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Diplomacy in Action

2012 Investment Climate Statement - Indonesia


2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012
Report
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Openness To, and Restrictions Upon, Foreign Investment

Indonesia’s growing middle class, strong domestic demand, stable political situation, and sound macroeconomic policy paired with gross domestic product (GDP) growth of 6.5% in 2010 make Indonesia an attractive destination for Foreign Direct Investment (FDI). In 2011, Indonesian government officials verbally welcomed increased FDI, aiming to create jobs and spur economic growth, and courted foreign investors, notably focusing on participation in a large number of public private partnerships to develop Indonesia’s infrastructure. However, vague and conflicting regulations, poor infrastructure, and corruption continued to be significant concerns for foreign investors. U.S. firms lamented the lack of ministerial coordination and a body empowered to act as a final authority in the case of regulatory uncertainty.

Restrictions on FDI are, for the most part, outlined in presidential decree 36/2010, commonly referred to as the Negative List. The Negative List aims to consolidate FDI restrictions from numerous decrees and regulations to create greater certainty for foreign and domestic investors. The 2010 iteration of the Negative List clarified that companies are grandfathered in the case of increased foreign ownership restrictions. However, exceptions remain; in the case of wholly foreign owned security service companies, their licenses were not renewed, despite grandfathering provisions. In 2010, the share of foreign ownership permitted was increased in health services, creative industries, construction services, and multilevel marketing, but decreased in cell towers, security services, and inspection services. For investment in certain sectors, such as mining and higher education, the Negative List is useful only as a starting point, as additional licenses and permits are required from individual ministries. Foreign capital investment, through the stock market, is not governed by the Negative List. Foreigners may purchase equity in state-owned firms through initial public offerings, and capital investments in publicly listed companies through the stock exchange are not subject to Indonesia's negative list unless an investor is buying a controlling interest.

The Investment Coordinating Board (BKPM) is responsible for issuing investment licenses to foreign entities and has taken steps to simplify the application process through better coordination between various government institutions. BKPM launched a National Single Window for Investment which will eventually allow foreign investors to apply for licenses and other services online. Although BKPM is meant to act as a one-stop service institution, investments in the mining, oil and gas, plantation, and other sectors require further licenses from related ministries and authorities. Likewise, certain tax and land permits, among others, typically must be obtained from local government authorities. Though Indonesian companies only require one approval at the local level, businesses report that foreign companies must obtain both administrative and legislative approval in order to establish a business.

The Coordinating Ministry of Home Affairs, Ministry of Administrative Reform and Bureaucracy Reform, and BKPM issued a circulating letter on September 15, 2010, to clarify investment that crosses provincial and regional boundaries. Investment in one regency is managed by the regency government; investment that lies in two or more regencies is managed by the provincial government; and investment that lies in two or more provinces is managed by central government, or central BKPM.

Natural Resources

Indonesia’s vast natural resource wealth has attracted significant foreign investment over the last century. Though the potential for gain is evident, a variety of government regulations have made doing business in the resources sector increasingly difficult. For example, Government Regulation 79 retroactively removes previously-agreed recoverable oil and gas production costs from some production sharing contracts (PSCs). Also, the 2009 mining law requires mining companies to renegotiate their contracts of work to increase government tax and royalty rates.

Infrastructure

Indonesia’s Master Plan for Acceleration and Economic Development (MP3EI) http://www.ekon.go.id/media/filemanager/2011/05/27/p/d/pdf_mp3ei.pdf is an ambitious 15-year, $1 trillion infrastructure development plan that includes several public-private partnership tenders and will require almost $700 billion in private financing. The Government of Indonesia (GOI) has already sent delegations to Korea, Japan, China, and the United States to increase foreign participation.

Measure

Year

Index/Ranking

TI Corruption Index

2010

2.8/110 of 178

Heritage Economic Freedom

2011

56/116 of 179

World Bank Doing Business

2011

129 of 183

MCC Gov’t Effectiveness

2011

0.27 (66%)

MCC Rule of Law

2011

-0.16 (34%)

MCC Control of Corruption

2011

-0.24 (31%)

MCC Fiscal Policy

2011

-1.0 (77%)

MCC Trade Policy

2011

73.9 (44%)

MCC Regulatory Quality

2011

0.17 (59%)

MCC Business Start Up

2011

0.952 (44%)

MCC Land Rights Access

2011

0.705 (41%)

MCC Natural Resource Mgmt

2011

100.0 (82%)

Conversion and Transfer Policies

The rupiah (Rp), the local currency, is freely convertible. Currently, banks must report all foreign exchange transactions and foreign obligations to the Bank of Indonesia (BI). With respect to the physical movement of currency, any person taking cash into or out of Indonesia in the amount of Rp 100 million ($11,000) or more, or the equivalent in another currency, must report the amount to the Director General of Customs and Excise.

Banks on their own behalf or for customers may conduct derivative transactions related to derivatives of foreign currency rates, interest rates, and/or a combination thereof. BI requires borrowers to conduct their foreign currency borrowing through domestic banks registered with BI. The regulations apply to borrowing in cash, non-revolving loan agreements, and debt securities.

