Indonesia: Investment Climate Statement 2000

A.1. Openness to Foreign Investment

Indonesian government policy is to encourage private sector-led growth and foreign investment. President Wahid has adopted increasing foreign investment as a personal cause, and since taking office has carried a message of welcome in his foreign travels. In 1998 and 1999, the GOI issued several new regulations to ease the entry of foreign firms and capital into Indonesia. However, the Foreign Capital Investment Law of 1967, which provides the basic framework for foreign investment, is still in effect. The law has been under revision for almost two years and its reform comprises one of the objectives of the GOI’s IMF-supported economic reform program.

Investment in Indonesia is categorized as either domestic (PMDN) or foreign (PMA). An investment with any degree of direct foreign ownership is defined as PMA. The Capital Investment Coordinating Board (BKPM) -- now subsumed under the Board of Investment and State-Owned Enterprises (BPM-PBUMN) -- plays a key role in promoting foreign investment and approving project proposals. The relevant technical government departments handle investments in the oil and gas, banking, and insurance industries. BKPM, or the corresponding provincial board (BKPMD), approves foreign and domestic investment in all other sectors.

While BKPM/BKPMD aims to function as a one-stop investor service, investors are routinely required to work closely with relevant technical government departments, such as Finance, Manpower, Land Affairs, and Justice, as well as regional and local authorities, unless they investing in Bonded Zones (Kawasan Berikat) or in Integrated Economic Zones (KAPET). Recent reforms have freed investors from some cumbersome documentary requirements resulting from the need to work with other departments and local governments. One significant change is that master lists of capital goods and basic material imports for both foreign and domestic investments are approved by BKPM/BKPMD and no longer need clearance from the Directorate General of Customs and Excise.

The GOI has also made efforts to streamline and simplify foreign investment application processes. For example, approvals for foreign investment over USD 100 million no longer must be approved by the President of Indonesia, but can now be approved by the Chairman of BKPM. Currently there are no restrictions on the investment level (below USD 100 million) that can be approved by a BPKMD. Starting in January 2000, some provinces, among them the Jakarta District, West Java, West Kalimantan, and East Kalimantan, started accepting foreign investment applications. Plans are afoot to permit Indonesian embassies and consulates abroad to accept and process foreign investment applications.

Obtaining initial investment approval (IIA) now takes an average of 10 to 15 working days, a marked improvement from the past when application processing could take months. The IIA serves as a temporary operating license for a period of 12 months (the license can be extended), and it enables the PMA company to start its commercial activities. The IIA allows the parties to form a limited liability company (Perseroan Terbatas, or P.T.) by executing through an Indonesian notary a Deed of Establishment. The Articles of Association of the PMA company are included in the Deed of Establishment and must comply with Law No. 1/1995 on Limited Liability Companies. Once executed, the Deed of Establishment is submitted to the Ministry of Law and Legislation (MOLL). Approval usually takes more than the 60-day statutory maximum, and until companies receive formal approval, the founding shareholders are personally liable for all obligations undertaken in the name of the company. Once the permission has been received, the PMA company must be registered in the Company Registry under the Department of Industry and Trade and the Deed of Establishment published in the Supplement to the State Gazette (Tambahan Berita Negara). The time between formal MOLL approval and publication in the Supplement can take more than a year, during which the directors of the company are jointly and severally liable for actions taken in the name of the company.

The IIA can be used until the PMA company reaches the state of commercial operation or commercial production. At that point, the PMA company must apply through BKPM or the appropriate BKPMD for a Permanent Business License (Ijin Usaha Tetap, or IUT). This licensing process can take months.

A foreign investor may be an individual or a corporate entity. Private entities may establish, acquire, and dispose of interests in business enterprises. Current regulations permit foreign firms to acquire domestic firms in sectors open for foreign investment after receiving approval from BKPM. When reviewing applications from foreign firms seeking to acquire locally established firms, BKPM frequently requires the buyer to reserve a small stake for a local buyer or the original owner and, in cases where the local firm is being "rescued" by a foreign buyer, to inject capital, not just provide management expertise, technology or assume outstanding loans. The approval process to take over a "sick" firm may take as long as two months. In 1998, the GOI established the Jakarta Initiative, with a mandate to eliminate obstacles to corporate debt restructurings. In May 1999, the government issued regulations providing incentives for corporate debt restructurings that could address some of the obstacles to foreign investment in existing, but distressed, firms.

