic for the country's economic development. Nickel ore processing and refining is one as the metal is a key material in EV batteries.

Indonesia -- home to world's biggest nickel reserves -- plans to develop an electric-vehicle battery industry that is vertically integrated, from the mining of raw materials to the manufacturing of the batteries themselves.

U.S. electric vehicle maker Tesla has proposed joining Indonesia's plans to create an EV battery supply chain.

Other designated sectors reflect Indonesia's push to integrate itself more fully into the global supply chain for electronic goods. To that end, Jakarta has named semiconductors and other electronic components, wireless communication equipment, and electronic audio and video equipment as priority industries.

Despite the U.S.-China trade spat shaking up global supply chains, the archipelago has so far failed to benefit, with manufacturers setting up shop in neighboring countries such as Vietnam.

The minimum investment to qualify for the incentives has been set at 10 billion rupiah ($710,000) for foreign investors.

Those that invest in the key sectors will qualify for both fiscal and nonfiscal benefits, according to the presidential regulation. Fiscal incentives include various tax breaks, while nonfiscal inducements include streamlined licensing, guaranteed access to energy and raw materials, and "other conveniences in accordance with the provisions of laws and regulations."

Before the omnibus law was passed, Indonesia had a "negative list" that specified that certain industries were completely closed to capital, or open only under certain conditions. The country did not have a comprehensive system for incentivizing investment.

While some elements of the negative investment list remain, its scope has been vastly narrowed. The number of sectors that are completely closed has been reduced to six from 20 previously, with industries such as hard alcoholic beverage distillation removed from the list.

The number of business areas reserved for micro, small and medium-sized enterprises -- for which investment is only permitted when partnering with smaller companies -- was cut to 89 from 145. The number of sectors that are open with conditions, such as caps on foreign ownership, has been slashed to 46 from 350.

The presidential regulation also eases foreign investment in Indonesian startups by exempting them from the 10 billion rupiah investment minimum. The floor will not apply to investment in startups in the country's 15 special economic zones, "in order to encourage the strengthening of the technology-based startup ecosystem," the regulation says.

Despite the economic drag from the COVID-19 pandemic, investment in Indonesia remained robust last year.

Combined domestic and foreign investment in 2020 reached 826.3 trillion rupiah, up 2% on the year. Although foreign direct investment fell 2.4%, domestic investment grew 7%. Investments in transportation, warehousing and telecommunications made up 17% of the total, while money pumped into electricity, gas and water supply made up another 13.5%.

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