Under the 2007 Investment Law, the GOI gives assurance to investors relating to the transfer and repatriation of funds, in foreign currency, on capital, profit, interest, dividend, and other income, funds required for (i) purchasing raw material, intermediate goods or final goods, and (ii) replacing capital goods for continuation of business operations, additional funds required for investment project, funds for debt payment, royalties, income of foreign individual working on the invested project, earnings from selling, or liquidation of invested company, compensation for losses, and compensation for expropriation. U.S. firms report no difficulties in obtaining foreign exchange.

Beginning in 2012, BI will require exporters to repatriate their export earnings from offshore banks to domestic banks within three months from the date of the Export Declaration Form. Exporters will have six months from the date on the Export Declaration Form during a transition period when the regulation becomes effective on January 2, 2012. Once repatriated, there are no restrictions on exporters from re-transferring the export earnings back to an offshore bank.

Expropriation and Compensation

The GOI continues to recognize and uphold property rights of foreign and domestic investors, and there have been no overt expropriatory actions forced on investors in recent years. The 2007 Investment Law opened major sectors of the economy to foreign investment while assuring investors’ protection from nationalization, except where corporate crime is involved.

In the area of land ownership, some assert that the GOI has been too protective of private property rights when it comes to land acquisition in the public interest for roads, electrical transmission lines, pipelines, and other badly needed infrastructure projects. The new Law on Land Acquisition Procedures for Public Interest Development passed in December 2011 seeks to address this problem and significantly increase the feasibility of land acquisition projects. However, the law is too new to have undergone real-world testing. The law seeks to clarify roles, impose time limits on each phase of the land acquisition process, deter land speculation, and curtail obstructionist litigation, while still ensuring safeguards for land-right holders. However, because the crucial power of revoking land rights will rest with provincial governors, the new law’s effectiveness – or potential misuse as a tool of expropriation – will depend in part on the inclination of respective governors.

Other GOI actions – including new and pending laws and regulations – reflect an increasing sense of economic nationalism, especially in the natural resources sector, and could represent a form of creeping expropriation that will require close monitoring. Recent examples:

- Government Regulation 79 retroactively removes previously-agreed recoverable oil and gas production costs from some production sharing contracts – effectively raising tax rates after the fact. Although a clear violation of contract sanctity, the Supreme Court in October 2011 refused to hear the Indonesian Petroleum Association’s appeal for judicial review of the regulation, and its implementation is expected in 2012.

- The GOI is requiring mining companies to renegotiate their contracts of work with the government in an effort to bring those contracts into line with the 2009 Mining Law, but also to increase government tax and royalty rates. The Mining Law reduces the size of the mining production concession areas by 85% to 90% and reduces the potential length of contracts of work, but it is unclear which provisions of the law will be incorporated into renegotiated contracts of work. Renegotiations, while strongly supported by the GOI, have only recently begun and are proceeding slowly on a case-by-case basis with no guarantee of consistent outcomes. The GOI is focusing initially on the few hundred nationally-issued contracts of work that includes most major foreign companies.

Dispute Settlement

Indonesia’s legal system is based on civil law. The court system consists of District Courts (primary courts of original jurisdiction), High Courts (courts of appeal), and the Supreme Court (court of last resort). Indonesia’s Constitutional Court has the same legal standing as the Supreme Court, and its role is to review the constitutionality of legislation. Both the Supreme and Constitutional Courts have authority to conduct judicial review.

Judicial handling of investment disputes remains mixed. Indonesia is a signatory to the Convention On The Settlement Of Investment Disputes Between States And Nationals Of Other States (ICSID) and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Thus, foreign arbitral awards are recognized and enforceable in the Indonesian courts. Indonesia’s legal code recognizes the right of parties to apply any rules of arbitration upon which they mutually agree. Some arbitration but not all is handled by Indonesia’s domestic arbitration agency, the Indonesian National Arbitration Body. District Courts do not have authority to hear disputes where parties are bound by an arbitration agreement. In reality, some claims are still accepted by District Courts on the basis of tort or fraud, but are often reversed upon appeal. Some companies have resorted to ad hoc arbitrations in Indonesia using the UN Commission on International Trade Laws (UNCITRAL) arbitration rules. While doing business in Indonesia remains challenging, there is not a clear pattern of investment disputes involving U.S. or other foreign investors.

The court system often does not provide effective recourse for resolving property and contractual disputes. Judges are not bound by precedent and many laws are open to various interpretations. Lack of clear land titles has plagued Indonesia for decades, although a land acquisition law enacted in December 2011 included legal mechanisms that may begin to resolve some past land ownership issues. Indonesia also has a poor track record on contract sanctity, most recently seen in the issuance of a government regulation that requires foreign oil and gas companies to renegotiate the terms of their contracts, with terms that would be financially more favorable to the Indonesian government. Indonesia’s commercial code, grounded in Dutch colonial law, has been updated to include provisions on bankruptcy, intellectual property rights, incorporation and dissolution of businesses, banking, and capital markets. Application of the commercial code, including the bankruptcy provisions, remains uneven, in large part due to corruption and training deficits for judges, prosecutors, and defense lawyers, as well as the lack of a commercial court. The bankruptcy law is decidedly pro-creditor and the law makes no distinction between domestic and foreign creditors. As a result, foreign creditors have the same rights as all potential creditors in a bankruptcy case, as long as foreign claims are submitted in compliance with underlying regulations and procedures. Monetary judgments in Indonesia are made in local currency.

