INDONESIA: An Introduction to Corporate/M&A

Trends and Developments

Contributed by Walalangi & Partners.

Authors:
- Jeanne Elisabeth Donauw
- Raditya Pratamandika Putra
- Putri Bening Larasati

Indonesian Economy At a Glance 

Following growth of 3.69% in 2021, the Government of Indonesia (“GoI”) estimated the country’s economy would grow 5.2% in 2022, which is consistent with the World Bank’s prediction in December 2021.

To maintain recovery momentum and strengthen structural reform, the GoI has allocated a total budget of IDR2,708 trillion, focusing on, among others, healthcare, energy, social protection, and infrastructure programs, including the development of Indonesia’s new capital city.

General Foreign Investment 

Total (foreign and domestic) investment realization for 2021 reached IDR901 trillion, which is slightly higher than the original target of IDR900 trillion. The relaxation by the GoI of foreign shareholding restrictions in many significant sectors – such as construction, telecommunication, and power – plays a key role in this achievement.

If the GoI maintains the same attitudes towards liberalization of foreign investments and can preserve political stability and security (including around the period of the country’s general election in 2024), foreign investment growth is likely to keep its momentum in the long run.

Energy 

Indonesia has targeted its domestic consumption of renewable energy at 23% and 31% by 2025 and 2050 respectively.

To encourage renewable-energy-based power plant projects, the GoI introduced a Build Own Operate (BOO) scheme (as opposed to Build Own Operate Transfer (BOOT) scheme in non-renewables), where Independent Power Producers are no longer required to transfer their projects to the GoI at the end of the term of the Power Purchase Agreement. The GoI also hopes to see more foreign investments following the liberalization of power generation activities with a capacity of 1 MW and above early last year.

Practitioners are now anticipating new laws and regulations that would help promote the renewable energy sector, including the law on renewable energy, the presidential regulation on power purchase by the State-owned electricity company (PLN) from renewable energy-based power plants, and regulation on carbon pricing.

Indonesia plans to implement carbon tax for coal-fired power plants in April 2022 and thereafter gradually impose carbon tax on other sectors by 2025.

Real Estate 

Demands for industrial estate land seem to be on an upward trend alongside the growth of industries, such as IT and data centres, automotive, and EV batteries.

For the residential segment, particularly small landed houses, mortgage demands appear to start recovering, mainly due to VAT subsidy and Loan-to-Value relaxation.

Notwithstanding, from foreign investors’ perspective, the classic question has always been around when foreigners are permitted to hold freehold land in Indonesia. This liberalization does not however seem feasible at this point in time.

Telecommunication Services and Tower Business 

Among the recently announced transactions in the telecommunication sector is the acquisition of over 76% shares in Centratama Telekomunikasi Indonesia and 4,247 of Indosat’s towers by Edge Point Singapore. Other notable transactions include the recent merger between Indosat and Hutchison 3 Indonesia, and the acquisition of Solusi Tunas Pratama by Protelindo. One of the key driving factors is the relaxation of foreign shareholding restrictions in the telecommunication sector, including internet service providers, telecommunication network operators, and telecommunication tower operators. More transactions and consolidations in this space are expected to take place this year.

For internet network services, Telkomsel plans to further develop 5G network infrastructure to meet the demand for data traffic to support its expansion plan to other major cities in Indonesia, while the GoI will continue the development of 4G internet network by constructing BTS towers to serve remote areas.

Banking 

The acquisition of Bank Fama International by EMTEK group is considered one of the most important bank acquisitions in 2021. The acquisition trend is expected to continue in 2022, particularly due to the requirement that all commercial banks must have at least IDR3 trillion core capital by the end of 2022.

Another notable trend is digital banking, which is mainly driven by the development of the IT sector in Indonesia. The new banking regulation on commercial banks issued by the Indonesian Financial Services Authority in 2021 also helps offer some level of certainty for investors to invest in digital banking. The rising number of Indonesian small banks being acquired to be converted into digital banks, such as the acquisition of minority shares in Bank Jasa Jakarta by WeLab and the acquisition of Bank Neo Commerce by Akulaku (both in 2021), demonstrates how attractive the sector is.

Healthcare 

The GoI has allocated around 9.4% of Indonesia’s 2022 State Budget for healthcare spending, focusing on the COVID-19 vaccination programs, prevention measures, and healthcare worker incentives.

Given its potential market size and the government’s budget on universal healthcare, Indonesia’s healthcare business – particularly after the relaxation of foreign investment restrictions – offers a good investment opportunity to foreign investors. Sectors such as private hospitals and main clinics, which were previously limited only to a maximum of 67%, are now fully open to foreign investors.

This year, the collaboration trend is expected to grow further, not only in number but also in areas of collaboration. Some hospitals and healthcare companies have partnered up with digital platform companies to enable patients to access online doctor consultations and medicine delivery services from home.

Export sales of natural health care products that are believed to help boost immunity (e.g., essential oil) are expected to increase further this year. Likewise, cold chain business has also seen opportunities to grow as the vaccination program continues.

Automotive and Logistics 

The automotive sector outlook in 2022 is projected to remain positive, and several car producers have revealed plans to manufacture electric or hybrid vehicles this year. New car sales continue on the recovery trend – which is partly due to the GoI’s policy to apply VAT discount on luxury goods to help the automotive industry. The incentive is valid until March 2022, and thereafter an increase of 1% to 3% will be imposed gradually for the next three quarters. A similar recovery trend is also projected for the used cars market.

In the logistics segment, the industry is on a growth trail after the rising of e-commerce transactions. The removal of foreign investment restrictions in the courier agent services business and freight forwarding sector – which were previously subject to a maximum limit of 49% and 67% respectively – is also expected to help improve the growth in the space.

In 2022, logistics companies will continue to innovate and improve their delivery services offering to customers by adopting cutting-edge technology. “GoFood” with its pilot project for the use of automated robot technology for food delivery services is a perfect example of innovation in this space.

Digital Payment 

In the digital payment sector, digital payment transactions in Indonesia are likely to continue on the rise this year, and this trend is expected to drive fund-raising and M&A activities. Tech start-ups such as “GoTo”, “Traveloka”, and “SiCepat” are reportedly planning to go public in 2022. More collaboration, consolidation, and further disruption seem to be the key themes for this year.

To facilitate start-ups and tech-related businesses to gain access to the capital markets, the Indonesia Stock Exchange (“IDX”) recently took some conducive steps, including the launch of the ‘IDX Sector Technology’ index, the introduction of a fast-track policy to help companies get fast entry to several benchmark indexes, and the introduction of multiple voting shares.  

Other Major Regulatory Updates 

Following a judicial review of the Job Creation law (Omnibus law) filed at the Indonesian Constitutional Court in November 2021, the court ordered the GoI and the House of Representatives to ‘revise’ the flaws in the law within two years. However, the general view is that no substantial change to the law is expected, given that the court decision seemed to have merely focused on the procedural flaws.

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