Some sectors are closed to all private or foreign investment. According to the July 1998 "negative list", published by the Ministry of Investment and State-Owned Enterprises, 16 business fields are closed to both foreign and domestic investment, while nine business fields are closed only to foreign investment. Sectors that remain closed to foreign investment include freshwater fishing, forest utilization, taxi/bus transport, local shipping, private television and radio broadcasting, cinema operation, management of radio and satellite frequencies, domestic trade and support services (except for large-scale retailing, distributing and wholesaling services, restaurants, quality certification, market survey services, and sales services), and medical services. (Copies of the negative list are available from U.S. Commercial Center in Jakarta and on the Internet at http://www.usembassyjakarta.org - see Commercial Center). The GOI has missed several deadlines in its IMF-supported economic reform program for issuing a new, shorter negative list. Officials anticipate issuing the revised list soon.

In June 1994 and May 1995 several previously restricted sectors were opened, some conditionally, to foreign investment, including harbors, electricity generation, telecommunications, shipping, airlines, railways, and water supply. Foreign investment opportunities in many services remain restricted, however. The government is continuing to develop policies on the private provision of infrastructure through build-own-operate and build operate-transfer schemes, particularly for electric power, telecommunications, and roads. Full foreign ownership is not permitted in these sectors. Local partners are required to own anywhere from five to 51 percent of these investments. Electric generating plants that were developed as independent power projects ran into difficulties when the sharp depreciation of the rupiah led the Indonesian Government to postpone projects or seek renegotiation of the terms of Power Purchase Agreements.

Other sectors are reserved for small-scale enterprises. Large or medium-scale foreign companies must partner with small businesses or cooperatives before investment applications are approved. Presidential Decree No. 99/1999 on Small-scale Enterprises details sectors open only to small businesses and those open to medium and large-scale companies in partnership with smaller firms.

The GOI has eliminated many restrictions on foreign investment in retail and wholesale operations. Foreign firms are now allowed to invest directly in both wholesale and large-scale retail trade sectors (generally interpreted as shopping centers, malls, supermarkets, and department stores), with the condition that they enter into a cooperative agreement with a small-scale enterprise. In addition, many foreign firms use franchising, licensing, and technical service agreements to distribute their goods. Indonesia has also lifted many restrictions on foreign participation in domestic distribution services. Under current regulations, foreign companies manufacturing in Indonesia may distribute their locally produced goods at the wholesale level and may apply for permits to import and distribute other products as well. These licensing processes, like many other processes, may be substantially affected by decentralization. However, companies engaging in wholesale distribution may not conduct retail operations directly, but must form a separate retail company. Further, the number of expatriate employees granted visas to work in any single wholesale and retail business remains limited.

Current legislation (Government Regulation No. 20/1994 and Ministry of Investment Decree No. 15/1994) mandates a fifteen-year time limit after which foreign companies must divest a percentage (usually one to five percent) of their shares to allow Indonesian citizens to take up minority holding in the company. The new draft law on investment proposes to remove the fifteen-year time limit and leave the determination of time to the discretion of the Ministry of Investment and State-Owned Enterprises. U.S. firms are urging the GOI to eliminate the condition altogether as a means to further improve Indonesia’s investment climate.

Oil and gas: The Indonesian government, through state oil and gas company Pertamina, owns all oil and hydrocarbons in the ground. Oil contractors (mainly foreign) operate under production sharing contracts (PSCs) and variations of PSCs to explore and produce hydrocarbons from a licensed area. The contractor is reimbursed for allowable expenditures. In return, the contractors have certain rights to split oil and gas production with Pertamina.

The Indonesian government plans to resubmit an oil and gas bill to Parliament in 2000. A first bill, submitted to Parliament in early 1999, was rejected. Like the original, the current draft contemplates a shift in management of PSC contractors from Pertamina to the central government and gradually phases out Pertamina's responsibility for PSCs. The draft law may also call for an end to Pertamina's monopoly over downstream oil distribution and marketing of fuel products.

Mining: Foreign investors operate under coal contracts of work (CCOW) and contracts of work (COW) for general mining. The contractor conducts all stages of the operation and assumes all financial and operational risks. The government's latest eighth-generation COW and fourth-generation CCOW contain significant new provisions that give regional governments greater input in mining companies' community development plans and a larger share of royalties and taxes. Both of these new contractual arrangements, however, have not been finalized pending promulgation of regulations to implement the 1999 Fiscal Decentralization Law.