Performance Requirements/Incentives

The Indonesian government notified the WTO of its compliance with Trade-Related Investment Measures (TRIMS) on August 26, 1998. The 2007 Investment Law states that the GOI shall provide the same treatment to both domestic and foreign investors originating from any country pursuant to the rules of law.

On August 15, the GOI announced a tax holiday scheme to exempt certain businesses from paying corporate income taxes for up to ten years under Ministry of Finance Decree No. 130/PMK.011/2011. Businesses must have operated as a legal entity in Indonesia for at least 12 months prior to the issue of the tax holiday regulation, among other requirements. Priority is given to investment in resource extraction, resource refinement, industrial machinery, renewable resources, telecommunications equipment, or pioneer sectors. Government Regulation No. 62 of 2008 provides a tax incentive program for projects conducted in national high-priority sectors which encompass 128 different fields. Businesses may only apply for one tax incentive: either the tax holiday or the tax incentive program.

The GOI 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. If a direct investment enterprise wants to employ foreigners, the enterprise should submit an Expatriate Placement Plan to BKPM to get a Limited Stay Visa or Semi Permanent Residence Visa (VITAS/VBS). Expatriates are issued a Limited Stay Permit (KITAS) and a blue book, valid for two years and renewable for up to two extensions without leaving the country. Under Ministry of Manpower regulations, any expatriate who holds a work and residence permit must contribute $1,200 per year to a fund for local manpower training at regional manpower offices. Some U.S. firms report difficulty in renewing KITAS for their foreign executives.


The Indonesian Government does not impose offset requirements for any procurement. However, the GOI grants special preferences to encourage domestic sourcing and to maximize the use of local content in government procurement. It also instructs government departments, institutes, and corporations to utilize domestic goods and services to the maximum extent feasible. The Negative List seeks to maximize local content in procurement, use foreign components only when necessary, and delegate foreign contractors as sub-contractors to local companies. Foreign firms bidding on high value government sponsored projects report that they have been asked to purchase and export the equivalent value of selected Indonesian products if they are awarded the contract. Some businesses established as Indonesian entities report discrimination as they possess higher foreign equity.

The Ministry of Law and Human Rights’ implementation of an electronic business registration filing and notification system has dramatically reduced the number of days needed to register a company. At present, it takes four days to obtain the standard form of the company deed, obtain clearance for the Indonesian company’s name, and arrange for a notary electrically. Another seven days is needed to apply for approval of the deed of establishment. Foreign firms are not required to disclose proprietary information to the government before investing.

At present, Indonesia does not have formal regulations granting national treatment to U.S. and other foreign firms participating in Government-financed or subsidized research and development programs. The State Ministry for Research and Technology handles applications on a case-by-case basis.


Effective January 1, 2011, the GOI introduced a requirement that companies can only import goods for further distribution or goods for their own manufacturing, but not both. The rationale for this policy is unclear, though importers report that it is being applied more stringently on imports destined for distribution than on imports used in the production process, raising concerns that its application is import restriction. Exporters to Indonesia must comply with numerous and overlapping import licensing requirements that impede access to Indonesia’s market. In 2009, the Government implemented a sweeping regulation imposing non-automatic import licensing procedures on a broad range of products, including electronics, household appliances, textiles and footwear, toys, and food and beverage products. The measure includes a requirement for pre-shipment verification by designated surveyors at importers’ expense and a restriction that limits entry of imports to five designated ports and airports.

Indonesia’s average most favored nation applied tariff is 7.6%. Over the past several years, Indonesia has raised tariffs on a number of products. In 2010, Indonesia increased applied tariffs for products including medicines, cosmetics, and energy efficient lights. Most Indonesian tariffs are bound at 40%, although bound tariff levels exceed 40% or remain “unbound” on automobiles, iron, steel, and some chemical products.

Right to Private Ownership and Establishment

Indonesia recognizes the right to private ownership and establishment by both foreign and domestic entities. Foreign investors are restricted from establishing or acquiring businesses in certain sectors as laid out in the Negative List. Private entities have the right to dispose of interests in business enterprises under Indonesia’s bankruptcy law, although it may take several years to do so. Likewise, terminating employees is associated with high costs and a lengthy process that requires bipartite negotiation, non-binding mediation, and Labor Court approval unless settled by agreement in writing at any time during the process.

To establish a business, one must: obtain the standard form of the company deed; arrange for a notary electronically; obtain clearance for the Indonesian company’s name at the Ministry of Law and Human Rights; notarize company documents; pay the State Treasury for the non-tax state revenue fees for legal services; apply to the Ministry of Law and Human Rights for approval of the deed of establishment; apply at the one stop service for the permanent business trading license and company registration certificate; register with the Ministry of Manpower; apply for the workers social security program; and, obtain a taxpayer registration number and a valued added tax (VAT) collector number. The process takes an average of 45 days.

