Indonesia: Investment Climate Statement 2003

A.8. Transparency of the Regulatory System

Indonesia has a tangled regulatory and legal environment causing most firms, both foreign and domestic, to avoid the justice system. Laws and regulations are often vague and require substantial interpretation by implementing offices, leading to business uncertainty and rent seeking opportunities. Deregulation has been somewhat successful in reducing barriers, creating more transparent trade and investment regimes, and has alleviated, but not eliminated, red tape. Still U.S. businesses routinely cite transparency problems and red tape as factors hindering operations.

In April 2002, the Parliament enacted a new law creating a tax tribunal to replace the Tax Disputes Settlement Board (BPSP), a special government institution. The tax tribunal will hold public hearings on tax disputes to combat irregularities and closed-door deals previously done between taxpayers and the judges. According to tax observers, tribunal decisions have run 70 - 80 percent in favor of the taxpayer.

A.9. Efficient Capital Markets and Portfolio Investment 

Indonesia has two stock exchanges, the Jakarta Stock Exchange (JSX) and the Surabaya Exchange. Securities trading on the JSX, the dominant exchange, is very thin. For the first six months of 2003 the value of the JSX rose 20 percent; however, the 460 million average daily transaction volume remains less than seventy-five percent of pre-crisis transaction levels. Corporate bond issues increased in 2003 as interest rates declined. Still a recent phenomenon, therefore the lack of a well-developed corporate bond market limits financing options.

In February 2001, the government liberalized foreign ownership in Joint Venture Securities Company allowing foreigners to own up to 85 percent of paid-up capital in joint venture companies engaged in finance, other than securities. Licensed foreign entities involved in the securities business are now allowed to own up to 99 percent of paid-up capital of joint venture securities companies.

Foreign firms generally enjoy good access to the Indonesian securities market. Financial reforms introduced in 1987 allow foreign firms to form joint ventures with Indonesian partners in the securities market as underwriters, broker-dealers, and investment managers. In 1997, Ministry of Finance lifted the 49-percent restriction on foreign purchases of shares in non-bank listed firms, and in 1999 lifted those restrictions for banks. In 1998, Ministry of Finance lifted discriminatory capital requirements on foreign securities. BAPEPAM, which the government formed in 1976 to regulate and supervise capital and stock market activity, regulates portfolio investment.

The large amount of non-performing corporate debt, roughly USD 39 billion as of May 2003 according to IBRA, is a major factor limiting capital markets growth in Indonesia. Although debtors and creditors have reached agreement on a substantial number of restructuring agreements through IBRA and the Jakarta Initiative Task Force, most of these agreements have not yet reached legal closing. As a result, few of Indonesia's large corporations are creditworthy.

A.10. Political Violence 

The political reaction to the United States military invasion of Iraq was limited to sporadic protests and mostly nonviolent. In recent years foreign investors in Indonesia, particularly in the oil, gas, and mining sectors were victims of a number of acts of political violence. Mines and oil production facilities in East Kalimantan and Riau provinces were subject to blockades by local groups. Labor disputes also turned violent in several instances.

In April 2003, a bomb exploded outside a building occupied by the United Nations, and another exploded at the Jakarta International Airport, causing new security concerns in the capital. Since 2000, Jakarta has experienced a number of bombings by unknown groups likely pursuing varied agendas given the wide range of targets, including police stations, malls, the Jakarta Stock Exchange, diplomatic housing, parliament, and churches. Two American citizens were killed in an ambush in Timika, Papua in August 2002 near a large mine. The police are continuing their investigation into the murders.

The Department of State warns citizens to defer all non-essential travel to Indonesia. There is potential for violence and unrest; both can erupt without warning. There are threats, including the possibility of terrorist activity, throughout Indonesia. Sectarian, ethnic, communal and separatist strife, and violence are ongoing threats to personal safety and security in various areas, including Maluku, North Maluku, Sulawesi, Papua and West Timor. The Department of State encourages American citizens considering travel to Indonesia to review carefully the information available in the State Department's Consular information sheet (CIS for Indonesia), at http://travel.state.gov/indonesia.html which is available at any US Embassy or Consulate abroad and on the Department of State, Bureau of Consular Affairs' web site http://travel.state.gov.

