Beyond ridesharing: potential new regulations in Indonesia that may affect startups

Photo credit: nseika.

The recent controversy around the bans of ride sharing apps has left a bitter taste in the Indonesian startup ecosystem. Not only causing a huge uproar in social media, this move sparked immediate response from members of the people’s representative council, former Indonesian vice president Boediono, all the way up to president Jokowi himself. Less than 24 hours later, transport minister Ignasius Jonan was forced to revert this decision due to the amount of negative reaction from the public.

On one side, the backlash showed that ride sharing apps have started to become an integral part of society, especially in Jakarta. A good progress considering how recent the services were introduced in this market (On-demand motorcycle service Go-jek started in 2010, while GrabTaxi entered Indonesia just last year). On the other side, the controversy once again highlighted one of the biggest challenges of this country’s startup scene: uncertain regulation.

So looking forward, are there any other regulatory developments that Indonesian startup founders and investors should be cautious about? Below are some of my observations.

Jakarta provincial administration ban on virtual offices

Last month, Jakarta’s provincial administration signed a new bill which prohibits the use of virtual office (Link in Bahasa) and co-working spaces as official address for corporations. Citing fraud reduction as the main reason, the new regulation will be effective starting January 1 2016. According to CNN Indonesia, this new bill will negatively impact 50 thousand SMEs including startups.

For Jakarta-based startups, this regulation will practically increase their overhead cost. Annual SOHO building rental in a non-prime area in Jakarta could cost US$8,000 at minimum while the one year fee for co-working spaces such as Comma or Conclave is only around US$1,500-$2,500. When the regulations is enforced next year, it will be much cheaper for startups to operate in the surrounding areas outside Jakarta such as Depok, Bekasi and South Tangerang. It will also give strong incentive for startups to move operations into other regions which have lower regional wages altogether, such as Bandung or Jogja.

Several parties such as the Virtual Office Association (VOACI) and the Indonesia Young Entrepreneur Association (HPMI) have been voicing objection on this bill and are urging the government to adjust this decision.

Proposed foreign investment limitation on ecommerce

Following the explosive growth of online shopping in Indonesia, Indonesia’s Investment Coordination Board (BKPM) is currently drafting a proposal for adjusting the foreign investment guide. One the main topics on the BKPM agenda is ecommerce. Under the previous regulation, foreign investment in ecommerce companies was 100 percent closed.

One of the proposals coming out from the discussions is to limit foreign ownership to only 33 percent with the maximum amount of investment  capped at US$15 million. While the ownership percentage seems to be reasonable, a 15 million cap could potentially be troublesome for ecommerce companies looking for late stage funding (series C are mostly above US$30 million). Aside from foreign VCs,  there are not a lot of options. Most local VCs and investors still mostly do seed fundings.

Until today, foreign venture capital firms who want to invest in the Indonesian ecommerce industry have to do some workaround to navigate regulatory hurdles. As a primary example, Tokopedia received US$100 million from SoftBank and Sequoia Capital as a loan instead of equity. TIA’s Nadine Freischlad has written a good piece on this practice.

The proposed regulation adjustment is currently still under discussion and expected to be final on the early 2016.