Protection of Property Rights

The Basic Agrarian Law of 1960, the predominant body of law governing land rights, recognizes the right of private ownership. Indonesia’s 1945 Constitution states that all natural resources are owned by the GOI for the benefit of the people. This principle was augmented by the passage of a land acquisition bill in December 2011 that enshrined the concept of eminent domain and established mechanisms for fair market value compensation and appeals. The National Land Agency registers property under Regulation No. 24 of 1997, though the Ministry of Forestry administers all ‘forest land’. Registration is sometimes complicated by local government requirements and claims as a result of decentralization. Registration is also not conclusive evidence of ownership, but rather strong evidence of such. Foreigners are not allowed to own land in Indonesia, but can acquire the rights to use, sell, lease, and mortgage land through an Indonesian entity.

Indonesia is currently on the Special 301 priority watch list for intellectual property rights (IPR) protection. Indonesia’s failure to effectively protect intellectual property and enforce IPR laws has resulted in high levels of physical and online piracy. The International Intellectual Property Alliance estimates that 87% of business software is unlicensed, while retail and mall piracy rates are likely even higher.

Indonesia’s 2002 Copyright Law and 2001 Trademark Law are currently under review. While not fully adequate, both laws provide a solid foundation for enforcement efforts. Unfortunately, enforcement has been insufficient. The Copyright Law requires commercial courts to try cases of alleged copyright violations and render judgments within 90 days, though it often takes much longer. Even so, criminal cases against corporate end-user piracy in Jakarta and Semarang were successfully prosecuted in 2009. The GOI has signed and ratified the WIPO internet treaties, but further clarifications in its Copyright Law must be made to fully implement both treaties.

Transparency of the Regulatory System

Indonesia continues to bring its legal, regulatory, and accounting systems into compliance with international norms, but progress is slow. Recent successes include passage of a comprehensive anti-money laundering law in late 2010 and a land acquisition law in December 2011, both of which have positive implications for foreign investment. Although Indonesia continues to move forward with regulatory system reforms, these efforts have not yet created a level playing field for foreign investors nor does the current regulatory system establish clear and transparent rules for all actors. Certain laws and policies, including the Negative List, establish sectors that are either fully off-limits to foreign investors or are subject to substantive conditions. A proposed revision to Indonesia’s 2003 labor law may establish more stringent restrictions on outsourcing, currently used by many firms to circumvent a laundry list of formal-sector job benefits that tend to make the labor market rigid and uninviting to potential investors. Bureaucratic reforms have slowed, and decentralization has introduced another layer of bureaucracy for firms to navigate, resulting in unnecessary and costly red tape. U.S. businesses cite regulatory and transparency problems as ongoing factors hindering operations. Government ministries and agencies, including the Indonesian Parliament, continue to publish many proposed laws and regulations in draft form for public comment; however, not all draft laws and regulations are made available in public fora. Laws and regulations are often vague and require substantial interpretation by implementing offices, leading to business uncertainty and rent-seeking opportunities. In short, investors remain interested but wary, as Indonesia is not currently making the longer-term regulatory changes to generate substantive domestic or foreign investment.

Efficient Capital Markets and Portfolio Investment

Although there is some concern regarding the operations of the many small, family-owned banks, the banking system is generally considered sound with banks enjoying some of the widest interest rate margins in the region. The 10 largest banks, with Rp 2,103 trillion ($238.1 billion) in total assets or 62.4% of the total, dominate the banking sector. Loans grew 26% year-on-year as of October 31, 2011, (vis-à-vis 22% in 2010) while gross non-performing loans stood at 3%, down from 3.6% a year earlier.

Foreigners may purchase up to 99% of the total shares of a domestic bank through private placement or on the stock exchange. Purchases of 25% or more require BI approval. Foreign banks may establish branches if the foreign bank is ranked in the top global 200 banks by assets. To establish a representative office, the foreign bank must be ranked in the top global 300 banks by assets. A special operating license is required from Bank Indonesia in order to establish a foreign branch.

BI is considering limiting bank ownership to no more than 50% by any single shareholder, applicable to foreign and domestic shareholders, and requiring foreign bank branches to become subsidiaries.

The Indonesia Stock Exchange (IDX) index closed at 3,821.99 on December 30, 2011, up 3.2% for the calendar year. As of December 30, 2011, IDX had 440 listed companies with a total capitalization Rp 3,511.6 trillion. There were 15 initial public offerings in 2011. Foreigners made up about 30% of the total stock traded in 2011. In 2011, the IDX launched the Indonesian Shariah Stock Index (ISSI), its first index of shariah-compliant companies, primarily to attract greater investment from Middle East companies, and investors. The ISSI is composed of 214 stocks that are already listed on IDX’s Jakarta Composite Index.

Government treasury bonds are the most liquid bonds offered by the GOI. Treasury bills are less liquid due to their small issue size. Liquidity in BI-issued Sertifikat Bank Indonesia (SBI) is also limited due to the six-month required holding period. As of November 2011, the government’s total gross bond sales (including international bond issuance) had reached Rp 184.5 trillion. The GOI also issued its first sukuk treasury bills as part of efforts to diversify Islamic debt instruments and increase their liquidity. Indonesia’s sovereign debt was upgraded to investment grade by Fitch Ratings in December 2011, and by Moody’s in January 2012.