A.11. Corruption 

In recent years, considerable attention focused on the increasing costs of corruption and influence peddling to local and foreign businesses, and the economy as a whole. In early 2003, a risk consultancy company rated Indonesia as the most corrupt country in Asia in its annual survey. Since the fall of Soeharto in 1998, Indonesians have supported the idea of eliminating government corruption and collusive business practices. However, Indonesia's judicial branch is underfunded and recent legislation strengthening judicial independence appears to have reinforced the impunity of judges from effective accountability. Experienced court observers say all participants in the justice system from police to Supreme Court Judges augment their incomes through bribes, fees, or other unofficial means. Decentralization has also in the short term increased the number of politicians and officials with significant discretionary power and therefore corruption opportunities. A free press provides extensive coverage of past and current corruption investigations. Successful prosecutions are rare; however, as corruption prosecutions frequently involve a political dimension that obscures the true motivation. In November 2001, the government passed new anti-corruption legislation to clarify sections of the 1999 Law on the Eradication of Corruption, including gratuities received by public employees. The 1999 law provided for the creation of the Commission for Eradication of Corruption (KPTPK), but it is unclear if the government will succeed in establishing it this year as planned.

University of Indonesia research, conducted in the third quarter of 2001, reported bribes to the government bureaucracy increased total business costs by 10 percent. Bribes increased costs by a greater amount in less advanced regions outside of Java. Common business complaints include: frequent demands for "facilitation fees" to obtain required permits or licenses, government award of contracts and concessions based on personal relations, and an arbitrary legal system. In addition, foreign companies continue to report difficulties in obtaining and renewing necessary immigration permits for expatriate staff.

B. Bilateral Investment Agreements 

Indonesia has signed investment protection agreements with 54 countries, but an Agreement with the United States is still in draft form as of June 2003. Government bilateral investment agreements exist for Argentina, Australia, Bangladesh, Belgium, Cambodia, Chile, Cuba, Czech Republic, Denmark, Egypt, Finland, France, Germany, Hungary, India, Italy, Jamaica, Jordan, Kyrgyzstan, Laos, Malaysia, Mauritius, Mongolia, Morocco, Mozambique, North Korea, Norway, Pakistan, People's Republic of China, Poland, Qatar, Romania, Singapore, Slovak Republic, South Korea, Spain, Sri Lanka, Sudan, Suriname, Syria, Sweden, Switzerland, Thailand, The Netherlands, Tunisia, Turkey, Turkmenistan, Ukraine, United Kingdom, Uzbekistan, Vietnam, Yemen, and Zimbabwe.

C. OPIC and Other Investment Insurance Programs 

Since 1967, Overseas Private Investment Corporation (OPIC) has provided insurance to U.S. investors in Indonesia covering: inconvertibility, expropriation, and war, revolution and insurrection. In 1987, OPIC extended coverage to bid bonds on service contracts. OPIC has also provided project financing to companies with at least 25 percent U.S. ownership.

D. Labor 

Labor management relations in Indonesia have undergone sweeping change since the fall of former President Soeharto in 1998. Following decades of suppression, beginning in 1998 the government granted significant freedom of association to workers, resulting in increased union activism and the need for both employers and unions to invest more in labor relations. Unions oftentimes oppose government privatization plans and corporate restructuring. The government struggled, unsuccessfully in the view of most business observers, to find the right balance between protecting worker rights and the competitiveness concerns of business. The government issued several regulations viewed as unreasonable by employers, including the controversial Ministerial Decree No. 150/2000 on severance and service payments. Until early 2003, various labor and business opposition frustrated government efforts to update two main labor laws, regarding labor (No. 14/1969) and the settlement of labor disputes (No. 22/1957).

In February 2003 the Parliament endorsed the "Manpower" law, the most significant new labor law since 1998. The law, the result of lengthy labor-employer negotiations and compromise, rationalizes some matters including severance pay and strike activity, but introduces new constraints on business in other areas such as fixed-term labor and outsourcing. Nevertheless, employers associations and most major trade unions agree that the Act represents a positive step. As of July 2003, legal uncertainty continued as the Manpower Ministry had not yet issued implementing regulations for the new Act. The Manpower Ministry has drafted an industrial dispute settlements bill that will replace law 22/1957. The draft is in an advanced stage of discussion with employer and labor representatives.

Indonesian labor and management are often uncertain about interpretation and enforcement of existing labor laws and regulations due to their limited dissemination, the lack of clarity regarding the application of new and previous regulations, and conflicting application by government authorities and within Indonesia's weak legal system. Employers view many government labor regulations introduced since 1998 as overly favorable to workers. Unions point to overall weak implementation of laws and regulations, including the lack of a credible labor inspection system, allowing some businesses to avoid their legal responsibilities to workers. Overall, the process of revising Indonesia's legal framework for labor relations has been slow and controversial, introducing new uncertainties for all parties.

Indonesia has over 72 registered trade union federations and roughly 16,000 company-level unions. Some union federations have political affiliations. Law number 21 /2000 on Trade Unions details the process of union formation. It allows ten or more individuals to form a union and allows multiple unions in a company. Multiple and competing unions within individual companies pose difficulties for both employers and workers as it calls into question which group represents workers' interests. The 2003 Manpower Act provides some clarification on negotiating collective labor agreements when multiple unions are present. Labor unions represent only some 8 million of Indonesia's 40 million formal sector workers.

