Global Insight Perspective | |
Significance | Under the new rules, foreign ownership in Indonesian mobile and fixed-line companies will be capped at 65% and 49%, respectively. The regulations, however, will not be applied to investments that already exist or are being processed in Indonesia. |
Implications | The new rules will not disturb the existing foreign ownership, although they will limit new investment from foreign entities. |
Outlook | Although foreign entities have already made significant investments in the Indonesian telecoms sector, the market growth potential continues to attract investment interest. |
The Indonesian government has issued a new presidential instruction that limits foreign ownership in mobile and fixed-line companies to a maximum of 65% and 49% respectively, Dow Jones reports, citing Trade Minister Mari Pangestu. The regulations will not be applied to investments that already exist or are being processed in Indonesia, said Mari Elka Pangestu, adding that "the new regulation isn't retroactive." However, the government will not allow foreign investors to raise their existing stakes in mobile and fixed-line operators if the stakes are already above those limits, said Pangestu.
Outlook and Implications
- Political Background: The foreign ownership limit in the telecoms sector is part of a negative investment list issued yesterday by the Indonesian government capping foreign investment in numerous strategic sectors, including telecoms, multimedia, ports, airports and education, following the passing of a new investment law in March. The caps in the new negative investment list have naturally been met with criticism among foreign investors and sends mixed signals at a time when the government of President Susilo Bambang Yudhoyono is keen to attract tens of billions of dollars in foreign investment into Indonesia to push economic growth. It will serve as a disincentive to foreign investors—with many having awaited the release of the negative investment list before committing further investments to their projects—and testifies to nationalist bureaucrats having gained the upper hand over technocrats in the Yudhoyono government. While other parts of the new investment law have improved the investment climate in Indonesia, the country continues to face additional challenges in attracting foreign direct investment due to high levels of corruption, red tape, an unpredictable legal system and poor infrastructure, although these are concerns that the government is gradually seeking to address.
- Existing Foreign Ownership: Previously, there was no clear limit on foreign ownership in telecoms companies. The new rules will, however, not disturb existing foreign ownership and will only limit new investment from foreign entities. At least two Indonesian mobile companies currently have foreign ownership of above 65%. Exelcomindo, the country's third-largest mobile operator, is 67%-owned by Telekom Malaysia, while Natrindo Telepon Selular (NTS) is 95% owned by Malaysia's Maxis Communications (see Asia-Pacific: 27 June 2007: Saudi Telecom Strikes US$3.01-bil. Deal with Malaysia's Maxis; Gains Foothold in India, Indonesia). Furthermore, Singapore's state investment company, Temasek, which holds cross-ownership in two of Indonesia's leading mobile operators, is currently under investigation by the country's competition watchdog. Temasek owns a 56% stake in SingTel, which has a 35% stake in Indonesia's largest mobile operator, Telkomsel. Meanwhile, Temasek's wholly-owned Singapore Technologies Telemedia (STT) owns 40% of the second-largest mobile company, Indosat. If found guilty of monopoly practice, Temasek may have to sell its ownership in either Telkomsel or Indosat (see Indonesia: 24 May 2007: Anti-Monopoly Watchdog Investigating Temasek's Business Practice in Indonesia).
- More Interest from Foreign Investors: By Global Insight’s estimates, there were 63.6 million mobile subscribers in Indonesia at the end of 2006, a penetration rate of 26.6%. Despite the competition—not only from established mobile operators, but also from low-cost CDMA operators—there is still plenty of room for growth: the country has a population of over 220 million. Although foreign entities have already made significant investment in the Indonesian telecoms sector, the market growth potential continues to attract investment interest. Several foreign players have recently expressed interest in investing in Indonesia, including Altimo, the telecoms arm of Russia's Alfa Group conglomerate, and South Korea's SK Telecom.