The corporate bond market is dominated by banks and automotive financing companies. Trading in the corporate bond market by value was up 31% as of December 30, 2011. The corporate bond market is small but growing, accounting for only 16 % of the total rupiah-denominated bonds outstanding as of December 30, 2011. For the twelve month period ending December 30, 2011, total outstanding corporate bonds rose 28% to Rp 146.97 trillion and total trading in corporate bonds was up 40%.


The Financial Services Supervisory Authority (OJK) will assume BI’s supervisory role over commercial banks as of January 1, 2014. OJK will also oversee the capital markets and non-banking institutions as of January 1, 2013, replacing the Capital Market and Financial Institution Supervisory Board.

Foreigners have good access to the Indonesian securities market and are a major source (29.7% in government securities) for portfolio investment. Foreign ownership of Indonesian companies may be limited in certain industries as determined by the Negative List.

Competition from State-Owned Enterprises (SOEs)

Indonesia has 142 SOEs, 26 of which contributed more than 90% of the total SOE profit. Sixteen are listed on the Indonesian stock exchange and fourteen are special purpose entities such as the Indonesian Infrastructure Guarantee Fund. SOEs are present in almost every sector including banking, tourism, agriculture, forestry, mining, construction, fishing, energy, and telecommunications. SOEs employ around 780,000 people and contribute an estimated 40 % of the country’s gross domestic product. Currently, SOEs command around 53.2% of market share in the cellular telecommunication sector in terms of number of subscribers, hold around 37.1% of the banking sector’s total assets, 52% of the cement sector’s total sales, and 50% of the total energy supply.

GOI has stated it will consolidate the number of SOEs in order to increase efficiency and benefits. The consolidation is expected to take place through mergers, privatization, establishing sectoral holding companies, or liquidation. The government expects the number of SOEs to decrease from 78 in 2014 to 25 in 2025.

Private enterprises can compete with SOEs under the same terms and condition with respect to access to markets, credit, and other business operations. However, some sectors reported that, in reality, SOEs receive increased preference for GOI projects. SOEs publish an annual report and are audited by the Supreme Audit Agency (BPK), the Financial and Development Supervisory Agency (BPKP), and external and internal auditors.

Indonesian SOEs adopt a two-tiered Board structure with a Board of Commissioners (similar to an American company’s board of directors) and a Board and Directors (similar to an American company’s executive management team). Depending on the type of SOE, either the President or the Minister of SOEs has the right to make appointments and to dismiss members of either the Board of Commissioners or Board of Directors. With such control, board member appointments are subject to government interference. Hence, it is not uncommon for SOEs to have ministers, high-ranking bureaucrats, military generals, or member of political parties, either retired or still active, sitting as Board members. Consequently, SOEs may suffer from poor management, which has led to several cases of graft and corruption against former Commissioners and Directors.

The GOI established the Pusat Investasi Pemerintah (PIP) to act as a special purpose investment entity and eventually as a sovereign wealth fund. To date, it has limited its investments to the domestic market in strategic sectors with the goal of stimulating national economic growth. PIP can invest in a variety of asset classes such as equity, debt, infrastructure, and direct investments. PIP is in addition to other GOI SOEs that invest in domestic markets such as PT Sarana Multi Infrastructure, PT Indonesia Infrastructure Guarantee Facility, and Indonesia Infrastructure Finance.

Corporate Social Responsibility (CSR)

CSR, as a comprehensive management paradigmenvisioned by international organizations like the OECD and UN, is not well understood beyond a limited group of large, mostly multinational corporations operating in Indonesia. Although CSR in the international context includes concepts like human rights, employee relations, environment and science, bribery and corruption, consumer interests, and taxation, understanding of CSR in Indonesia tends to focus on community, economic development, and educational projects and programs. This is at least in part caused by the fact that such projects are often required in the environmental impact permits (“Amdal”) of resource extraction companies, who undergo a good deal of domestic and international scrutiny in their operations.

Even so, there is limited general awareness of the CSR projects these companies develop, even among government regulators and officials, and resource extraction companies are not necessarily viewed favorably even if they operate large, successful CSR projects. Because much resource extraction activity occurs in remote and rural areas where government services are limited or completely absent, these companies face very high community expectations to provide such services themselves.

The American Chamber of Commerce in Indonesia has a corporate responsibility committee that is seeking to raise a more holistic understanding of CSR among its membership and give public recognition to companies with strong CSR programs.

Political Violence

As in other democracies, politically motivated demonstrations occur regularly throughout Indonesia. Such demonstrations on occasion become violent, but are not a major ongoing concern for most foreign investors. Public reaction to events in the Middle East, including anti-U.S. demonstrations, continues to be limited to sporadic protests, mostly nonviolent.