Banking, Securities and Insurance: A 1988 deregulation package partially opened the banking, securities and insurance industries to foreign investment. In 1998, in keeping with its commitments under the World Trade Organization's (WTO) Financial Services Agreement, the government equalized the capital requirements for domestic and foreign insurance firms. In a move that exceeded its WTO commitments, in 1998 the GOI also amended the 1992 Banking Law to allow full foreign ownership of banks. The GOI also removed restrictions on foreign banks opening additional branches outside of Jakarta. The Department of Finance licenses new securities and insurance ventures; Bank Indonesia, the central bank, licenses banks and regulates banking activity.

Privatization

To enhance the efficiency of state-owned enterprises and as part of the Indonesia's ongoing IMF-supported economic reform program, the Habibie government set an ambitious timetable to divest majority ownership in SOEs. Difficulties establishing the valuation of the state-owned firms, domestic resistance to selling key national assets, and the challenge of attracting buyers in an uncertain political and economic environment slowed the program down.

The FY 2000 (April-December 2000) has a budget target of Rp 6.5 trillion (USD 722 million) to be raised from privatization. On June 29, 2000, the GOI launched a revised State-Owned Enterprise Masterplan in response to concerns about lagging privatization and continuing "high-cost" practices in the 164 enterprises. The revised plan aims to accelerate SOE restructuring and privatization and to establish good governance practices (transparency, independence, and accountability) within the parastatals. The government has slated 10 companies from a variety of sectors, including mining, plantations, airport operations and fertilizer, to be fully or partially privatized before the end of 2000. Nine SOEs are on "standby" for privatization in 2000, and the others for more gradual privatization through 2004.

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A.2. Conversion and Transfer Policies

In July 1997, the Indonesian rupiah began to weaken in the face of regional currency instability. Indonesia opted to float the currency in August 1997 rather than spend large amounts of reserves to defend it. The rupiah depreciated sharply from 2,500/USD in July 1997 to a low of 17,000/USD in June 1998. By December 1998, the rupiah had strengthened to Rp 8,000/USD. Following the election of President Wahid on October 20, 1999, the rupiah strengthened further to Rp 6,700/USD. More recently, however, the rupiah has shown signs of weakening, hovering around Rp 9,300 per USD in early July 2000.

The Indonesian rupiah is freely convertible and is traded in the Jakarta and offshore (principally Singapore) interbank markets. Indonesia maintains no capital controls and foreign exchange may flow freely in and out of the country. No prior permits are necessary to transfer foreign exchange. Foreign investors have the right to repatriate capital and profits at the prevailing rate of exchange. The government does not place restrictions on outward direct investment. Foreign Exchange Law No. 24/1999, which entered into force in April 2000, requires the reporting of all foreign exchange transactions above USD 10,000. The new law does not change the system of free currency convertibility.

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A.3. Expropriation and Compensation

Article 21 of the 1967 Foreign Capital Investment Law stipulates that the government shall not initiate nationalization of foreign investments except by law and when such action is necessary in the interest of the state. According to BKPM, no foreign investment has been expropriated since the passage of the 1967 law. In one case, however, OPIC paid a claim by a U.S. investor after the Indonesian Government failed to honor an arbitration award. Although there has been concern that a post-Soeharto government might nationalize projects or abrogate contracts awarded to firms connected to the family of former President Soeharto, Indonesian government officials have stated that foreign firms will not be expropriated in the process of dismantling the business empires of former first family members. However, several foreign companies who signed contracts during the Soeharto era have had their contracts challenged by provincial and local governments and NGOs.

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A.4. Dispute Settlement

The Indonesian government has agreed to submit any investment disputes to the International Center for the Settlement of Investment Disputes (ICSID) in Washington, D.C. A long-pending investment dispute involving a U.S. investor was resolved through the ICSID in 1993. Indonesia has signed on to UNCITRAL (United Nations Commission on International Trade Laws) arbitration rules. Foreign firms have entered arbitration hearings in Indonesia under UNCITRAL administration. An Indonesian investment arbitration board, BANI, is available when both parties to a dispute agree to submit to its arbitration.