Dramatic increases in minimum wages in 2001-2002 (Jakarta wages increased over 69 percent in this two-year period) unsettled businesses and reduced Indonesia's competitiveness for labor-intensive manufacturing. In 2003 minimum wages increased more modestly (in Jakarta by 7 percent reaching Rp 631,000, or USD 78). Under Indonesia's regional autonomy regulations, local governments set the minimum wage for their localities. Provincial monthly minimum wages, which serve as guides for local governments, vary from USD 34-78. Given the relative rarity of collective bargaining agreements, the annual minimum wage exercise commonly takes the place of labor-employer wage negotiations. Wages remain very low in absolute terms, often below government-calculated minimum subsistence levels, and many workers still do not receive the minimum wage. Despite increased wages, in a number of industries analysts estimate that total labor costs remain less than the invisible costs faced by companies.

New entrants to Indonesia's labor force increase by 2.5 million every year. Official statistics show Indonesia has a working age population (those above the age of 15) of 141 million and a labor force of 96 million. The Ministry of Manpower claims that as much as 65 percent of the total number of workers is employed in the informal market. Labor market studies report that Agriculture, Services, and Industry employ 43 percent, 43 percent, and 14 percent of the labor force, respectively.

Indonesia has a shortage of qualified managerial and professional personnel. Approximately 55 percent of the labor force completed elementary school, 15 percent junior high school, 17 percent high school, 2 percent college and 2 percent university. The low quality of government educational institutions and the lack of job training opportunities create a large number of workers whose skills do not match market demand. The national and provincial governments increased spending on education and are improving quality but this will be a long-term process at best.

The Ministry of Manpower in 2002 claimed 30 million are underemployed and about 8.4 million more are unemployed or work less than 15 hours a week. Most observers believe these estimates understate the true number of unemployed and underemployed workers. Unemployment has hit hardest those with high school and college degrees, according to the Indonesian Statistics Bureau. The Asian Development Bank estimates that Indonesia's economic growth would have to reach 7-8 percent annually to absorb all the new graduates and workers entering the workforce each year. Since 2000 economic growth rates have only reached 3 to 4 percent.

The United States has traditionally been a top choice for Indonesians wishing to study abroad. In the 2002-2003 academic year, there were an estimated 11,600 Indonesians studying in the United States, roughly the same as in the previous academic year. Indonesia now ranks ninth in the total number of students attending colleges and universities in the United States, according to statistics of the Institute for International Education (IIE). Approximately 68 percent were enrolled in 2-year or 4-year programs and, 25 percent in graduate programs, and the remaining 7 percent in non-degree programs, including English language studies.

Indonesia signed ILO Convention No. 138 and incorporated it into law 20/1999, which stipulates a minimum age of 15 years for employment. Indonesia in 2000 ratified the ILO Convention No. 182 on the elimination of the worst forms of child labor. In 2002 Indonesia passed the National Child Protection Act, providing a stronger basis for protecting children from work-related abuses. Not withstanding law 22/1999, the 2003 Manpower Act restricts the employment of children, ages 13-15, to light work of no more than three hours per day, and restricts the type of work permitted. Out of a potential population of 70 million children 15 years and younger, most observers believe some 6 to 8 million work to support their families. The vast majority of Indonesia's child labor is employed in the informal sector and in agriculture.

E. Foreign Trade Zones/Free Ports 

The government offers incentives to foreign and domestic industrial companies that locate in any of Indonesia's seven designated bonded zones. The largest bonded zone is on the island of Batam, located just south of Singapore. Investors in bonded zones are not required to apply for additional implementation licenses (location, construction, and nuisance act permits and land titles), and foreign companies are allowed 100 percent ownership. These companies do not pay import duty, income tax (Article 22), value added tax (VAT), and sales tax on imported capital goods, equipment, and raw materials until the portion of production destined for the domestic market is "exported" to Indonesia, in which case fees are owed only on that portion. Companies operating in bonded zones may also lend machinery and equipment to subcontractors located outside of the bonded zone for a maximum two-year period. The companies have also enjoyed exemption from VAT and sales tax on luxury goods on the delivery of products to subcontractors for further processing outside of bonded zones. The Free Trade Agreement between the United States and Singapore, signed on 6 May 2003, allows special tax treatment for certain Singaporean exports made with components sourced Indonesia.