Fighting terrorism remains a top priority for the Indonesian government, and President Yudhoyono has demonstrated a continued strong commitment to combating terrorism. Since the 2009 bombings of two international hotels in Jakarta, Indonesian police and security forces have disrupted a number of terrorist cells, including some affiliated with Jemaah Islamiyah (JI), a U.S. government-designated terrorist organization that carried out several bombings at various times since 2000. In response to terrorist threats and attacks, Indonesia has effectively pursued counterterrorism efforts through legislation and law enforcement. As of mid-2011, more than 150 terrorism cases were awaiting trial. Violent elements in Indonesia continue to demonstrate a willingness and ability to carry out attacks with little or no warning. Although U.S. and Western-affiliated interests remain potential targets of terrorists, increasingly the focus of terrorists is on attacks against local governments and law enforcement entities, especially the police.

Foreign investors in Papua face certain unique challenges relative to those operating in other parts of Indonesia. Indonesian security forces are engaged in operations to suppress the Free Papua Movement, a low-intensity separatist insurgency. Low-intensity communal, tribal, and political conflict also exists in Papua and has caused numerous deaths and injuries. Travelers should strictly avoid situations involving armed tribal members. Anti-government protests have caused numerous deaths and injuries and led to temporary closures of the airport in Timika. Between 2009 and 2011, sniper fire from unknown attackers on a private road from Kuala Kencana to Tembagapura caused several casualties, including deaths, of government forces, local workers, and expatriates.

Corruption

President Yudhoyono campaigned and was re-elected in 2009 on a strong anti-corruption platform. However, some believe efforts to combat corruption have weakened, both within the administration, and within Indonesia as a whole. Corruption is endemic across all sectors. Campaign financing, rife with money politics, ensures that corruption remains endemic and engrained within the ranks of government officials. Although the government has issued detailed directions on combating corruption in targeted ministries and agencies, there has not been a concerted government-led effort to encourage or require companies to establish internal codes of conduct, or effective internal controls, ethics, and compliance programs to detect and prevent bribery of public officials.

Although Indonesia’s ranking improved in Transparency International’s Corruption Perceptions Index for 2011, corruption remains pervasive despite laws to combat corruption and a strong, independent Corruption Eradication Commission (KPK). The KPK’s purview in corruption cases is typically limited to law enforcement and other public officials, cases that exceed $110,000 in value and/or that represent significant loss to the state. Outside of those parameters, corruption cases are handled by the Indonesian National Police and Attorney General’s Office, neither of which have the same organizational capacity to investigate or prosecute corruption cases. Giving or accepting a bribe is a criminal act, with possible fines ranging from $5,500 to $110,000 and imprisonment up to a maximum of 20 years, depending on the severity of the charge.

Indonesia ratified the UN Convention Against Corruption in September 2006. Indonesia has not yet acceded to the OECD Anti-Bribery Convention, but does co-chair the OECD Anti-Corruption Working Group. Indonesia is a steering committee member of the Open Government Partnership, a multilateral platform to promote transparency, empower citizens, fight corruption, and strengthen governance. Indonesia has also committed to sending an anti-corruption expert to Afghanistan every three months to build the capacity of that country’s anti-corruption institution. Several civil society organizations function as vocal and competent corruption watchdogs, including Transparency International Indonesia and Indonesia Corruption Watch.

Bilateral Investment Agreements

Indonesia has signed investment protection agreements with 60 countries, including: Algeria, Argentina, Australia, Bangladesh, Belgium, Bulgaria, Cambodia, Chile, Croatia, Cuba, Czech Republic, Denmark, Egypt, Finland, France, Germany, Hungary, India, Iran, Italy, Jamaica, Jordan, Kyrgyzstan, Laos, Malaysia, Mauritius, Mongolia, Morocco, Mozambique, North Korea, Norway, Pakistan, People's Republic of China, Peru, Philippines, Poland, Qatar, Romania, Saudi Arabia, 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.


Indonesia has extensive preferential trade relationships with other Asian countries. Under the ASEAN Free Trade Agreement (FTA), import duties from ASEAN countries are applied at zero percent to five percent, except for products specified on an exclusion list. In addition, Indonesia accords preferential market access to Australia, China, Japan, Korea, India, and New Zealand (under ASEAN FTAs) and to Japan (under a bilateral Economic Partnership Agreement). Implementation of the ASEAN-China FTA has been contentious, with domestic industries pressing for more time to implement tariff commitments as well as for the imposition of new non-tariff barriers to offset the reduction in tariff protection. Indonesia also is currently negotiating bilateral agreements with Iran, India, Pakistan, Australia, and European Free Trade Association countries. Indonesia has also been exploring joint studies on potential FTAs with Chile, Turkey, South Korea, Tunisia, and Egypt.


Non double income taxation between the United States and Indonesia is granted in accordance with the Convention between the Government of the Republic of Indonesia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of the Fiscal Evasion with Respect to Taxes on Income, signed at Jakarta July 11, 1988, and its amending Protocol, signed at Jakarta July 24, 1996.

OPIC and Other Investment Insurance Programs

In 2010, the Overseas Private Investment Corporation (OPIC) updated its 1967 investment support agreement between the United States and Indonesia by adding OPIC products such as direct loans, coinsurance, and reinsurance to the means of OPIC support which U.S. companies may use to invest in Indonesia.

Indonesia has joined the Multilateral Investment Guarantee Agency (MIGA). MIGA, a part of the World Bank Group, is an investment guarantee agency to insure investors and lenders against losses relating to currency transfer restrictions, expropriation, war and civil disturbance, and breach of contract.