Indonesia is also party to the 1958 New York Convention on Recognition and Enforcement of Foreign Arbitral Awards. The record of enforcement of foreign arbitral awards is, however, negative. In practice, foreign companies have had great difficulty enforcing foreign arbitration awards or getting the judicial system to honor arbitration clauses in contracts involving foreign investors. In 1999, Indonesia enacted a Law on Arbitration that addresses many concerns, but the new law’s impact has yet to be felt.

Disputes between Independent Power Producers (IPPs) and the state electric company PLN and lack of respect for arbitration rights clauses in contracts, as in the Swiss pharmaceutical company’s case, have been cited by many foreign chambers of commerce operating in Indonesia as major causes for alarm and strong deterrents to further investment in Indonesia.

The court system does not provide effective recourse for solving commercial disputes. The judiciary is nominally independent, but irregular payments and other collusive practices often influence judicial outcomes. The GOI has recognized that the legal system must be modernized. Legal and judicial reform is an important part of Indonesia's economic reform program. Amendments to the Bankruptcy Law entered into effect in August 1998, but the court's performance has been extremely weak.

Aiming to make the Bankruptcy Law more effective, the GOI has announced it will submit a new amendment to the law to Parliament in August 2000. Indonesia enacted laws on consumer protection, anti-corruption, and anti-monopoly/competition in 1999; however, the regulatory frameworks to enforce these new laws remain incomplete.

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A.5. Performance Requirements and Incentives

The GOI has notified the WTO of its compliance with TRIMS’ Notification.

Various fiscal incentives are available to both foreign and domestic investors. A company producing for the domestic market may apply for import duty exemptions on all required machinery and equipment as well as on raw and supporting materials needed during the first two years of commercial production. A company producing 65 percent for export has additional incentives. It may apply for restitution of import duties paid on inputs that are subsequently re-exported in finished form. Special investment incentives in the form of income tax, value-added tax, and luxury tax facilities are made available on a case-by-case basis by BKPM.

The tax holiday system is under review and may be abolished. The GOI re-introduced basic tax holidays with Government Regulation No. 45 of 1996. According to Regulation 45, specific sectors, including capital goods manufacturing, agribusiness, infrastructure, sea and air transport, engineering, and professional personnel training may be eligible for tax holidays. In 1999, Presidential Decree No. 7/1999 laid out evaluation criteria for tax facilities for new investors entering designated "pioneer" industries. According to the decree, the basic incentive period is three years, with an additional two years for investments outside of Java and Bali. The incentive period can be extended for investments that employ more than 2,000 Indonesian workers, are at least 20 percent held by an Indonesian cooperative, and/or whose total investment is US$ 200 million or more excluding land and buildings. Tax exemption for qualifying investments begins at the start of commercial operations or after the project is licensed, whichever comes first. Time beyond five years to achieve startup will be deducted from the period of the tax incentives. In January 2000, following the signing of its new Letter of Intent with the International Monetary Fund, the GOI announced it would withdraw all or at least some of its tax facilities for new investors as listed in Decree No. 7. Tax holidays are covered by tax laws bills currently under consideration by Parliament.

Indonesia expects foreign investors to contribute to the training and development of Indonesian nationals, allowing the transfer of skills and technology required for their effective participation in the management of foreign companies. As a general rule, a company can hire foreigners only for positions that the government has deemed open to non-Indonesians. Employers must have manpower training programs aimed at replacing foreign workers with Indonesians.

At present, Indonesia does not have formal regulations concerning U.S. and other foreign firms’ participation in GOI-financed and/or subsidized research and development programs on a national treatment basis. The State Ministry for Research and Technology handles applications on a case-by-case basis. However, the Ministry is currently drafting regulations to enable interested parties to pursue their interest in a clear and systematic manner.

Indonesia does not have rules requiring that investors purchase from local sources or export a certain percentage of output. Rules that encouraged investors to locate in industrial estates were diluted in June 1998. Foreign firms are not required to disclose proprietary information to the government before investing.

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A.6. Right to Private Ownership and Establishment

Indonesia recognizes the right to private ownership and establishment and has relied heavily on the private sector -- albeit at times heavily protected -- as the principal engine of its economic growth. Parastatals have traditionally played an important role as well. Their role declined as private sector activity grew and privileges awarded to state-owned enterprises decreased. A State Ministry for State-Owned Enterprises was formed in 1998; privatization was an important part of its mandate.