F. Foreign Direct Investment Statistics 

For the first four months of 2003 BKPM reports the overall value of investment approvals rose 69 percent to USD 3.136 billion from USD 1.86 billion over the same period in 2002. Project totals for the first four months of 2003 rose 7 percent to 338 projects from 315 projects for the same period in 2002. However, government sales of state-owned assets have boosted investment approvals numbers in 2003. For example, the sale of shares of state-owned telecommunications company, Indosat, accounts for over half of the total amount of investment approvals as of April 2003. Investment approval totals have included a category termed "change of status" that inflates actual investment figures. This category accounts for ownership changes, the result primarily of privatization of state-owned firms, or of the sale of corporations taken over by IBRA whereby foreign firms have assumed some new degree of ownership. Even a one percent purchase of an Indonesian firm by foreign investors results in the entire Indonesian firm's equity being counted in the FDI totals.

Recalculating FDI excluding the "change of status" category changes the investment picture. For the first four months of 2004 investment approvals (new and expansion) fell 45 percent to USD 979 million from USD 1.786 billion over the same period 2002, although the number of approved projects rose to 397 from 368 in the first four months of 2003 and 2002, respectively. The amount of foreign investment approvals have declined every year since 1997 with the exception of 2000, when approvals rose to USD 15.4 billion, or 41 percent over prior year, helped by economic growth of 4.8 percent, and strong oil and commodity prices.

Except as noted, the Capital Investment Coordinating Board (BKPM), the central processing point for most investment applications, collected the data below. The data does not include investments in the following sectors: oil and gas, finance, banking, non-bank finance, insurance, and leasing. BKPM approval reports should be treated with caution, because the agency performs little monitoring of investment project implementation. Some investors may inflate the value of their investments to maximize government incentives. For example, the mid-1990's approvals were inflated for several years by a surge of interest in oil product refineries, most of which were never constructed. In addition, year-on-year comparisons of domestic approvals after the rupiah began to decline in mid-1997 are difficult because of the currency's fluctuating value.

Table 3. Foreign Investment Approvals by Region 1997-2002

Appendix

Areas Reserved For Small-scale Businesses Under Presidential 
Decree DEC/2001

1. Farming of buras chicken; 
2. Trawler fishing using small ships within a 12 miles coastal radius; 
3. Seeding and caring of fish;
4. Fishing of fresh water aquarium fish; 
5. Cultivation of honeybees; 
6. Cultivation of forests for sugar palm, sago, rattan, candlenut, bamboo, and sweet wood; 
7. Cultivation of swallows in the wild; 
8. Cultivation of forests for tamarind, coal, syrup, wood oils; 
9. Very small-scale mining; 
10. Manufacture of traditional processed foods; 
    11. Processing of fibers into cloth using hand-operated equipment; 
    12. Manufacture of textile products using hand-operated equipment; 
    13. Processing of non-food plantation and forest products; 
    14. Manufacture of manual or mechanic hand tools for handicraft or cutting; 
    15. Manufacture of farming hand tools; 
    16. Manual or semi-automatic maintenance and repair services for cars, boats under 30 Gross Ton (GT), electronic and home appliances; 
    17. Manufacture of cultural heritage handicrafts; 
    18. Manufacture of pottery products for household use; 
    19. Rural transport services on land and inland water (for ships up to 30 GT); 
    20. Telecommunication booth services and cable installation for houses and buildings; 
    21. Single-professional health practice; 
    22. Health practice by a group of professionals; 
    23. Provision of basic health services; 
    24. Health research Center; 
    25. Apothecary services; 
    26. Maternity house; 
    27. Traditional medical services; 
    28. Drug stores; 
    29. Retail of traditional drugs; 
    30. Collection of "simplisia".

Areas Open to Medium and Large-scale Business in Cooperation With Small-scale Businesses Under Presidential Decree DEC/2001 

1. Cultivation of roots; 
2. Farming of white snappers "kerapu", "bandeng", "labi-labi", "nila", "sidat" fish, bull frogs and pearl oysters; 
3. Cultivation of industrial forests; 
4. Small-scale mining; 
5. Manufacture of powder and thick sweet milk and processed foods from roots, sago, "melinjo" and Copra; 
6. Manufacture of Batik cloth by printing technique; 
7. Processing of raw rattan and leather goods; 
8. Manufacture of pottery products for building materials and chalk products; 
9. Manufacture of silver handicrafts; 
10. Manufacture of wooden boats for tourism and fishing; 
11. Manufacture of farming machinery using primary technology; 
12. Manufacture of hand pumps, bicycle equipment, electronic equipment and other components and water meters; 
13. Large scale retail services; 
14. Combined hotel, restaurant and holiday resort services; 
15. Tourism services; 
16. Taxi services, ship loading services, freight forwarding services, courier services, people's sailing services; 
17. Vocational training services.

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