The Indonesian Rupiah may be purchased using the exchange rate provided by BI pursuant to the current rate on the date of the transaction. The BI exchange rate can be found at www.bi.go.id. In 2011, the Rupiah depreciated 0.9% against the USD.

Labor

Indonesian labor is relatively low cost by world standards, but the country's under-funded education system and rigid labor laws combine to make Indonesia's competitiveness lag behind other Asian competitors. Investors frequently cite high severance payments to dismissed employees, restrictions on outsourcing and contract workers, and rules on expatriate workers, as significant obstacles to new investment in Indonesia. Lack of education is especially problematic among unskilled and semi-skilled workers. Labor contracts are relatively straightforward to negotiate but are subject to renegotiation, despite the existence of a written agreement. Local courts are likely to ignore written contracts and side with local citizens in labor disputes. On the other hand, some socially responsible foreign investors view Indonesia’s labor regulatory framework, respect for freedom of association, and the right unionize as an advantage to investing in the country. The GOI established in January 2006 a new Labor Court as part of a broader labor dispute resolution system. Expert local human resources advice is essential for American companies doing business in Indonesia, even those only opening representative offices.

Industrial relations at the factory level had been improving in recent years, but some business leaders are concerned that recent strikes could influence an increase in factory-level industrial actions. Each year provincial governments adjust their respective provincial minimum wages. Unions have demanded annual minimum wage increases (regional, district, or industrial sector) as high as 50%, but most provinces settled for increases closer to 10%. In 2011, the highest annual increase was 16.5% for West Papua province, thus making the minimum wage there the highest for the year. There was an increase in 2011 of labor protests, sometimes violent, over negotiations of 2012 minimum wage levels. Draft revisions to the labor law – particularly reductions in severance payments and removal of restrictions on outsourcing and contract employment – led to labor protests in 2006 that prompted the GOI to suspend efforts to amend the law, and to instead formulate regulations aimed at changing severance pay to ease the burden on employers while providing a cushion to the unemployed. In October 2011, the Indonesian government passed a revised Social Security Law that will establish a national agency to support workers in the event of work accident, death, retirement, or old age. The new law will begin taking effect in January 2014.

Foreign Trade Zones/Free Ports

The GOI offers incentives to over 1,500 foreign and domestic industrial companies that operate in bonded zones throughout Indonesia. The largest bonded zone is the free trade zone 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% ownership. These companies do not pay import duty, income 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 lend machinery and equipment to subcontractors located outside of the bonded zone for a maximum two-year period.

A recent Ministry of Finance Regulation No. 147/2011 stipulates that the delivery of products outside of bonded zones into the domestic market is set at a maximum of 25% (down from 50%) of export realization value of the previous year. If a bonded zone company exceeds the 25% limitation, its domestic quota for the next year will be reduced. The new regulation also restricts subcontract work and requires bonded zones less than 10,000 square meters in size to relocate to industrial estates.

As stipulated by the 2007 Investment Law, the Indonesian Legislature (DPR) passed regulations on special economic zones (SEZ) in 2009. Though 20 areas have submitted applications for SEZ status, none have been created to date.

Foreign Direct Investment Statistics

Indonesia has two main sources for FDI statistics: BKPM, which issues permanent business licenses to domestic and foreign investors, and BI, which records international capital flows as part of balance of payments statistics. BKPM records FDI figures based on issued business licenses. Since licenses for oil and gas, mining, banking, non-bank financial institutions, insurance and leasing are issued by other government bodies, these sectors are not covered under the BKPM statistics. BKPM is expected to increase the sectoral coverage gradually while BI statistics cover all sectors.

BKPM categorizes all investments made into a foreign capital investment company as FDI, even if it is a joint venture with a local partner. This practice tends to inflate BKPM’s FDI figures, which may additionally include equity contributions from domestic partners and investments financed from domestic sources. BI instead follows the standard FDI categorization of equity investment, retained earnings, and other capital inflows.

Table 1. FDI by industry

in USD million

 

2005

2006

2007

2008

2009

2010

Agriculture & Forestry

3

225

286

197

-52

286

Fishing

9

4

19

-25

10

52

Mining & Quarrying

1,226

322

1,904

3,610

1,302

1,896

Manufacturing

5,264

1,691

2,412

2,322

1,573

4,971

Electricity, Gas and Water

162

-1

-61

-56

53

204

Construction

130

85

195

24

7

-49

Wholesale & Retail

60

375

215

1,159

73

2,463

Hotel & Restaurant

0

7

-10

16

0

1

Transport, Storage & Communication

384

592

919

134

1,799

2,389

Financial Intermediation

780

1,027

1,361

1,927

149

408

Real Estate and Business Activity

17

-14

-4

-201

-25

27

Others

0

599

37

212

-11

654

TOTAL

8,338

4,914

6,928

9,318

4,876

13,303

% of GDP

2.9

1.3

1.6

1.8

0.9

1.9

Note: Public Administration & Defense, Education, Health, Other Community Services all recorded zero FDI

Source: Bank Indonesia

Table 2. FDI by Country of Origin

in USD million

 

2005

2006

2007

2008

2009

2010

Japan

1,542

1,057

1,126

1,144

896

3,728

U.S.