The Indonesian Bank Restructuring Agency (IBRA), established in 1998, is assigned responsibility for banks that have been closed or taken over by the government. In addition, under the bank recapitalization program, it has assumed custody of non-performing loans. IBRA's mandate is time-bound and its stewardship of formerly private assets is to be temporary. IBRA has suffered numerous delays in meeting its mandate. Currently IBRA controls assets with a face value of about Rp 600 trillion (about USD 66 billion. The GOI has tasked IBRA with disposing of USD 18.9 trillion (about USD 2.1 billion) in assets during FY 2000, but progress has been slow. IBRA’s biggest success story to date was the sale of its shares in the publicly listed automotive giant PT Astra International. It also launched an initial public offering (IPO) for Bank Central Asia (BCA). IBRA plans to sell 14 to 20 additional companies by the end of 2000, many through IPOs.

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A.7. Protection of Property Rights

Indonesia has suspended many private infrastructure projects, especially in the field of private power generation, for economic and political reasons. The U.S. Embassy and other U.S government entities have vigorously emphasized to the Indonesian government the importance of honoring internationally binding contracts and urged that all project reviews and contract negotiations be conducted in a rule-based, consistent, objective, and transparent manner.

Mortgages and secured interests in chattel and real property are recognized, but a comprehensive and efficient recording system is not in place. Foreign entities have no freehold rights to land ownership in Indonesia. Foreign investors' land holdings are often obtained through long-term lease agreements with the government. Leases are generally for 20 or 25 years and are renewable up to 100 years. These lease holdings can be used as collateral. Enforcement of secured interests is problematic.

The court system does not provide effective recourse for settling property disputes. Indonesia’s decentralization process has unleashed a flurry of new land claims by local residents against companies, often operating on government-granted concessions located in their communities.

In April 2000, the USG downgraded Indonesia to the Special 301 watch list from the priority watch list where it had been for four years. Indonesia has made progress in improving the regulatory and legal framework for protection of intellectual property rights. Effective enforcement of IP rights through Indonesia's justice system is still very difficult. Indonesia is a member of the World Intellectual Property Organization and a party to the Paris Convention for the Protection of Intellectual Property. In March 1997, the Parliament passed amendments to Indonesia's patent, copyright and trademark laws designed to bring them into compliance with the TRIPS agreement of the Uruguay Round. In 1997, Indonesia also reacceded to the Berne Convention and signed the Trademark Law Treaty. Other international agreements to which Indonesia is party include the Nice Agreement for the International Classification of Unclassified Goods and Services, the Strasbourg Agreement Concerning International Patent Classification, and the Budapest Treaty on the International Recognition of the Deposit of Microorganisms. New laws to protect industrial design, trade secrets, and integrated circuits are expected to be in place by the end of 2000.

Patents: Indonesia's first patent law entered into effect on August 1, 1991. The law and its implementing regulations outline patent application procedures, application fees, registration of patent consultants, and patent announcements. Products and production processes are in principle patentable for a period of 14 years commencing from filing of the patent application, subject to certain requirements. The patent may be extended for another two years. In addition to this relatively short period of patent protection, other drawbacks in the law include compulsory licensing provisions, and a provision allowing importation of 50 specific pharmaceutical products by non-patent holders, and patent protection granted only to pharmaceutical products manufactured in Indonesia. The government has proposed amendments to the patent law to increase the patent protection period among other things.

Trademarks: The current trademark law took effect on April 1, 1993. This act states that trademark rights are determined on a first-to-file basis rather than on a first-use basis. After registration, the mark must actually be used in commerce. The law offers protection for service marks and collective marks and sets forth a procedure for opposition prior to examination by the trademark office. It also provides well-known trademark protection, although, to the detriment of several foreign marks, procedures for registering trademarks as well-known have not been fully developed. Cancellation actions must be lodged within five years of the trademark registration date.

Copyright: Parliament passed amendments to the 1982 copyright law in 1987 and March 1997. The amended law affords protection to foreign works, expands the scope of coverage and raises the terms of protection to international standards. The United States and Indonesia concluded a bilateral copyright agreement extending reciprocal protection in 1989. In May 1997, Indonesia reacceded to the Berne Convention on copyright protection. The government has proposed new legislation that will increase penalties for copyright infringement.

New technologies: Indonesian law does not include specific protection for biotechnology. Legislation covering integrated circuits is being drafted for presentation to Parliament. The U.S.-Indonesia Science and Technology Agreement ensures protection for intellectual property derived from cooperative activities under the agreement's umbrella.

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