3,442

-549

1,093

1,040

159

571

Europe

1,581

2,017

2,622

1,966

674

279

China

300

124

117

531

358

354

Korea

239

317

250

186

80

342

ASEAN

Malaysia

Singapore

884

141

741

1,354

278

1,077

1,107

232

836

3,397

1,018

2,297

1,381

313

1,016

5,903

340

5,479

Other

25

20

436

597

174

950

Total

8,338

4,914

6,928

9,318

4,877

13,304

Source: Bank Indonesia


Table 3. FDI by Country of Origin

in total percentage

 

2005

2006

2007

2008

2009

2010

Japan

18.5

21.5

16.3

12.3

18.4

28.0

U.S.

41.3

-11.2

15.8

11.2

3.3

4.3

Europe

19.0

41.0

37.8

21.1

13.8

2.1

China

3.6

2.5

1.7

5.7

7.3

2.7

Korea

2.9

6.5

3.6

2.0

1.6

2.6

ASEAN

Malaysia

Singapore

10.6

1.7

8.9

27.5

5.6

21.9

16.0

3.3

12.1

36.5

10.9

24.7

28.3

6.4

20.8

44.4

2.6

41.2

Other

0.3

0.4

6.3

6.4

3.6

7.1

Total

100.0

100.0

100.0

100.0

100.0

100.0

Source: Bank Indonesia

Table 4. FDI by Type of Investment

in USD million

 

2005

2006

2007

2008

2009

2010

Equity Capital

5,129

2,451

5,252

8,033

4,358

7,895

Reinvested Earnings

2,683

2,164

2,294

1,070

621

4,105

Other Capital

525

298

-619

215

-104

1303

Total

8,338

4,914

6,928

9,318

4,877

13,303

Source: Bank Indonesia

Table 5. FDI by Industry and Country of Origin

in USD million

 

2005

2006

2007

2008

2009

2010

Agriculture, Hunting, and Forestry

225

286

197

-52

286

0

Japan

0

3

0

-4

1

12

U.S.

9

-2

5

0

0

0

European Union

-36

183

185

10

-157

34

China

4

-4

6

7

21

-24

ASEAN

2

-2

-8

0

-5

0

Other

0

-2

15

7

16

-12

Mining & Quarrying

1,226

322

1,904

3,610

1,302

1,896

Japan

182

83

341

546

-78

84

U.S.

165

34

1,262

1,056

177

430

European Union

218

37

405

617

392

404

China

239

123

170

534

357

354

ASEAN

32

-142

113

614

144

186

Other

295

277

-50

228

295

272

Electricity, Gas, and Water Supply

162

-1

-61

-56

53

204

Japan

-14

-7

16

0

0

63

European Union

176

-13

-76

4

9

135

ASEAN

0

19

-1

-66

31

4

Other

0

0

0

8

1

8

Manufacturing

5,264

1,691

2,412

2,322

1,573

4,971

Japan

182

83

341

546

-78

84

U.S.

165

34

1,262

1,056

177

430

European Union

647

819

1,128

991

185

-1,016

China

46

0

8

-4

1

1

ASEAN

627

423

397

989

531

1,722

Other

-90

-49

45

-230

-49

814

Wholesale & Retail

60

375

215

1,159

73

2,463

Japan

25

30

-23

86

74

133

U.S.

9

-13

-20

-1

-8

0

Construction

130

85

195

24

7

-49

Japan

2

21

6

0

-1

10

U.S.

0

-14

-6

0

0

0

European Union

125

31

27

0

-1

0

China

0

0

0

0

0

2

ASEAN

2

35

24

14

-5

-23

Other

0

-14

-6

0

0

0

Others

301

599

37

212

-11

654

Japan

354

166

-123

-13

13

61

U.S.

2

-3

-1

8

3

-7

European Union

-32

86

183

6

-86

10

China

0

-1

-62

0

0

0

ASEAN

-72

339

27

-4

26

122

Other

26

7

18

159

26

419

TOTAL

8,338

4,914

6,928

9,318

4,877

13,304

Source: Bank Indonesia

Table 6. FDI Realization by Region in Indonesia
in USD Million

 

2005

2006

2007

2008

2009

2010

Java

7,251

4,413

8,498

13,567

9,370

11,736

Jakarta

3,272

1,468

4,669

9,928

5,511

6,606

West Java

2,567

1,619

1,328

2,552

1,934

1,704

East Java

702

384

1,691

457

422

1,739

Banten

668

512

708

478

1,412

1,622

Kalimantan

182

537

309

115

284

2,062

East Kalimantan

39

405

160

13

80

1,147

Sumatera

1,225

884

1,386

1,009

776

787

Riau

796

585

724

461

252

142

Sulawesi

145

14

80

65

142

851

Nusa Tenggara

103

110

57

96

234

368

Bali

97

103

51

81

227

278

Maluku

9

20

0

0

6

383

Papua

0

1

2

19

2

397

Total

8,915

5,977

10,350

14,870

10,815

16,585

% of GDP

3.1

1.6

2.4

2.9

2.0

2.3

Source: Investment Coordinating Board (BKPM)



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